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SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 25, 2004

Commission File Number 1-8048

TII NETWORK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
                                    Delaware                                                               66-0328885            
                              (State or other jurisdiction of                                                (I.R.S. Employer Identification No.)
                               incorporation or organization)

1385 Akron Street, Copiague, New York 11726
(Address of principal executive offices) (Zip Code)

                                (631) 789-5000                                
(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock. $.01 par value
Series D Junior Participating Preferred Stock Purchase Rights

        Indicate by check mark whether the registrant (l) 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 [ ]

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

        The aggregate market value of the voting stock of the registrant outstanding as of December 26, 2003, the last business day of the registrant's most recently completed second quarter, held by non-affiliates of the registrant was approximately $22.7 million. While such market value excludes the market value of shares that may be deemed beneficially owned by executive officers and directors, this should not be construed as indicating that all such persons are affiliates.

        The number of shares of the Common Stock of the registrant outstanding as of September 20, 2004 was 11,907,784.

DOCUMENTS INCORPORATED BY REFERENCE

Forward-Looking Statements

Certain statements in this Report 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 the Company’s 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 the Company’s actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements. These factors include, but are not limited to:

Part I

ITEM 1. Business

General

        TII Network Technologies, Inc. formerly named TII Industries, Inc. and subsidiary (together, the “Company” or “TII”), designs, produces and markets lightning and surge protection products, network interface devices (“NIDs”), station electronics and other products. The Company sells these products principally to United States telephone operating companies (“Telcos”), including the Regional Bell Operating Companies (“RBOCs”) and Independent Operating Companies (together, incumbent local exchange carriers or “ILECs”) and competitive local exchange carriers (“CLECs”). The Company also sells its products to original equipment manufacturers (“OEMs”) and multi-system operators (“MSOs”) of communications services. The Company believes that its products offer superior, cost-effective performance, features and characteristics, including high reliability, long life cycles, ease of installation and optimum protection against adverse environmental conditions. This has resulted in TII becoming a leading supplier of overvoltage surge protectors to the ILECs for use at their subscriber locations.

        Overvoltage surge protection is mandated in the United States by the National Electrical Code (“NEC”) to be installed on subscriber telephone lines to prevent injury to users and damage to their equipment due to surges caused by lightning and other hazardous overvoltages. The NEC is published by the National Fire Protection Agency and typically is adopted by states and local municipalities. While similar requirements exist in most other developed countries, a significant portion of the world’s communications networks remains unprotected from the effects of overvoltage surges. The 1999 edition of the NEC requires overvoltage surge protection to be included on network powered coax lines, a technology that brings telephony and broadband services to homes and businesses. The Company’s patented broadband In-Line® coax protector product line was designed to address this market.

        The Company also markets a line of NIDs tailored to various customer specifications. NIDs house the FCC mandated demarcation point between Telco-owned and subscriber-owned property. NIDs typically also enclose overvoltage surge protectors and various station electronic products that, among other things, allow a Telco to remotely test the integrity of its lines, thereby minimizing costly maintenance dispatches.

        In fiscal 2003, three RBOCs (Verizon, SBC and BellSouth) jointly announced a ten to fifteen year multi-billion dollar capital improvement program to deploy fiber optic lines to virtually all homes and businesses within their regions (referred to as Fiber to the Premise, or “FTTP”). FTTP transmission is significantly faster than traditional copper networks currently deployed by most Telcos and MSOs. While the FTTP program is still in the early stage of deployment by the RBOCs, its deployment will impact the Company’s traditional protection based products since FTTP networks require less traditional protection than traditional copper networks. In response to this program, the Company is developing fiber optic based products and is actively pursuing relationships with suppliers of fiber-optic based network systems.

        The Company files Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, files or furnishes Current Reports on Form 8-K, files or furnishes amendments to those reports, and files proxy and information statements with the Securities and Exchange Commission (the “SEC”).  These reports and statements may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  These reports and statements, as well as beneficial ownership reports filed by the Company’s officers, directors and beneficial owners of more than 10% of the Company’s common stock, may be obtained without charge through the Company’s Internet site http://www.tiinettech.com as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC.

Products

Lightning and Overvoltage Surge Protection Products. The Company designs, produces and markets overvoltage surge protection products primarily for use on the subscribers’ home or business telephone lines. Surge protectors: (i) protect the subscribers and their equipment; (ii) reduce the subscribers’ loss of service; (iii) reduce the communications providers’ loss of revenue due to subscriber outages; and (iv) reduce the communications providers’ costs to replace or repair damaged equipment. Overvoltage surge protectors differ in power capacity, application, configuration and price to meet varying needs.

         In the United States, the NEC mandates overvoltage surge protectors to be installed on all subscribers’ telephone lines that are exposed to lightning and accidental contact with electric light or power conductors.

         Gas Tubes: The Company’s gas tubes represent the foundation upon which most of the Company’s overvoltage surge protector products are based. The principal component of the Company’s overvoltage surge protector is a proprietary two or three electrode gas tube. Overvoltage surge protection is provided when the voltage on a communication line elevates to a level preset in the gas tube, at which time the gases in the tube instantly ionize, momentarily disconnecting the phone or other equipment from the circuit while safely conducting the hazardous surge to ground. When the voltage on the line drops to a safe level, the gases in the tube return to their normal state, returning the phone and other connected equipment to service. The Company’s gas tubes are a standard in the industry and have been designed to withstand multiple high-energy overvoltage surges while continuing to operate over a long service life.

         Modular Station Protectors: One of the Company’s most advanced overvoltage surge protectors, marketed under the trademark Totel Failsafe® (“TFS”), combines the Company’s three electrode gas tube with a thermally operated failsafe mechanism. The three-electrode gas tube is designed to protect equipment from hazardous overvoltage surges and the failsafe mechanism is designed to insure that, under sustained overvoltage conditions, the protector will become permanently grounded. In certain of its modular protectors, the Company combines the TFS protection element with a sealing gel making this protector impervious to severe moisture or environmental contamination while providing advanced overvoltage surge protection. The Company has developed several overvoltage protectors for high-speed broadband applications.

         Broadband Coaxial Protectors: The 1999 revision to the NEC requires overvoltage surge protection on all network powered subscriber coax lines, a cable technology that brings telephony and broadband services to homes and businesses. As an integral part of the Company’s broadband product line, the Company has developed and patented a high-performance, 75-ohm Broadband Coax Protector to safeguard coaxial cable lines. While providing overvoltage surge protection, the Company’s In-Line® Broadband Coax Protectors are virtually transparent to the network, permitting high-bandwidth signals to be transmitted without adversely affecting the signal.

         Utilizing the Company’s patent on In-Line® Coaxial Cable Surge Protectors, the Company also offers for sale a 50-ohm Base Station Protector product line which is designed to protect wireless service providers’ cell sites from the damaging effects of lightning and other surges.

         Solid State and Hybrid Modular Station Protectors: Incorporating solid-state components, the Company’s products include solid-state overvoltage surge protectors. While solid-state overvoltage surge protectors are faster than gas tube overvoltage surge protectors at reacting to surges, a feature that some customers believe important in protecting certain of their sensitive equipment, they have lower energy handling capability and higher capacitance than gas tubes. When an overvoltage surge exceeds the energy handling capacity of the solid-state protector, it fails, causing the telephone or other connected equipment to cease operating. High capacitance on a communication line adversely affects high-bandwidth transmission, distorting the signal. As a result, most Telcos use high-energy handling, low capacitance gas tube protectors at the subscriber location. In the Telco’s switching center, where lower energy handling and higher capacitance is not a major concern, solid-state protectors are used more frequently. As communications equipment becomes more complex, a protector’s reaction speed to a surge may be perceived to be more critical than its energy handling capabilities. In response, the Company has combined solid-state protectors with the Company’s gas tubes in hybrid overvoltage surge protectors. While generally more expensive and complex than gas tube surge protectors, the hybrid surge protector can provide the speed of a solid-state protector with the energy handling capability of a gas tube. (See “Business —Competition.”)

         AC Powerline Protectors: TII’s powerline surge protectors utilize the Company’s surge protection technology and are principally used by Telcos at their central office (“CO”) locations. These devices protect the connected communication equipment against damage or destruction caused when overvoltage surges enter equipment through the powerline. These products have superior surge handling characteristics compared to the standard strip surge protectors that plug into a homeowner’s AC outlet.

         AC Powerline/Dataline Protectors: The Company has developed the TII Lightning and Power Surge Shield™ protection system for personal computers and home entertainment systems. The TII Lightning and Power Surge Shield™ combines the Company’s powerline protection technology with the Company’s proprietary protection for the telephone, DSL, Ethernet and universal serial bus (“USB”) and coax lines. The powerline/dataline protector has unique protection and low capacitance qualities that are ideal for certain applications, especially where protection and low capacitance are necessary, particularly in the emerging market for residential powerline networking applications.

         Lightning and overvoltage surge protection products, sold separately from NIDs, accounted for approximately 31%, 27% and 31% of the Company’s net sales during the Company’s fiscal years 2004, 2003 and 2002, respectively.

Network Interface Devices. The Company designs, produces and markets various NIDs, which house the FCC mandated demarcation point between Telco-owned and subscriber-owned property. The Company’s NIDs typically also enclose its overvoltage surge protectors and various station electronic products that, among other things, allow Telcos to remotely test the integrity of their lines minimizing costly maintenance dispatches.

         To address the demand for voice, high-speed data and interactive video services, Telcos and MSOs are expanding and upgrading their networks to accommodate the higher bandwidth necessary to transmit these services. In response, and with future technology in mind, TII has developed a line of broadband NIDs designed to enclose the technology of choice needed to accommodate higher bandwidth signals, whether traditional twisted pair lines, high-bandwidth coaxial cable or fiber optic lines. The Company’s broadband NID product line is modular in design and thus facilitates expansion to accommodate additional subscriber access lines. For use in various markets, the NID product line currently consists of enclosures that accommodate from one to twenty-five access lines. The Company’s broadband NIDs can also accommodate TII’s DSL electronic products in addition to the Company’s patented coaxial overvoltage surge protector. The Company is working with technology partners to jointly develop a fiber optic based NID in anticipation of the requirements of the FTTP deployment.

         NID sales represented approximately 54%, 62% and 61% of the Company’s net sales during fiscal 2004, 2003 and 2002, respectively.

Station Electronic and Other Products. The Company designs, produces and markets station electronic products that are typically installed within a NID. One of the Company’s station electronic products allows a Telco to remotely test the integrity of its lines, minimizing costly maintenance dispatches.

         Additionally, since Telcos have been expanding and upgrading their networks with new technologies to provide users with the expanded bandwidth necessary for high-speed transmission of data over traditional Telco lines, TII has developed several DSL station electronic products for this market, including DSL filters and splitters.

Home Networking Systems. To address the growing demands and complexities of communications networks in the home, the Company is in the process of bringing to market a multi-service residential gateway product through its traditional Telco distribution channels. This new system, referred to as a SID (Service Interface Device), is being jointly developed and marketed with a technology partner. The Company is in discussions with several ILECs which are expected to begin field trials of the SID in mid fiscal 2005. After completion of these trials, the Company anticipates that initial sales should occur sometime in its fiscal 2005 second half.

         Recently the Company designed and introduced a power-line protector to address the high speed residential power-line network market. Utilizing the Company’s proprietary power-line protection technology, this protector is designed to protect sensitive equipment from the effects of lightning and other hazardous surges, without affecting the high-speed signals that are transmitted over the residential power-lines.

Research and Development

        New product opportunities continue to arise in the Company’s traditional Telco markets, as well as in the OEM and MSO markets. The Company also continues to evaluate the commercial, industrial and international markets for its current products as well as variations of them. The Company’s research and development (“R&D”) and related marketing efforts are focused on several projects, currently including:

         The Company’s R&D strategy includes developing products internally, with technology partners and with contract manufacturers. The Company’s R&D engineers work closely with its contract manufacturers during the design and development phase of all products, especially its gas tubes and enclosures. The Company is jointly developing and marketing SID with a technology partner.

         The Company’s R&D department is skilled and experienced in various technical disciplines, including physics, electrical and mechanical design, with specialization in such fields as plastics, electronics, metallurgy and chemistry. The Company’s contract manufacturing partners are similarly skilled in these R&D fields, with engineering and manufacturing expertise to bring a product of the highest quality and at a competitive price to market on time. The Company’s SID technology partner is skilled in the design of systems products for advanced communications networks.

         The Company utilizes advanced computer aided design equipment networked with collaborative partners and directly linked to stereo lithographic modeling capability to accelerate time-to-market.

         The Company’s R&D expense was $1.4 million, $1.3 million and $1.8 million during fiscal years 2004, 2003 and 2002, respectively. Though essentially spending at the same level in fiscal 2004 as in fiscal 2003, the Company is directing most of its R&D outlays in 2004 to new products as opposed to its traditional copper-based protection products. The decrease in fiscal 2003 was due to the Company’s ability to reduce these expenses through the use of collaborative engineering efforts with its contract manufacturers. (See “Business – Manufacturing”)

Marketing and Sales

        The Company markets and sells its products to the Telcos through direct sales personnel, as well as manufacturers’ representatives. Products are distributed either directly or through national and regional distributors. During fiscal 2004, the Company further expanded its marketing and sales efforts to the cable and satellite MSOs, hiring a national sales director and an emerging markets consultant. OEM customers are typically sold direct or through distribution.

        Prior to selling its products to a Telco, MSO or associated OEM customer, the Company must typically undergo a lengthy product qualification process involving approval agencies designated by law, codes and/or customers. Thereafter, the Company continually submits successive generations of products, as well as new products, to its customers for qualification. The Company’s reputation as a leading supplier of overvoltage surge protectors to Telco customers for over 30 years combined with its strategy to develop products by working closely with its customers, provides a strong position from which it can market new products to its current Telco customer base as well as to new emerging markets customers.

        The following customers accounted for 10% or more of the Company’s consolidated net sales during one or more of the years presented below. The loss of, or the disruption of shipments to, one of these customers could have a material adverse effect on the Company’s results of operations and financial condition.

         While the Company has begun to more aggressively market and sell into new emerging markets, Telco customers, including those listed above, represent approximately 75% of the Company’s current sales. Verizon Corporation is a Telco RBOC. Tyco Electronics Corporation purchases overvoltage protection products from the Company for inclusion within their products for resale to Telcos. Telco Sales, Inc. is a distributor that purchases the Company’s products for resale to Telcos.

         Sales of the Company's products to Telcos are generally through “as-ordered” general supply agreements. General supply agreements do not require Telcos to purchase specific quantities of products and can be terminated, amended or extended for reasons such as changing technologies, product standardizations, or a policy of consolidation of vendors. The Verizon general supply agreement is scheduled to expire in April of 2006. However, Verizon is in discussions with the Company, and the Company’s competitors to, among other things, incorporate new sealing technologies into the NIDs that the Company is currently supplying under its agreement. The Company believes that Verizon will accept the Company’s offer to fulfill Verizon's new NID requirements.

         The Company believes that its products offer superior, cost-effective performance, features and characteristics, including high reliability, long life cycles, ease of installation and optimum protection against adverse environmental conditions. The Company believes that this, together with responsive customer service, reduces the risks inherent in “as-ordered” contracts. The Company further believes that its superior products and customer care-attributes which have attracted and maintained its Telco business- will enhance the Company’s ability to expand into emerging markets.

         Purchases of the Company’s products are generally based on individual customer purchase orders for delivery from inventory or within up to thirty days. The Company, therefore, has no material firm backlog of orders.

         The Company’s international sales were approximately $1.8 million in fiscal 2004 (6% of sales), $768,000 in fiscal 2003 (3% of sales) and $1.3 million in fiscal 2002 (4% of net sales). International sales have been made primarily to countries in the Caribbean, South and Central America, Canada, the Pacific Rim and Europe. The Company requires foreign sales to be paid for in U.S. currency. International sales are affected by such factors as NAFTA requirements, exchange rates, changes in protective tariffs and foreign government import controls. The Company believes international markets continue to offer additional opportunities for its products and continues to seek methods to increase these sales.

Manufacturing

        While the Company maintains a quick-response, low-cost assembly and specialty gas tube manufacturing operation at its facility in Puerto Rico, substantially all the high volume production has been outsourced and is now being produced by contract manufacturers within the Pacific Rim, principally Malaysia and China, utilizing, in most cases, the Company’s equipment and processes. The Company maintains all final quality assurance approval for all products prior to shipment.

        The Company’s contract manufacturers’ facilities are listed by UL and are ISO 9000 registered. The Company continually evaluates its current and potential contract manufacturers to assure the highest quality product, best delivery and most competitive pricing.

         One of the Company’s contract manufacturers is a subsidiary of Tyco Electronics Corporation that also owns a company that is a competitor and customer of the Company. A second contract manufacturer produces a significant portion of the Company’s proprietary gas tubes. This company also sells its own gas tubes to competitors of the Company. There are strict non-disclosure agreements with each of these contract manufacturers.

Raw Materials

         The primary components of the Company’s products are stamped, drawn and formed parts made out of a variety of commonly available metals, ceramics and plastics. The manufacture of the Company’s overvoltage surge protectors and station electronic products use commonly available components, printed circuit boards and standard electrical components, such as resistors, diodes and capacitors. The Company has no orders with suppliers of the components utilized in the manufacture of its products with delivery scheduled later than a year. The Company’s products contain a significant amount of plastic that is manufactured out of petroleum which has recently risen in price. This price increase could have an adverse effect on the cost of the Company’s products and profit the Company realizes. The Company depends on its contract manufacturers to produce the majority of its products for sale to customers.

Competition

         The Company faces significant competition across all of its markets and product lines. Its principal competitors within the Telco market are Corning Cable Systems LLC, Tyco Electronics Corporation, which is also a customer of the Company (see “Business — Marketing and Sales”) and Bourns Inc. Its principal competition within the MSO market is Panamax, Inc, Belkin Corporation and American Power Conversion Corp.

         The Company’s gas tube overvoltage surge protectors not only compete with other companies’ gas tube overvoltage surge protectors, but also with solid-state overvoltage surge protectors. While solid-state surge protectors react faster to surges, gas tube overvoltage surge protectors have generally remained the overvoltage surge protection technology of choice at the subscribers’ location by virtually all Telcos because of the gas tube’s ability to repeatedly withstand significantly higher energy surges than solid-state surge protectors. This enables gas tubes to survive longer in the field than solid-state surge protectors, reducing loss of service and costs in dispatching a maintenance vehicle to replace the failed surge protector. Further, solid state protectors have significantly higher capacitance than gas tube protectors. Higher capacitance adversely affects transmission on a high bandwidth communication line by distorting the signal. Solid state overvoltage surge protectors are used principally in Telcos’ central office switching centers where speed is perceived to be more critical than energy handling capabilities and in regions where there is a low incidence of lightning. The Company believes that, for the foreseeable future, both gas tube and solid state protectors will continue to be used as overvoltage surge protectors within the Telco market. The Company also believes that the deployment of FTTP networks by the Telcos could include less traditional protection requirements. The Company is working with technology partners to jointly develop a fiber optic based NID, while also closely monitoring the developments of these new requirements.

         The Company’s reputation among its customers is one of providing swift responses to their needs with creative and effective solutions using products compliant with, and in most cases superior in performance to, the demanding specifications of customers. This approach, combined with the Company’s history of continually improving technology, improved operations and effective collaborations, allows the Company to bring product solutions to its customers faster, more effectively and more competitively priced.

         Principal competitive factors within the Company’s markets include price, technology, product features, service, quality, reliability and bringing new products to market on time. Most of the Company’s competitors have substantially greater financial, sales, manufacturing and product development resources than the Company. The Company believes that its sales, marketing and research and development departments, its high quality products and service, its contract manufacturers’ low cost production capabilities and their engineering resources combined with the Company’s overvoltage surge protection technology, enable it to maintain its competitive position.

Patents and Trademarks

        The Company owns or has applied for a number of patents relating to certain of its products or product components and owns a number of registered trademarks that are considered to be of value principally in identifying the Company and its products. TII®, In-Line®, Totel Failsafe® and Angle Driver® are among the registered trademarks of the Company. While the Company considers its patents and trademarks to be important, especially in the early stages of product marketing, it believes that, because of technological advances in its industry, its success depends primarily upon its sales, engineering and manufacturing skills and effective development collaborations which have accelerated time-to-market of improved and new products. To maintain its industry position, the Company relies primarily on technical leadership, trade secrets, its proprietary technology and its contract manufacturers’ low cost production capabilities and their engineering resources.

Government Regulation

        The Telco industry is subject to regulation in the United States and in other countries. In the United States, the FCC and various state public service or utility commissions regulate most of the Telcos and other communications access providers who use the Company’s products. While such regulations do not typically apply directly to the Company, the effects of such regulations, which are under continuous review and subject to change, could adversely affect the Company’s customers and, therefore, the Company.

        The NEC requires that an overvoltage surge protector listed by Underwriters Laboratories or another qualified electrical testing laboratory be installed on all subscriber telephone lines that are exposed to lightning and accidental contact with electric light or power conductors. Listing by Underwriters Laboratories has been obtained by the Company where required.

         Compliance with applicable federal, state and local environmental regulations has not had, and the Company does not believe that compliance in the future will have, a material adverse effect on its earnings, capital expenditures or competitive position.

Employees

        On September 20, 2004, the Company had approximately 77 full-time employees, of whom 44 were employed at the Company’s Puerto Rico facility. The Company has not experienced any work stoppage as a result of labor difficulties and believes it has satisfactory employee relations. The Company is not a party to any collective bargaining agreements.

ITEM 2. Properties

        The Company occupies a single story building and a portion of another building, consisting of an aggregate of approximately 14,000 square feet in Copiague, New York under leases that expire in July 2005. These facilities house the Company’s principal research and development activities, marketing, administrative and executive offices.

        The Company also leases a 20,000 square foot facility in Toa Alta, Puerto Rico, which is approximately 20 miles southwest of San Juan, under an agreement that expires in April 2006. This facility contains certain of the Company’s assembly and manufacturing, warehousing, research and development, and quality assurance function.

        The Company believes that its facilities and equipment are well maintained and adequate to meet its current requirements.

ITEM 3. Legal Proceedings

        The Company is not a party to any material pending legal proceedings.

ITEM 4. Submission Of Matters To A Vote Of Security Holders

        No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

PART II

ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters

        The Company’s Common Stock trades on the Nasdaq SmallCap Market under the symbol “TIII”. The following table sets forth, for each quarter during fiscal 2004 and 2003, the high and low sales prices of the Company’s common stock on that market:

        As of September 7, 2004, the Company had approximately 347 holders of record of its common stock.

        To date, the Company has paid no cash dividends. For the foreseeable future, the Company intends to retain all earnings generated from operations for use in the Company’s business. Additionally, the Company’s borrowing arrangement entered into September 2003 prohibits the payment of cash dividends.

        The Company did not sell any equity securities during the year ended June 25, 2004 that were not registered under the Securities Act of 1933, as amended.

ITEM 6. Selected Financial Data

        The following Selected Financial Data has been derived from the Company’s consolidated financial statements for the five years ended June 25, 2004 and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the related notes thereto, included elsewhere in this Report:

Selected Financial Data
(Dollars in thousands, except per share data)

_________________

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Report.

Business

        TII Network Technologies, Inc., formerly named TII Industries, Inc., and subsidiary (together, the “Company” or “TII”), designs, produces and markets lightning and surge protection products, network interface devices (“NIDs”), station electronic and other products. The Company has been a leading supplier of overvoltage surge protectors to U.S. telephone operating companies (“Telcos”) for over 30 years.

Critical Accounting Policies, Estimates and Judgments

        TII’s consolidated financial statements have been prepared in accordance with accounting principles that are generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments. The Company believes that the determination of the carrying value of the Company’s inventories and long-lived assets and establishment of a valuation allowance for deferred tax assets are the most critical areas where management’s judgments and estimates most affect the Company’s reported results. While the Company believes its estimates are reasonable, misinterpretation of the conditions that affect the valuation of these assets could result in actual results varying from reported results, which are based on the Company’s estimates, assumptions and judgments as of the balance sheet date.

         Inventories are required to be stated at net realizable value at the lower of cost or market. In establishing the appropriate inventory write-downs , management assesses the ultimate recoverability of the inventory considering such factors as technological advancements in products as required by the Company’s customers, average selling prices for finished goods inventory, changes within the marketplace, quantities of inventory items on hand, historical usage or sales of each inventory item, forecasted usage or sales of inventory and general economic conditions.

        The Company reviews long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value.

        At June 25, 2004, the Company has provided a valuation allowance against all its net deferred tax assets due to the uncertainty of realizing any future benefits there from. If and when the Company’s historical and projected pre-tax earnings indicate it will be more likely than not, all or a portion of its deferred tax assets will be realized, the Company would reduce its valuation allowance, accordingly.

Results of Operations

General

         Over the last several years, a telecommunications industry-wide slowdown, cutbacks in construction and maintenance budgets by the Telcos and a reduction in the number of their access lines has adversely affected the Company. During this period, the Company has been both reducing the cost of its products and its overall cost structure (see Note 2 of Notes to Consolidated Financial Statements) while also developing new products in an effort to increase its market share and diversify its customer base. These actions, combined with an increase of sales over the prior year, have enabled the Company to operate profitably for the 2004 full fiscal year.

         The Company’s major cusotmer, Verizon, has begun its strategy to deploy fiber optic lines to homes and businesses within their region (referred to as Fiber to the Premise, or "FTTP"). This multi-year program is expected to result in a reduction of capital outlays on their traditional copper network and will therefore impact the Company’s traditional protection based products since FTTP networks require less traditional protection than the current copper networks. Though the full extent of the impact on the Company of this program is not yet known, the Comany believes that the current embedded copper infrastructure will continue to play a significant role as a transmission medium for years to come.

        Sales of the Company's products to Telcos are generally through “as-ordered” general supply agreements. General supply agreements do not require Telcos to purchase specific quantities of products and can be terminated, amended or extended for reasons such as changing technologies, product standardizations, or a policy of consolidation of vendors. The Verizon general supply agreement is scheduled to expire in April of 2006. However, Verizon is in discussions with the Company, and the Company’s competitors to, among other things, incorporate new sealing technologies into the NIDs that the Company is currently supplying under its agreement. The Company believes that Verizon will accept the Company’s offer to fulfill Verizon's new NID requirements.

Fiscal Years Ended June 25, 2004, June 27, 2003 And June 28, 2002

        Net sales for fiscal 2004 increased $4.4 million or 18.3% to $28.5 million from $24.1 million in fiscal 2003. Net sales for fiscal 2003 decreased $5.7 million or 19.2% to $24.1 million from $29.8 million in fiscal 2002. The increase in sales for fiscal 2004 compared to fiscal 2003 resulted from increased need for the Company’s products primarily due to the severe weather that occurred during the summer of calendar 2003, compounded by the low inventory levels that the Company’s customers were then carrying, and the impact of the improvement in the telecommunications industry on some of the Company’s customers. These increases were partially offset by the reduction in the number of telephone access lines per subscriber being deployed. The sales decrease in fiscal 2003 compared to fiscal 2002 was due to the telecommunications industry-wide slowdown including cutbacks by telecommunications service providers in their construction and maintenance budgets and a reduction in the number of telephone access lines per subscriber being deployed.

        Gross profit in fiscal 2004 was $8.6 million compared to $5.8 million in fiscal 2003, an increase of approximately $2.8 million or 48.4%. Gross profit margins for those periods were 30.2% and 24.1%, respectively. The improved gross profit level and margin were primarily due to the increased sales levels and the actions that the Company has taken to reduce the cost of producing its products. Gross profit in fiscal 2003 was $5.8 million, or 24.1% of sales, compared to $7.2 million in fiscal 2002, or 24.2% of sales, excluding a $1.9 million inventory write-down for excess and obsolete inventory in fiscal 2002. The lower gross profit level in fiscal 2003 was due to the lower sales level. Excluding the inventory write-down in fiscal 2002, gross profit margins for fiscal 2003 and 2002 were essentially at the same levels, despite the lower sales levels in the fiscal 2003 period, due to the actions taken by the Company to reduce its cost structure and an improved mix of sales of higher margin products.

        Selling, general and administrative expenses in fiscal 2004 were $5.7 million compared to $5.5 million in fiscal 2003, an increase of approximately $215,000 or 3.9%. The increase in these expenses resulted primarily from an increase in marketing expenses related to the Company’s efforts to introduce new products and diversify its customer base. Selling, general and administrative expenses in fiscal 2003 were $5.5 million compared to $8.7 million in fiscal 2002, a decrease of approximately $3.2 million, or 37.3%. The decrease in fiscal 2003 was principally due to the success of the Company’s cost reduction efforts and the effect of lower sales on variable expenses.

        Research and development expenses in fiscal 2004 were $1.4 million compared to $1.3 million in fiscal 2003. Though essentially spending at the same level in fiscal 2004 as in fiscal 2003, the Company directed most of these outlays in 2004 to new products as opposed to its traditional copper-based protection products. Research and development expenses for fiscal 2003 were $1.3 million compared to $1.8 million in fiscal 2002, a decrease of approximately $413,000 or 23.5%. The decrease in fiscal 2003 was due to the Company’s ability to reduce these expenses through the use of collaborative engineering efforts with its contract manufacturers.

        The charge of $1.7 million in fiscal 2002 was for the impairment of long-lived assets the Company no longer used. See Note 2 of notes to Consolidated Financial Statements for information concerning this charge.

        Interest expense was $14,000 in fiscal 2004 compared to $41,000 in fiscal 2003, a decrease of approximately $27,000 or 65.9%. Interest expense was $41,000 in fiscal 2003 compared to $70,000 in fiscal 2002, a decrease of approximately of $29,000. The declines were due to decreased borrowings under the Company’s credit facilities.

        Interest income for fiscal 2004 was $32,000 compared to $17,000 in fiscal 2003, an increase of approximately $15,000 or 88.2%. Interest income was $17,000 in fiscal 2003 compared to $8,000 in fiscal 2002, an increase of approximately $9,000. The increases were due to higher average cash and cash equivalent balances held by the Company.

        In fiscal 2004, the Company recorded a provision for income taxes of $60,000, primarily due to the limitations on the use of net operating loss carryforwards under alternative minimum tax regulations. (See Note 4 of Notes to Consolidated Financial Statements for information relating to the Company’s net operating loss carryforwards.) Due to the Company’s pre-tax losses, there was no tax provision during the two years ended June 27, 2003.

        Net earnings for fiscal 2004 were $1.6 million or $0.12 per diluted share, compared to a net loss of $1.0 million or $0.09 per diluted share in fiscal 2003 and a net loss of $6.5 million or $0.56 per diluted share in fiscal 2002.

Impact of Inflation

        The Company does not believe its business is affected by inflation to a greater extent than the general economy. The Company’s products contain a significant amount of plastic that is manufactured out of petroleum which has recently risen in price. This price increase could have an adverse effect on the cost of the Company’s products and profit the Company realizes. The Company monitors the impact of inflation and attempts to adjust prices where market conditions permit. Inflation has not had a significant effect on the Company’s operations during any of the reported periods.

Liquidity and Capital Resources

          Fiscal 2004 Liquidity compared to Fiscal 2003

        The Company’s cash and cash equivalents were $4.2 million at the end of fiscal 2004 compared to $772,000 at the end of fiscal 2003, an increase of approximately $3.4 million. Working capital increased to $11.0 million at the end of fiscal 2004 from $8.2 million at the end of fiscal 2003.

        During fiscal 2004 and fiscal 2003, the Company generated $3.7 million and $293,000, respectively, of net cash from operating activities. The cash generated from operating activities in fiscal 2004 was produced from cash provided by changes in operating assets and liabilities of $617,000 and net cash earnings (net earnings of $1.6 million plus depreciation and amortization expense of $1.0 million and loss on disposal of capital assets of $512,000) of $3.1 million. The cash produced by changes in operating assets and liabilities resulted from an increase of $1.0 million in accounts payable and accrued liabilities due to timing of payments to vendors and a reduction in inventory of $500,000 due to the fulfillment of sales orders with existing inventory, partially offset by an increase in accounts receivable of $914,000 due to higher sales.

        Net cash used in investing activities was $444,000 in fiscal 2004 compared to $85,000 of net cash provided in fiscal 2003. The net cash used in investing activities during fiscal 2004 was for purchases of capital assets.

        Net cash provided by financing activities was $88,000 in fiscal 2004 compared to $474,000 of net cash used in fiscal 2003. The net cash provided by financing activities in fiscal 2004 was due to proceeds received from the exercise of stock options of $127,000, partially offset by $39,000 of payments of debt and obligations under capital leases. In fiscal 2003, $455,000 was used to repay a term loan under a revolving credit facility.

          Fiscal 2003 Liquidity compared to Fiscal 2002

        The Company’s cash and cash equivalents decreased during fiscal 2003 by $96,000 to $772,000 at the end of fiscal 2003. The decrease resulted from net cash flows used in financing activities of $474,000 primarily to repay the Company’s term loan, partially offset by net cash flows from operations of $293,000 and from investing activities of $85,000. Working capital was $8.2 million at the end of both periods.

        During fiscal 2003 and fiscal 2002, the Company generated $293,000 and $2.9 million, respectively, of net cash from operating activities. The cash generated from operating activities in fiscal 2003 was produced from cash provided by changes in operating assets and liabilities of $398,000 exceeding the Company’s net cash loss (net loss of $1.0 million plus depreciation and amortization expense of $1.1 million less gain on disposal of assets of $212,000) of $105,000. The cash produced by changes in operating assets and liabilities resulted from a decrease of $997,000 in accounts receivable from the prior year balance to $2.5 million at June 27, 2003 due to improved collections and lower sales, and inventory decreases of $1.5 million primarily due to the fulfillment of sales orders with existing inventory, partially offset by a decrease in accounts payable and accrued expenses of $2.0 million due to the lower sales volume, cost reduction efforts implemented during the year and accelerated payments to vendors.

        Net cash provided by investing activities was $85,000 in fiscal 2003 compared to $136,000 of net cash used in fiscal 2002. The comparative increase in net cash provided by investing activities during fiscal 2003 was principally the result of the sale of two of the Company’s condominiums.

        Net cash used in financing activities was $474,000 in fiscal 2003 compared to $2.2 million in fiscal 2002. The net cash used in financing activities in fiscal 2003 resulted principally from the repayment of $455,000 of borrowings under the Company’s revolving credit facility.

Capital Resources

        The Company has a credit facility that enables it to have up to $3.0 million of borrowings outstanding at any one time, limited by a borrowing base equal to 85% of eligible accounts receivable, subject to certain reserves. Outstanding borrowings under the credit facility will bear interest at a specified bank’s prime rate (4.0% at June 25, 2004) plus 1%, but never less than 5% per annum, and the Company is also required to pay an annual facility fee of 3/4 of 1% of the maximum amount of the credit facility. At June 25, 2004, the borrowing base was $2.9 million and there were no borrowings outstanding. The credit facility has a scheduled term (ending September 2004) and is automatically renewed for successive two year periods but may be terminated by the lender at any time on 60 days notice, or the Company on 60 days notice prior to the end of the initial term or any renewal term. The credit facility is guaranteed by the Company’s subsidiary and is secured by a lien and security interest against substantially all of the assets of the Company. The credit facility requires, among other things, that the Company maintain a consolidated tangible net worth of at least $12.0 million and working capital of at least $6.0 million. The credit facility also prohibits, without the lender’s consent, the payment of cash dividends, significant changes in management or ownership of the Company, business acquisitions, the incurrence of additional indebtedness, other than lease obligations for the purchase of equipment, and the guarantee of the obligations of others.

        Funds anticipated to be generated from operations, together with available cash, cash equivalents and the Company’s Credit Facility, are considered to be adequate to finance the Company’s operational and capital needs for the next twelve months.

Contractual Obligations and Commercial Commitments

        The following table sets forth a schedule of payments required under the Company’s contractual obligations and includes the maximum potential payments that may be required under the Company’s other commercial commitments:

        The Company has no commitments for capital expenditures, but expects to purchase new equipment and incur leasehold improvements in the normal course of business.

Off-Balance Sheet Financing

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

Recently Issued Accounting Pronouncements

        In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.”  Interpretation No. 46 applied immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date.  This Interpretation was adopted by the Company in the quarter ending September 26, 2003 for interests acquired in variable interest entities prior to February 1, 2003.  This Interpretation requires variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack specified characteristics.  The Company does not have any variable interest entities and, therefore, the adoption of FIN 46 did not affect the Company’s financial position or results of operations.

        The FASB recently issued a proposed accounting standard that would require stock-based employee compensation to be recorded as a charge to earnings beginning in calendar 2005. The Company will continue to monitor the progress of the issuance of this standard as well as evaluate the impact on the Company.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risks

        The Company is exposed to market risks, including changes in interest rates. The interest payable under the Company’s Credit Facility is based on prime plus 1% and, therefore, is affected by changes in market interest rates. Historically, the effects of movements in the market interest rates have been immaterial to the consolidated operating results of the Company.

        The Company requires foreign sales to be paid in U.S. currency and is billed by its contract manufacturers in U.S. Currency. Since one of the Comp