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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

        For the quarterly period ended December 26, 2003

Commission file number 1-8048

TII NETWORK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

State of incorporation: Delaware                                         IRS Employer Identification No: 66-0328885

1385 Akron Street, Copiague, New York 11726
(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 __

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ___ No X    

The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of January 29, 2004 was 11,907,784.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, execpt share data)

See Notes to Consolidated Financial Statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, execpt share data)

See Notes to Consolidated Financial Statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
(Unaudited)

See Notes to Consolidated Financial Statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Interim financial statements: The unaudited interim consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. The consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals which, in the opinion of management, are considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2003. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year.

Note 2 – Comprehensive income: For the six months ended December 26, 2003 and December 27, 2002, comprehensive income (loss) was the same as net earnings (loss).

Note 3 — Fiscal year: The Company reports on a 52-53 week fiscal year ending on the last Friday in June, with fiscal quarters ending on the last Friday of each calendar quarter. The Company’s fiscal year ending June 25, 2004 will contain 52 weeks. Fiscal 2003 also had 52 weeks.

Note 4 – Stock–Based Compensation: The Company applies the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for its stock option plans. The exercise price of all options granted under all the plans has equaled at least the market value of the common stock on the dates of grants. Accordingly, no compensation expense has been recognized for options granted to employees or directors.

The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date, as prescribed by SFAS No. 123, the Company’s net earnings (loss) would have changed to the pro forma amounts indicated in the table below.

Note 5 — Net earnings (loss) per common share: Basic net earnings (loss) per share are computed based on the weighted average number of common shares outstanding during the respective period. Diluted earnings per share is computed based on the weighted average number of common shares outstanding increased by dilutive common stock warrants and options.

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

Options and warrants to purchase an aggregate of approximately 3,731,000 and 7,051,000 shares of common stock outstanding as of December 26, 2003 and December 27, 2002, respectively, are not included in the computation of diluted earnings per share for the three month periods then ended because their exercise prices were greater than the average market price of the Company’s common stock for the period.

Note 6 - Inventories: Inventories consisted of the following major classifications:

Note 7 – Credit Facility: The Company has a Credit Facility that enables the Company 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 December 26, 2003) 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 December 26, 2003, the borrowing base was $2.3 million and there were no borrowings outstanding. The Credit Facility has an initial one year term 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 covenants, 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.

Note 8 – Significant Customers: For the three months ended December 26, 2003 and December 27, 2002, the Company’s major customer accounted for approximately 47% and 56% of the Company’s consolidated net sales, respectively. Another customer accounted for approximately 11% and 14% of the Company’s consolidated net sales for the three months ended December 26, 2003 and December 27, 2002, respectively. A third customer accounted for approximately 13% of the Company’s consolidated net sales for the three months ended December 26, 2003. For the six months ended December 26, 2003 and December 27, 2002, the Company’s major customer accounted for approximately 53% and 59% of the Company’s consolidated net sales, respectively. Another customer accounted for approximately 12% and 11% of the Company’s consolidated net sales for the six months ended December 26, 2003 and December 27, 2002. A third customer accounted for approximately 11% of the Company’s consolidated net sales for the six months ended December 26, 2003. As of December 26, 2003 two customers accounted for 29% and 25% of accounts receivable, and as of December 27, 2002 these customers accounted for approximately 37% and 12% of accounts receivable, respectively.

Note 9 – Stock Option Plans: On December 3, 2003, the shareholders approved the 2003 Non-Employee Director Stock Option Plan (the “2003 Plan”), which expires on September 23, 2013 and replaced the Company’s 1994 Non-Employee Stock Option Plan on December 4, 2003. The 2003 Plan provides for the grant of options to purchase up to 500,000 shares of common stock to non-employee directors of the Company. At each annual shareholders meeting at which directors are elected, each outside director in office after the meeting will automatically be granted options to purchase 5,000 shares plus additional specified shares for serving on Board committees or as chairperson of a committee. On the date a person initially becomes an outside director, that individual is granted 24,000 options under the 2003 Plan. Options granted under the 2003 Plan must have an exercise price equal to the market value of the common stock on the date of grant. All options granted under the 2003 Plan will have a term of ten years and are exercisable on the date of grant, except the initial option grant to new outside directors will vest equally over three years.

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 consolidated financial statements and notes thereto.

Business

TII Network Technologies, Inc., formerly named TII Industries, Inc., and subsidiary (collectively 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 are the most critical areas where management’s judgments and estimates affect the Company’s reported results. While the Company believes its estimates are reasonable, misinterpretation of the conditions that effect 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 the lower of cost or market. In establishing the appropriate inventory allowances, management assesses the ultimate recoverability of the inventory considering such factors as technological advancements in products 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 undiscounted expected cash flows is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

General

Over the last several years, the continuing telecommunications industry-wide slowdown, cutbacks in construction and maintenance budgets and a reduction in the number of telephone access lines being deployed by Telcos have adversely affected the Company. During this period, the Company has been both reducing the cost of its products and its overall cost structure while also developing new products to increase its market share and diversify its customer base. While the Company expects some industry trends to adversely affect sales to certain of our customers, the Company believes that there is a general overall improvement in the telecommunications industry.

Beginning in the fourth quarter of fiscal 2003, sales of the Company’s products increased and, combined with the success of the cost reduction efforts, the Company has been profitable. Net earnings for the second quarter of fiscal 2004 were $320,000 or $0.02 per diluted share, compared to a net loss of $730,000 or $0.06 per diluted share, in the year ago quarter. Net earnings for the six months ended December 26, 2003 was $1.2 million or $0.10 per diluted share compared to a net loss of $669,000 or $0.06 per diluted share, in the year ago six month period.

This past fall, 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”). More recently, the Company's principal customer, Verizon, announced an accelerated plan to begin deploying FTTP and high-speed wireless without increasing its overall capital budget, which is expected to result in a reduction of capital outlays on their traditional copper network. While these programs are in the early stage of planning by the RBOCs, their deployment could have a significant impact on the Company’s traditional protection based products since FTTP and wireless networks require less traditional protection than the current copper networks.

Results of Operations

Net sales for the second quarter of fiscal 2004 were $7.0 million compared to $5.5 million for the comparative prior year period, an increase of approximately $1.5 million or 26.5%. Net sales for the first six months of fiscal year 2004 were $16.2 million compared to $12.6 million for the similar prior year period, an increase of approxima