UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington. D.C. 20549

FORM 10-K


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

For the fiscal year ended December 31, 2008

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)


Delaware		66-0328885

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

141 Rodeo Drive, Edgewood, New York 11717

(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:


Title of each class		Name of exchange on which registered

Common Stock, $0.01 par value		The NASDAQ Stock Market LLC

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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 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. 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.


	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 aggregate market value of the voting stock of the registrant outstanding as of June 30, 2008, the last business day of the registrant’s most recently completed second quarter, held by non-affiliates of the registrant was approximately $21.5 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 March 24, 2009 was 13,769,792.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to its 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

Table of Contents


			PAGE

PART I

	Item 1	Business	5

	Item 1A	Risk Factors	10

	Item 1B	Unresolved Staff Comments	15

	Item 2	Properties	15

	Item 3	Legal Proceedings	16

	Item 4	Submission of Matters to Vote of Security Holders	16

PART II

	Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Repurchases of Equity Securities	16

	Item 6	Selected Financial Data	16

	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

	Item 7A	Quantitative and Qualitative Disclosures About Market Risks	25

	Item 8	Financial Statements and Supplementary Data	26

	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	48

	Item 9A(T)	Controls and Procedures	48

PART III

	Item 10	Directors and Executive Officers of the Registrants	*

	Item 11	Executive Compensation	*

	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters	*

	Item 13	Certain Relationships and Related Transactions	*

	Item 14	Principal Accountant Fees and Services	*

PART IV

	Item 15	Exhibits and Financial Statement Schedules	49


	*	The information required by Part III (Items 10, 11, 12, 13 and 14) of Form 10-K is incorporated herein by reference to the information called for by those items which will be contained in our Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with respect to our 2009 Annual Meeting of Stockholders.

Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K 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:


	•	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 (see “Business – Marketing and Sales”);

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

	•	exposure to increases in the cost of our products, including increases in the cost of our petroleum-based plastic products and precious metals (see “Business – Manufacturing” and “Business – Raw Materials”);

	•	the ability to timely develop products and adapt our existing products to address technological changes, including changes in our principal market (see “Business – Products” and “Business –Product Development”);

	•	competition in our traditional Telco market and new markets into which we have been seeking to expand (see “Business – Competition”);

	•	dependence on, and ability to retain, our “as-ordered” general supply agreements with our largest customer and our ability to win new contracts (see “Business – Marketing and Sales”);

	•	dependence on third parties for certain product development (see “Business – 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 (see “Business – Manufacturing”);

	•	weather and similar conditions, including the effect of typhoons on our assembly facilities in the Pacific Rim, the effect of hurricanes on our warehouse in the United States, which can increase the demand for our products and harsh winter conditions which can temporarily disrupt the installation of certain of our products by Telcos (see “Business – Manufacturing” and “Business – Seasonality”);

	•	the ability to attract and retain technologically qualified personnel (see “Business – Product Development”); and

	•	the availability of financing on satisfactory terms (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

PART I


ITEM 1.	BUSINESS

General

TII Network Technologies, Inc. and subsidiaries (together, “Tii,” the “company,” “we,” “us” or “our”) design, manufacture and sell products to the service providers in the communications industry for use in their networks. Our products are typically found outdoors in the service provider’s distribution network, at the interface where the service provider’s network connects to the user’s network, and inside the user’s 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”). Tii is certified to the telecommunications quality standard TL9000 and is a voting member of the Quest forum group responsible for updating TL9000.

In June 2007, we moved our headquarters from a leased facility in Copiague, New York to a building we purchased in Edgewood, New York. In September 2007, we consolidated the operations of our Puerto Rico leased facility into our new headquarters, resulting in the closure of the Puerto Rico facility.

Products

Network Interface Devices (“NID”) and Accessories

Telco NIDs house the FCC mandated demarcation point between the public switched telephone network (PSTN) provider and the customer’s network. A NID is typically a thermoplastic box located on the outside of a customer’s premise, housing primary surge protectors, customer demarcation, customer termination ports and various electronic circuits. It is ruggedized against the environment and will have both Telco and customer access points.

Network Interface Devices: Our family of 1,2,3,6 and 12 line NIDs is designed to comply with rigorous industry environmental and electrical performance standards. Our NIDs usually incorporate a variety of components including our overvoltage surge protectors, Digital Subscriber Line (“DSL”) service splitters for broadband delivery and customer bridge modules which facilitate customer access to the network.

Accessories: Tii designs and manufactures a broad range of products designed to operate in our own and competitor’s NIDs. These products include station protectors, customer wiring modules to interconnect service to the home, DSL service splitters, Electro-Magnetic Interference (EMI) filters and line test modules, which enable remote testing of the integrity of the service providers’ lines, minimizing costly maintenance dispatches.

Broadband Products

Our broadband products facilitate the successful deployment of Triple Play services (voice, video and data) and are comprised of both active electronics and passive components. These products enable service providers to offer the most stable and highest bandwidth services safely to the user at the lowest deployment cost.

Digital Subscriber Line Technology: Telcos have been utilizing their existing infrastructure of copper access wires to deliver broadband services with DSL technology. We have developed an extensive line of DSL electronic products for this market, including a line of xDSL POTS (Plain Old Telephone Service) Splitters. These splitters isolate the voice and data signals on a Telco line to provide separate outputs for phone and data services which enables DSL services. Modules are available in several NID configurations, as well as several indoor units.

Fiber Optic: Tii has developed a grounding and overvoltage protection device used in the deployment of Optic Network Terminals (“ONT”) by the service providers which convert light pulses from a fiber optic line to electrical pulses. Tii provides various connectivity modules typically utilized inside ONTs, and active electronic devices to enable the fiber delivered telephone service to coexist with Gate Entry and Door Entry Intercom systems.

Intelligent NID: Our outdoor intelligent residential gateway Outrigger^TM, now sometimes referred to as an “iNID,” facilitates the delivery of Triple-Play bundled services – digital telephone, television and Internet data by telephone or cable service providers. Our current configuration accomplishes this by embedding the Home Phone Network Alliance (“HPNA”) technology for delivering Internet Protocol (“IP”) technologies to customers over a home’s existing cable TV (COAX) or telephone wiring, eliminating the need to run new dedicated CAT5 Ethernet cabling to provide Triple-Play services.

HomePlug®: HomePlug® technology enables networking of voice, data and audio devices through the consumers’ AC power lines. Our HomePlug®-compatible and HomePlug®-embedded surge protectors incorporate our patented and proprietary AC protection, filtering and HomePlug® Powerline integrated circuits.

Connectivity Products

Connectivity products include both active and passive solutions that incorporate superior wire management, technician friendly “tool-less” design, insulation displacement contact (“IDC”) and gel-sealed options. These products are designed to support broadband-enabled services and network management.

Voice over Internet Protocol (“VoIP”) Products: These solutions provide Telco “NID like” environmentally robust enclosures and advanced gel sealed wire termination products for connection of broadband delivered VoIP telephony service. An extensive range of connectivity solutions is offered for single family, multi-dwelling unit (“MDU”) and commercial applications.

Switchable Voice NID (“SVN”) Products: These solutions enable the efficient installation and connection of VoIP telephony to cable subscribers and include SVNs which remotely activate VoIP telephony. Units are available for single family, multiple dwelling unit (“MDU”) and commercial applications.

Voice Intercom Systems (“VIS”) Products: These products are used in MDUs for telephony delivered via cable, fiber or DSL VoIP to enable the newly installed telephone service to work with Gate Entry and Door Entry Intercom systems which are typically disconnected when broadband services are deployed.

Other Connectivity: These products include aerial terminals and enclosures that provide world class performance in extremely harsh outdoor environments and are located throughout the service providers’ network, typically deployed in aerial locations.

Overvoltage Surge Protection

Surge protection products are used by major telecommunications providers at subscriber locations, protecting both personnel and network plant equipment, while increasing field service reliability and reducing maintenance costs.

Gas Tubes: Our gas tubes represent the foundation upon which most of our overvoltage surge protector products are based. Our proprietary two and three electrode gas tubes have been designed to withstand multiple high-energy overvoltage surges while continuing to provide a long service life.

Modular Station Protectors: Our broad line of station overvoltage surge protectors are designed to be deployed in a variety of configurations to accommodate service providers’ requirements. Our most advanced overvoltage surge protector incorporates sealed Insulation Displacement Connector (“IDC”) “tool-less” connections, which reduce installation time, increase reliability and are ideally suited for today’s high speed broadband service networks.

Other Surge Protection Products: We design and manufacture a variety of other surge protection devices that include a patented high-performance 75 ohm coaxial protector for cable networks, a 50-ohm coaxial protector for wireless service providers’ cell sites, a gel-sealed Ethernet data protector and power line/data line protectors for personal computers and home entertainment systems.

Product Development

We focus our product development resources on products that providers of communication services need to more effectively deliver their services. Our customers maintain highly complex networks, and many of the products we develop are the result of inquiries of our engineers by our customers. An important aspect of our product development is that we also invest our resources to develop products in anticipation of the future network strategies of our customers.

Our R&D strategy includes developing products internally, as well as with contract engineers, technology partners and contract manufacturers. Our R&D engineers work closely with our contract manufacturers during the design and development phase of all products.

Our R&D department is skilled and experienced in various technical disciplines, including physics, electrical, mechanical and software design, with specialization in such fields as plastics, electronics, metallurgy and chemistry. We also use contract engineers skilled in specific design tasks. Our contract manufacturing partners are similarly skilled in these R&D fields, with engineering and manufacturing expertise to bring a product of the highest quality at a competitive price to market on time.

For the years ended December 31, 2008 and 2007, R&D expense was $2.0 million and $2.2 million, respectively. The largest portion of our development efforts is focused on new products for the growth segments of the Telco and MSO markets, primarily broadband deployment.

Marketing and Sales

We market and sell our products to the providers of communications services through a combination of our own sales employees and manufacturers’ representatives. Products are distributed either directly or through national and regional distributors. OEM customers are sold direct or through distributors.

The following is certain information concerning customers that accounted for 10% or more of our consolidated net sales during the periods presented below. The loss of, or the disruption of shipments to, any of these customers could have a material adverse effect on our results of operations and financial condition.


	Years ended December 31,

	2008		2007		2006

Customer A		33%		29%		46	%
Customer B		14%		13%		13	%
Customer C		*		15%			*
Customer D		12%		*			*

*Less than 10%

While we are marketing and selling into new markets, Telco customers represented approximately 87%, 74% and 89% of our net sales for the years ended December 31, 2008, 2007 and 2006, respectively.

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 are to continue to provide product to Verizon until March 31, 2010. Prices, warranties, benefits, terms and conditions granted to Verizon under the Verizon Agreement are fixed, but must be at least as favorable as those granted by Tii to other commercial customers under like or similar circumstances. The principal products being supplied under the terms of the Verizon Agreement are NIDs for deployment by Verizon in its traditional copper transmission network. The products incorporate our sealing technologies and other components, including overvoltage protection and DSL enabling electronics.

Sales of our products to Telcos, including Verizon, 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 for various reasons, including without cause by either party, or extended by mutual written agreement. Purchases of our products are generally based on individual customer purchase orders for delivery from inventory or within up to thirty days. We, therefore, have no material firm backlog of orders.

We believe that our 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. We believe that this, together with responsive customer service, reduces the risks inherent in “as-ordered” contracts. We further believe that our superior products and customer care, attributes which have attracted and maintained our Telco business, will enhance our ability to expand into emerging markets.

We are also pursuing international markets for our products. International sales have been made primarily to countries in the Caribbean, South and Central America, Canada, the Pacific Rim and Europe. Our international sales were approximately $3.2 million (9% of sales), $2.3 million (5% of sales) and $2.4 million (6% of sales) for the years ended December 31, 2008, 2007 and 2006, respectively. We require foreign sales to be paid for in U.S. currency. International sales are affected by such factors as the North American Free Trade Agreement (“NAFTA”) and future Central American Free Trade Agreement (“CAFTA”) requirements, exchange rates, changes in protective tariffs and foreign government import controls. We believe international markets continue to offer additional opportunities for our products and we are actively pursuing these markets.

Manufacturing

In September 2007, we relocated our quick-response, low volume manufacturing operation from our leased facility in Puerto Rico to our new headquarters in Edgewood, New York. All high volume production is outsourced and is produced by contract manufacturers within the Pacific Rim, principally China and Malaysia, utilizing, in most cases, our equipment and processes. All product manufactured in Asia is approved by Tii prior to shipping out of country of origin using Acceptable Quality Level (“AQL”) sampling procedures and on site auditing by Tii quality personnel located in our China Quality Assurance laboratory. This laboratory, which holds the same TL9000 certificate as Tii, reports directly to our Quality Vice President. Our primary contract manufacturer is an independent U.S. based corporation with a wholly owned subsidiary located in China that is listed by Underwriters Laboratories (“UL”) and is TL9000 qualified and registered. A second contract manufacturer, in Malaysia, produces most of our proprietary gas tubes. That company also sells its own gas tubes to some of our competitors. There are strict non-disclosure agreements with each of these contract manufacturers. We depend on our contract manufacturers to produce the majority of our products for sale to customers.

Raw Materials

The primary components of our products are stamped, drawn and formed parts made out of a variety of commonly available metals, ceramics and plastics. The manufacturers of our overvoltage surge protectors and station electronic products use commonly available components, printed circuit boards and standard electrical components, such as resistors, diodes and capacitors. All orders with suppliers of the components utilized in the manufacture of our products are scheduled for delivery within a year. Our products contain a significant amount of plastic that is manufactured out of petroleum and we import most of our products from our contract manufacturers, principally in China and Malaysia.

Competition

We face significant competition across all of our markets and product lines. Our principal competitors within the Telco market are Corning Cable Systems LLC, Tyco Electronics Corp, which is also our customer (see “Business - Marketing and Sales”) and Bourns, Inc. Our principal competition within the MSO market is Tyco Electronics Corp, Channell Commercial Corporation, Belkin Corporation and American Power Conversion Corp.

Our reputation among our 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 our history of continually improving technology, improved operations and effective collaborations, allows us to bring product solutions to our customers quickly and at competitive prices.

Principal competitive factors within our markets include price, technology, product features, service, quality, reliability and bringing new products to market on time. Compared to our business and operations, most of our competitors have substantially greater financial, sales, manufacturing and product development resources. We believe that our sales, marketing and research and development departments, our high quality products and service, our contract manufacturers’ low cost production capabilities and our engineering resources, combined with our overvoltage surge protection technology, enable us to maintain our competitive position.

Patent And Trademarks

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

Government Regulation

The Telcos and MSOs are 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 our products. While those regulations do not typically apply directly to us, the effects of those regulations, which are under continuous review and subject to change, could adversely affect our customers and, ultimately, TII.

The National Electric Code (“NEC”) requires that an overvoltage surge protector listed by UL or another qualified electrical testing laboratory be installed on all traditional Telco copper subscriber telephone lines that are exposed to lightning and accidental contact with electric light or power conductors. We have traditionally obtained and maintained listing by UL where required.

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

Employees

On March 24, 2009, we had approximately 38 full-time employees. We have not experienced any work stoppage as a result of labor difficulties and believe we have satisfactory employee relations. We are not a party to any collective bargaining agreements.

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 based on 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).


ITEM 1A.	RISK FACTORS

An investment in our common stock involves a number of risks. Our business and future operating results may be affected by many risks, uncertainties and other factors, including those set forth below. These factors could materially and adversely affect our business, financial condition, results of operations, cash flows and prospects. As a result, the market price of our common stock could decline and you could lose all or part of your investment. The risks, uncertainties and other factors described in this Report are not the only ones we face. There may be additional risks, uncertainties and other factors that we do not currently consider material or that are not presently known to us.

Risks Relating To Our Business

Current economic conditions may continue to adversely affect consumers and our customers and suppliers, thereby adversely affecting our financial performance, results of operations and financial condition.

The deterioration in the global economic environment over the past several months has resulted in declining values in real estate, reduced credit lending by banks, solvency concerns of major financial institutions and others, increases in unemployment levels and significant declines and volatility in the global financial markets. These factors have negatively impacted the level of consumer spending. Certain of the products offered by our customers - service providers in the communications industry - are dependent on consumer spending which, in turn, impacts the demand of the service providers for our products. The credit crisis is also causing our customers to reduce inventories and certain customers are more aggressively seeking pricing concessions than in the past. These actions have the potential to negatively affect our sales and profit margins.

Our primary market, the traditional Telco copper-based transmission network, has been declining over the last several years.

Principally due to the competitive impact of alternative technologies that compete with the Telco’s traditional copper-based transmission network, such as cellular service and Fiber-To-The-Premises (“FTTP”), and competition from MSOs, over the past several years there have been cutbacks in copper-based construction and maintenance budgets by the Telcos and a reduction in the number of their access lines. As a result, our principal copper-based business has been adversely affected.

In this regard, our major customer, Verizon, continues its strategy to deploy FTTP. This multi-year program has resulted in a reduction of capital outlays on its traditional copper network and has, therefore, impacted our traditional protection based products since FTTP networks require less traditional protection than current copper networks. Though landlines, in general, continue to be dropped by customers as a result of the introduction and acceptance of new technologies, current economic conditions are accelerating this trend. While we still believe that while the current embedded copper infrastructure will continue to play a significant role as a transmission medium for years to come, it will continue to decline year to year. Further, there can be no assurance that this trend will not accelerate.

New product introductions by us could be costly and there is no certainty that we will be able to successfully develop or market them.

In response to the trend by Telco’s to move away from reliance on their copper-based transmission network, we have been expanding our marketing efforts and incurring costs in pursuing new markets with new products designed to take advantage of our proprietary overvoltage surge protection, enclosure technologies and electronic design capabilities, while continuing to meet the needs of our existing customers.

Our success will depend, in large measure, upon our ability to timely identify, develop and market new products at competitive prices, enhance our current product offerings and develop new products that address our customers’ and the marketplace’s needs for additional functionality and new technologies. In this regard we have been developing various Voice over Internet Protocol, so called VoIP products, new station electronic and other products for Telcos, MSOs and home networking products for consumers. See Item 1, “Business – Products.” The development of new products is subject to a variety of risks, including:


	•	Our ability to determine and meet the changing needs of our customers and the marketplace;

	•	Our ability to predict market requirements and develop new products meeting those needs in advance of the development of similar or advanced products by our competitors;

	•	Our ability to develop and engineer products on a timely basis, within budget and at a quality and performance level that will enable us to manufacture, or have those products manufactured for us, and then sell them on a profitable basis;

	•	The availability or ability to obtain sufficient financing to fund any capital investments needed to develop, manufacture, market and sell new products;

	•	Product development cycles that can be lengthy and are subject to changing requirements and unforeseen factors that can result in delays;

	•	New products or features which may contain defects that, despite testing, are discovered only after a product has been installed and used by customers; and

	•	Changing technology, evolving industry standards, changes in customer requirements and competitive product introductions and enhancements.

We cannot provide assurance that products that we have recently developed or may develop in the future will achieve market acceptance. If our new products fail to achieve market acceptance, or if we fail to develop new or enhanced products that achieve market acceptance, our growth prospects and competitive position could be adversely affected. In addition, we cannot assure you that we will be successful in the development of new, profitable products or that we will not encounter delays, defects or product recalls or that we will be able to respond timely to changing industry and customer needs.

We are dependent upon a small number of customers for most of our revenue and a decrease in sales to these customers could seriously harm our business.

A relatively small number of customers account for most of our revenue. Our principal customer, Verizon, accounted for 33%, 29% and 46% of our revenue in 2008, 2007 and 2006, respectively. Another customer accounted for 14%, 13% and 13% of our revenues, respectively, during those years. Other customers have, from time to time, accounted for more than 10% of our revenues in a year. See Item 1, “Business – Marketing and Sales.” We expect that, at least in the near term, we will continue to rely on our success in selling our existing and future products to these customers in significant quantities. There can be no assurance that we will be able to retain our largest customers or that we will be able to obtain additional customers or replace key customers we may lose or who may reduce their purchases from us. The loss of one or more of these customers, or a substantial diminution in orders received from these customers, would have a material adverse effect on us.

Our contract with Verizon is a general supply contract and, as such, Verizon is not required to purchase any specific product from us, and our contract also contains other terms favorable to Verizon that could adversely impact our future results of operations.

In July 2005, we received a general supply agreement from Verizon, setting forth the terms under which we are to continue to provide product to Verizon, including additional approved products and an expanded territory, until March 31, 2010. General supply agreements do not require Telcos to purchase specific quantities of product and can be terminated without cause by either party, or extended by mutual written agreement. Prices, warranties, benefits, terms and conditions granted to Verizon under the Verizon agreement are fixed, but must be at least as favorable as those granted by us to other commercial customers under like or similar circumstances. The loss of Verizon as a purchaser of our products, or a substantial decrease in the orders received from Verizon, could have a material adverse effect on us.

Our dependence upon key customers and lack of long term commitments with customers makes it easier for those customers to cease or reduce purchases from us.

In most instances, our sales are made under open purchase orders received from time to time from our customers under general supply contracts which cover one or more of our products. Some of those contracts permit the customer to terminate the contract due to:


	•	the availability of more advanced technology;

	•	our inability to deliver a product that meets the specifications on time; or

	•	in certain cases, at any time upon notice.

In addition, although most of our general supply contracts contain terms such as the purchase price, they do not establish minimum purchase commitments.

We have certain contractual limitations on price increases, which coupled with pricing pressures, could adversely affect our gross profit margins.

Pricing pressures in the markets in which we operate are intense due in part to the consolidation of various telephone companies and their resulting purchasing power. Our general supply contracts generally prohibit us from increasing the price of our products to be sold under the contract for stated periods of time. Accordingly, any significant increase in our costs during those periods, without offsetting price increases, could adversely affect our gross profit margins.

Offshore manufacturing poses a number of risks.

Currently we depend on offshore contract manufacturers, principally in China and Malaysia, for the timely delivery of high quality product. As a result, we are subject to risks of doing business outside the United States, including:


	•	potential delays and added delivery expenses in meeting rapid delivery schedules;

	•	potential U.S. government sanctions, such as embargoes and restrictions on importation;

	•	potential currency fluctuations;

	•	potential labor unrest and political instability;

	•	potential restrictions on the transfer of funds;

	•	U.S. customs and tariffs;

	•	weather, such as Typhoons, that could disrupt the delivery of product from our Pacific Rim contract manufacturers; and

	•	health risks in the Pacific Rim region.

We are dependent upon suppliers of product components, the loss of whom could result in manufacturing and delivery delays, affect our ability to obtain components and increase prices to us.

Our contract manufacturers provide the components necessary to produce products for us. Generally they have no long-term supply contracts. Although we believe that substantially all components and supplies used will continue to be available in adequate quantities at competitive prices, we cannot assure you that we will not experience the absence of components or supplies, delays in obtaining their delivery or increases in prices in the future.

Our credit facility imposes restrictions on our ability to operate our business and obtain additional financing which may affect our ability to grow.

We currently have a credit facility in the amount of $5.0 million. The revolving credit facility is limited by a borrowing base, in general, equal to 80% of eligible accounts receivable, plus the lesser of 30% of eligible inventory, after certain reserves, or $1.5 million. The credit 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 the payment of dividends and limit our ability to repurchase our 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.

If we fail to comply with the covenants in our credit agreement, our bank lender may prohibit us from making future borrowings and may declare any borrowings outstanding at the time to become due and payable immediately.

If the amount we may borrow under the credit facility is not sufficient for our needs, we may require financing from other sources, which we may not be able to obtain until the credit facility is terminated. Our inability to obtain financing could have a material adverse effect on our ability to expand our business.

Accounting rules for stock-based compensation may adversely affect our operating results, our stock price and our competitiveness in the employee marketplace.

We have a history of using employee stock options and other stock-based compensation to hire, motivate and retain our employees. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R), “Shared-based Payment,” which has required us to measure compensation costs for all stock-based compensation, including stock options and restricted stock awards, at fair value and to recognize these costs as expenses in our statements of income. Although not a cash expense, the recognition of these expenses in our statements of income has had, and is expected to continue to have, a negative effect on our reported earnings and earnings per share, which could negatively impact our future stock price. In addition, if we reduce or alter our use of stock-based compensation to minimize the recognition of these expenses, our ability to recruit, motivate and retain employees may be impaired, which could put us at a competitive disadvantage in the employee marketplace.

The costs that we incur and management time we expend as a result of being a public company could increase significantly in the future.

We incur significant legal, accounting, administrative and other costs and expenses as a public company. We are required to comply with rules and regulations promulgated by the SEC and NASDAQ. Compliance with these rules and regulations causes us to incur legal, audit and financial compliance costs, and diverts management’s attention from operations and strategic opportunities. In 2007, we incurred significant initial costs in evaluating and reporting on our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules and regulations of the SEC and standards of the Public Company Accounting Oversight Board (PCAOB). We will incur additional costs when our independent registered public accounting firm is required to audit the effectiveness of our internal controls over financial reporting for the year ending December 31, 2009 and annually thereafter. We have provided our report on internal control over financial reporting with this filing Report. The process of assessing and testing our internal controls and complying with Section 404 is ongoing and has been, and will continue to be, expensive and time consuming, and it requires significant management attention.

A failure by us to maintain an effective system of internal controls in the future could have an adverse effect on our operating results, stock price and ability to raise financing.

We cannot be certain that the measures we have taken with respect to our internal control over financial reporting will ensure that we will maintain adequate controls over our financial processes and reporting in the future. We have in the past discovered, and may in the future discover, areas of our internal controls that require improvement. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Disclosures of material weaknesses could reduce the market’s confidence in our financial statements and harm our stock price and our ability to borrow and raise capital.

Risks Relating To Our Common Stock

We do not anticipate paying dividends.

We intend to retain any future earnings for use in our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future. In addition, our bank credit agreement prohibits us from declaring and paying any dividends.

The anti-takeover provisions in our certificate of incorporation and under Delaware law may discourage or prevent takeover offers which could increase the price of our stock if those provisions did not exist.

Our certificate of incorporation and the Delaware General Corporation Law contain provisions that, while intended to enable our Board of Directors to maximize security holder value, could discourage or prevent any attempts by outsiders to obtain control of us through mergers, tender offers, proxy contests and other means and could prevent or delay changes in our management. Generally, attempts to obtain control of a company results in security holders obtaining a premium above the market price of a company’s stock that existed before the attempt is made. These provisions include the following:


	•	the ability to issue preferred stock with terms fixed by our Board of Directors at the time of their issuance without further security holder authorization;

	•	a supermajority vote to authorize certain transactions;

	•	a classified Board of Directors;

	•	a requirement that directors may be removed only by stockholders for cause; and

	•	the benefits of Delaware’s “anti-takeover” statutory provisions.

Future sales of our common stock in the public market could adversely affect the trading price of our common stock.

Sales of significant amounts of our common stock in the public market, including short sale transactions, or the perception that such sales will occur, could adversely affect prevailing trading prices of our common stock.

The price of our common stock may continue to be volatile.

The market price of our common stock has been at times, and may in the future be, subject to wide fluctuations. See Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities.” Factors that may adversely affect the market price of our common stock include, among other things:


	•	quarter to quarter variations in operating results;

	•	the occurrence of events that affect or could affect our operating results;

	•	changes in earnings estimates by analysts;

	•	announcements regarding technological innovations or new products by us or others and the degree of success of those innovations and new products;

	•	announcements of gains or losses of significant customers or contracts;

	•	prospects in the telecommunications industry;

	•	changes in the regulatory environment;

	•	market conditions; and

	•	the sale or attempted sale of large amounts of our common stock into the public markets.

There is no assurance of continued NASDAQ listing of our common stock.

Although we are currently in compliance with the NASDAQ Capital Market continuing listing requirements, we cannot assure you that our common stock will continue to be quoted on NASDAQ. A listed issuer is not in compliance with NASDAQ Stock Market’s minimum closing bid price requirement for continued listing on its Capital Market if it fails to achieve at least a $1.00 closing bid price for a period of 30 consecutive business days. Once out of compliance, listed issuers are provided one automatic 180-day period to regain compliance.

Thereafter, issuers, such as the company, that are listed on the NASDAQ Capital Market can receive an additional 180-day remedial period if they are in compliance with all NASDAQ Capital Market initial listing requirements (except the minimum bid price requirement). We are not presently in compliance with the minimum closing bid requirement. The price range of our common stock on the NASDAQ Capital Market since January 1, 2006 is indicated under Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities.” However, in light of the extraordinary turmoil in the global economy and the capital markets, on October 16, 2008, the NASDAQ Stock Market suspended this requirement through January 19, 2009 and, on December 19, 2008, further extended the suspension of this requirement through April 19, 2009. On March 18, 2009, the NASDAQ Stock Market filed an application with the SEC to further extend the suspension of this requirement until July 19, 2009. Should the market price of our common stock not rebound, the time periods under which our compliance is judged would commence on April 20, 2009 (or July 20, 2009 if the NASDAQ Stock Market’s current application to extend the suspension period is approved by the SEC). There can be no assurance that the SEC will approve the NASDAQ Stock Market’s proposed extension of the suspension period or that the NASDAQ Stock Market will seek a further extension of the suspension of this requirement. If we fail to maintain a NASDAQ listing by reason of the price of our common stock or other listing maintenance requirements, our common stock will likely be traded on the NASDAQ OTC Bulletin Board or under the quotation system maintained by Pink Sheets, LLC. In such event, the market value of our common stock could decline and security holders may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock.

If our common stock ceases to be listed on NASDAQ, it could be subject to “penny stock” regulations.

Broker/dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 that are not registered on certain national securities exchanges, including NASDAQ. Quotation on the NASDAQ OTC Bulletin Board is not sufficient to avoid being treated as a “penny stock.” The penny stock rules require a broker/dealer, prior to a transaction in a penny stock, not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that, prior to a transaction in a penny stock, the broker/dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements at times have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If our securities become subject to the penny stock rules, investors in our securities may find it more difficult to sell their securities.


ITEM 1B.	UNRESOLVED STAFF COMMENTS

Not applicable.


ITEM 2.	PROPERTIES

On June 27, 2006, we purchased, from an unaffiliated third party, an approximately 20,000 square foot building located in Edgewood, New York for a purchase price of $2.8 million and subsequently added 5,000 square feet. We moved into this facility in June 2007. We lease an approximately 1,100 square foot quality assurance laboratory in Dongguan, China under a lease expiring March 9, 2010.

At the time we moved into our Edgewood, New York facility, we terminated the lease for, and closed, our 13,000 square foot Copiague, New York facility which housed our principal research and development activities, sales and marketing and administrative and executive offices, and consolidated and relocated those operations into our new facility. In September 2007 we also terminated the lease for, and closed, our 20,000 square foot facility in Toa Alta, Puerto Rico which contained certain of our domestic assembly and manufacturing, warehousing and quality assurance functions, and consolidated and relocated those operations into our new headquarters in Edgewood, New York.


ITEM 3.	LEGAL PROCEEDINGS

Not applicable.


ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II


ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

Our common stock trades on the NASDAQ Capital Market under the symbol “TIII.” The following table sets forth, for each calendar quarter since January 1, 2007, the high and low sales prices of our common stock on that market:


		High		Low

Year ended December 31, 2008
First Quarter	$	1.90	$	1.21
Second Quarter		2.16		1.45
Third Quarter		1.61		1.03
Fourth Quarter		1.12		0.56

Year ended December 31, 2007
First Quarter	$	2.70	$	2.21
Second Quarter		2.83		2.22
Third Quarter		2.77		2.06
Fourth Quarter		2.20		1.66

On March 24, 2009, the Company had approximately 260 holders of record of our common stock.

To date, we have paid no cash dividends. For the foreseeable future, we intend to retain all earnings generated from operations for use in our business. Additionally, our bank credit agreement prohibits the payment of cash dividends.

During 2008, the Company did not sell any securities that were not registered under the Securities Act of 1933, as amended, and did not repurchase any shares of its common stock.


ITEM 6.	SELECTED FINANCIAL DATA

Not applicable.


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 Item 8 “Financial Statements and Supplementary Data” and notes thereto included elsewhere in this Report. Historical operating results are not necessarily indicative of results that may occur in future periods. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under “Forward-Looking Statements” preceding Item 1, in Item 1A, “Risk Factors” and elsewhere in this Report. We undertake no obligation to update any forward-looking statement to reflect events after the date of this Report.

Overview

Business

We design, manufacture and sell products to the service providers in the communications industry for use in their networks. Our products are typically found outdoors in the service provider’s distribution network, at the interface where the service provider’s network connects to the user’s network, and inside the user’s home or apartment, and are critical to the successful delivery of voice and broadband communication services.

Results of Operations

The following tables set forth certain operating information in thousands of dollars and as a percentage of net sales for the periods indicated (except “Income tax provision (benefit),” which is stated as a percentage of “Income before income taxes”):


	Years ended December 31,										Dollar increase (decrease)			% increase (decrease)

	2008					2007

	Amount			% of Net sales		Amount			% of Net sales

Net sales	$	35,190		100.0	%	$	46,846		100.0	%	$	(11,656	)	-24.9	%
Cost of sales		23,178		65.9	%		32,204		68.7	%		(9,026	)	-28.0	%

Gross profit		12,012		34.1	%		14,642		31.3	%		(2,630	)	-18.0	%


Operating expenses:
Selling, general and administrative		8,610		24.5	%		10,926		23.3	%		(2,316	)	-21.2	%
Research and development		2,040		5.8	%		2,214		4.7	%		(174	)	-7.9	%

Total operating expenses		10,650		30.3	%		13,140		28.0	%		(2,490	)	-18.9	%


Operating income		1,362		3.9	%		1,502		3.2	%		(140	)	-9.3	%

Interest expense		(8	)	0.0	%		(12	)	0.0	%		4		-33.3	%
Interest income		39		0.1	%		172		0.4	%		(133	)	-77.3	%
Other income		(5	)	0.0	%		9		0.0	%		(14	)	-155.6	%


Income before income taxes		1,388		3.9	%		1,671		3.6	%		(283	)	-16.9	%
Income tax provision (benefit)		810		58.4	%		(4,769	)	-285.4	%		5,579		-117.0	%

Net income		578		1.6	%		6,440		13.7	%		(5,862	)	-91.0	%


	Years ended December 31,										Dollar increase (decrease)			% increase (decrease)

	2007					2006

	Amount			% of Net sales		Amount			% of Net sales

Net sales	$	46,846		100.0	%	$	39,104		100.0	%	$	7,742		19.8	%
Cost of sales		32,204		68.7	%		25,730		65.8	%		6,474		25.2	%

Gross profit		14,642		31.3	%		13,374		34.2	%		1,268		9.5	%


Operating expenses:
Selling, general and administrative		10,926		23.3	%		9,721		24.9	%		1,205		12.4	%
Research and development		2,214		4.7	%		1,899		4.9	%		315		16.6	%

Total operating expenses		13,140		28.0	%		11,620		29.7	%		1,520		13.1	%


Operating income		1,502		3.2	%		1,754		4.5	%		(252	)	-14.4	%

Interest expense		(12	)	0.0	%		(7	)	0.0	%		(5	)	71.4	%
Interest income		172		0.4	%		226		0.6	%		(54	)	-23.9	%
Other income		9		0.0	%		(2	)	0.0	%		11		-550.0	%


Income before income taxes		1,671		3.6	%		1,971		5.0	%		(300	)	-15.2	%
Income tax benefit		(4,769	)	-285.4	%		(710	)	-36.0	%		(4,059	)	571.7	%

Net income		6,440		13.7	%		2,681		6.9	%		3,759		140.2	%

Year Ended December 31, 2008 compared to Year Ended December 31, 2007

Net sales in 2008 were $35.2 million compared to $46.8 million in 2007, a decrease of $11.7 million or 24.9% due to the sharp downturn in economic activity which has negatively impacted the markets for the Company’s products and, during the fourth quarter of 2008 the absence of, and during the year ended December 31, 2008 lower sales of, the Company’s HomePlug® products.

Gross profit in 2008 was $12.0 million compared to $14.6 million in 2007, a decrease of approximately $2.6 million or 18% resulting from a decrease in sales, while the gross profit margin improved from 31.3% in 2007 to 34.1% in 2008. The improvement in gross profit margin is primarily attributable to (i) cost savings of $1.1 million related to the closing of our Puerto Rico facility, and its consolidation into our facility in Edgewood, New York, recorded during 2007 (consisting of severance charges of $489,000, accelerated depreciation of $245,000 and other closing expenses of $342,000), which is included in cost of sales in 2007, and (ii) improved product mix due to a reduction in sales of certain lower margin home networking products.

Selling, general and administrative expenses in 2008 decreased $2.3 million or 21.2% to $8.6 million from $10.9 million in 2007. The decrease over the prior year was primarily due to:


	•	lower salary and related employee benefits of $1.2 million resulting from reduced headcount in 2008;

	•	a decrease in professional and consulting fees of $417,000 primarily related to implementation of Section 404 of the Sarbanes-Oxley Act of 2002 in 2007, a decrease in audit fees, a decrease in costs associated with the implementation of our new enterprise resource planning computer software system in 2007, and the absence of legal fees incurred in 2007 with respect to the shutdown of the Puerto Rico facility;

	•	a decrease in share-based compensation expense of $280,000 as a result of stock options becoming fully vested during 2007 and the beginning of 2008, thereby completing the period during which the share-based compensation expense was recorded for these options, and the reversal of expense recognized for options forfeited by an executive;

	•	the absence of rent expense of $104,000 due to the fact that we no longer lease space as a result of the move to our new corporate headquarters which we purchased in June 2007.

Research and development expense was $2.0 million in 2008 compared to $2.2 million in 2007, a decrease of $174,000 or 7.9%. This decrease is attributable to a decrease in salary and related employee benefits of $85,000 as a result of a decrease in headcount in 2008 and a decrease in consulting expenses of $107,000, partially offset by an increase in share-based compensation expense of $15,000 as a result of stock options granted in 2008.

Interest expense was $8,000 in 2008 compared to $12,000 in 2007, a decrease of approximately $4,000 or 33.3%. The decrease is primarily the result of the absence of interest on financed insurance premiums primarily covering our facility in Puerto Rico, which we closed in 2007.

Interest income was $39,000 in 2008 compared to $172,000 in 2007, a decrease of approximately $133,000, or 77.3%, which was primarily attributable to lower average cash balances on hand during the first half of 2008 and the decline in interest rates in late 2008.

We recorded a provision for income taxes of $810,000 in 2008 compared to a tax benefit of $4.8 million in 2007. The provision in 2008 was 58.4% of our pre-tax income for financial reporting purposes. This rate exceeded the 34.0% U.S. Federal statutory rate, primarily due to state and local income taxes, including an increase in the combined state tax rate, which increased our effective tax rate for financial reporting purposes by 10.2 percentage points and certain share-based compensation expense recorded for financial reporting purposes that was not deductible for income tax purposes, which increased our effective tax rate for financial reporting purposes by 12.1 percentage points. The benefit in 2007 resulted primarily from a $5.7 million reduction in our deferred tax asset valuation allowance during 2007, net of Federal and state taxes provided on pretax income. This reduction in the valuation allowance was based on our projections for taxable income, considering, among other things, historical results of operations and our experience in projecting the timing and extent of taxable income in the future. As a result, our effective tax rate for financial reporting purposes in 2007 was a negative 285.4%, despite having pre-tax income. Neither the provision for taxes in 2008 nor the tax benefit in 2007 represents the actual cash tax payable or cash tax benefit receivable by us in the ensuing year.

As of December 31, 2008, we had available Federal net operating loss carryforwards of approximately $25 million and tax credits of approximately $264,000 to offset taxable income in the future. We also have $144,000 in tax credits for which we have provided a full valuation allowance as we believe these credits will expire unutilized.

Net income in 2008 was $578,000 or $0.04 per diluted share, compared to net income of $6.4 million or $0.48 per diluted share in 2007. Net income amounts include income tax expense of $810,000 ($0.06 per diluted share) in 2008 and income tax benefit of $4.8 million ($0.36 per diluted share) in 2007.

Year Ended December 31, 2007 compared to Year Ended December 31, 2006

Net sales in 2007 were $46.8 million compared to $39.1 million in 2006, an increase of $7.7 million or 19.8% due to increased sales of home networking products and connectivity products, offset, in part, by a decline in sales of our NIDs.

Gross profit in 2007 was $14.6 million compared to $13.4 million in 2006, an increase of approximately $1.3 million or 9.5%, while the gross profit margin for those years were 31.3% and 34.2%, respectively. The decrease in gross profit margin is primarily attributable to (i) charges of $1.1 million related to the closing of our Puerto Rico facility (consisting of severance charges of $489,000, accelerated depreciation of $245,000 and other closing expenses of $342,000 recorded during the year ended December 31, 2007), which is included in cost of sales, and (ii) sales of certain lower margin home networking products.

Selling, general and administrative expenses for the year ended December 31, 2007 increased $1.2 million or 12.4% to $10.9 million from $9.7 million in the similar prior year period. The increase over the prior year was primarily due to:


	•	an increase in professional and consulting fees of $269,000 primarily related to implementation of Section 404 of the Sarbanes-Oxley Act of 2002, and an increase in audit fees and costs associated with the implementation of a new enterprise resource planning computer software system in 2007;

	•	an increase in share-based compensation expense of $264,000 as a result of stock option grants during 2007 and the fourth quarter of 2006; and

	•	charges recorded in 2007 for severance benefits of $273,000 associated with the departure of an executive, partially offset for comparative purposes by severance benefits charges in 2006 related to the departure of two executives.

The balance of the increase is related to miscellaneous items, no one of which is individually material.

Research and development expense was $2.2 million in 2007 compared to $1.9 million in 2006, an increase of $315,000 or 16.6%. This increase is attributable to an increase in personnel and related employee benefits of $212,000, consulting expenses of $75,000 and share-based compensation expense of $52,000, partially offset by a decrease of $73,000 in amounts incurred in the development of certain products completed during 2007. The largest portion of our development efforts is focused on new products for the growth segments of the Telco and MSO markets, primarily broadband deployment.

Interest expense was $12,000 in 2007 compared to $7,000 in 2006, an increase of approximately $5,000 or 71.4%.

Interest income was $172,000 in 2007 compared to $226,000 in 2006, a decrease of approximately $54,000, or 23.9%, which was primarily attributable to lower average cash and cash equivalent balances on hand throughout 2007 than in 2006 due to capital expenditures during the course of 2006 and 2007 for our new facility in Edgewood, New York.

We recorded a benefit from income taxes for the years ended December 31, 2007 and 2006 of $4,769,000 and $710,000, respectively. These benefits primarily resulted from a $5.7 million and a $1.6 million reduction in our deferred tax asset valuation allowance during 2007 and 2006, respectively, net of Federal and state taxes provided on pretax income. These reductions in the valuation allowance were based on our current projections for taxable income, considering, among other things, historical results of operations, a trending decline in our dependence on one customer for a significant portion of our total sales and our experience in projecting the timing and extent of taxable income in the future.

As of December 31, 2007, we had available Federal net operating loss carryforwards of approximately $27.0 million and tax credits of approximately $222,000 to offset taxable income in the future. We also have $144,000 in tax credits for which we have provided a full valuation allowance as we believe these credits will expire unutilized.

Net income in 2007 was $6.4 million or $0.48 per diluted share compared to net income of $2.7 million or $0.20 per diluted share in 2006, including the income tax benefit of $4.8 million ($0.36 per diluted share) and $710,000 ($0.05 per diluted share) for 2007 and 2006, respectively.

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 and China, 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 not increase prices under our general supply agreement with Verizon Services Corp. Inflation has not had a significant effect on our operations during any of the reported periods.

Liquidity and Capital Resources

As of December 31, 2008, we had $19.3 million of working capital, which included $8.3 million of cash and cash equivalents, and our current ratio was 8.1 to 1. Our cash and cash equivalents increased during 2008 by $5.0 million to $8.3 million at December 31, 2008, from $3.3 million at December 31, 2007, primarily from net income of $578,000 plus non-cash expenses for (i) depreciation and amortization expense of $1.6 million, (ii) net loss on disposal of capital assets of $32,000, (iii) non-cash share based compensation of $807,000, and (iv) deferred income taxes of $736,000 and a decrease in accounts receivable $3.1 million. The generation of cash was offset, in part, by a decrease in accounts payable and accrued liabilities of $1.4 million.

Investing activities in 2008 used cash of $780,000 for capital expenditures, primarily for machinery and equipment used to manufacture products. Investing activities in 2007 used cash of $4.3 million for capital expenditures, primarily for building improvements ($2.7 million) and furniture and fixtures ($632,000) for our then new facility in Edgewood, New York and machinery and equipment used to manufacture products ($1.3 million). Financing activities provided $100,000 of cash in 2008 compared to $1.2 million in 2007 as a result of the exercise of stock options.

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

In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. which replaced a $5.0 million credit facility that was expiring. Under the amended credit agreement, we are entitled to borrow from the bank up to $5.0 million 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 $1.5 million. At December 31, 2008, our borrowing base was $4.6 million. Loans under the credit agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement during 2008.

Outstanding loans under the credit agreement bear interest, at our option, at either (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 LIBOR rate (as defined in the amended credit 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 credit agreement are collateralized by all of our accounts receivable and inventory, and are guaranteed by one of our subsidiaries.

The credit 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 the payment of dividends and limit our ability to repurchase our 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 credit agreement requires us to maintain, as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $35.3 million, a ratio of net income before interest expense and taxes for the 12-month period ending with that 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 that fiscal quarter of not greater than 2.5 to 1.0. As of December 31, 2008, we were in compliance with all covenants in the credit agreement.

Off-Balance Sheet Arrangements

We have no off-balance sheet contractual arrangements, as 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. We believe that the determination of the carrying value of our inventories and long-lived assets, the valuation of accounts receivable, the valuation of deferred tax assets and the valuation of share-based payment compensation are the most critical areas where management’s judgments and estimates most affect our reported results. While we believe our 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 our 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 our 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.

We review 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.

Accounts receivable are presented net of allowances for doubtful accounts and sales returns based upon facts and circumstances and our estimate of expected trends.

Consistent with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 109 (“SFAS No. 109”) and Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), we regularly estimate our ability to recover deferred tax assets, and report these assets at the amount that is determined to be “more-likely-than-not” recoverable. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning strategies. In 2008, we recorded a valuation allowance of $31,000 for deferred tax assets that will not be recoverable based on our estimate of state net operating losses that will expire unused after December 31, 2009. In 2007 and 2006, in response to favorable developments in our projections for taxable income in the future, and based primarily upon positive evidence derived from our sustained levels of historical profitability and our projections for taxable income in the future, we reduced our valuation allowance against deferred tax assets to reflect the amount of deferred tax assets determined to be more-likely than not recoverable. In the event that evidence becomes available in the future to indicate that the valuation of our deferred tax assets should be adjusted (for example, significant changes in our projections for future taxable income), our estimate of the recoverability of deferred taxes may change, resulting in an associated adjustment to earnings in that period.

In accordance with the requirements of SFAS 123(R), we record the fair value of share-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and expected term assumptions require a greater level of judgment. We estimate expected stock-price volatility based primarily on historical volatility of the underlying stock using daily price observations over a period equal to the expected term of the option, but also consider whether other factors are present that indicate that exclusive reliance on historical volatility may not be a reliable indicator of expected volatility. With regard to our estimate of expected term, we use historical share option exercise experience, along with the vesting term and original contractual term of options granted.

Recently Adopted Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This Statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS 162 makes the GAAP hierarchy explicitly and directly applicable to preparers of financial statements because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 became effective for us as of November 15, 2008. The adoption of SFAS 162 did not impact our financial position or results of operations.

In December 2007, the Securities Exchange Commission (“SEC”) published Staff Accounting Bulletin (“SAB”) No. 110, which amends SAB No. 107 to allow for the continued use, under certain circumstances, of the “simplified” method in developing an estimate of the expected term of so-called “plain vanilla” stock options accounted for under SFAS 123(R) beyond December 31, 2007. Companies can use the simplified method if they conclude that their stock option exercise experience does not provide a reasonable basis upon which to estimate expected term. We have concluded that our stock option exercise experience provides a reasonable basis upon which to estimate expected term; therefore we have refined our method to calculate estimates of the expected term of stock options. The adoption of SAB 110 did not have a material impact on our financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity is to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected are to be recognized in earnings as incurred and not deferred. SFAS 159 became effective for us as of January 1, 2008. We have not elected the fair value option to any of our arrangements. Accordingly, the adoption of SFAS 159 did not have any impact on our condensed consolidated financial statements.

On January 1, 2007, we adopted FIN 48 which is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”, and addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it meets the “more likely than not” threshold that the position will be sustained on examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the financial statements from that position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and also requires increased disclosures. When the tax law requires interest to be paid on an underpayment of income taxes, we recognize interest, which is classified as tax expense in the consolidated statements of income, in the first period that interest begins to accrue according to relevant provisions of the tax law. The amount of interest to be recognized is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with this interpretation and the amount previously taken or expected to be taken on a tax return. The adoption of FIN 48 did not result in any adjustment to the recognized benefits from our uncertain tax positions.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. In February 2008, the FASB issued FASB Staff Positions (FSP) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157.” FSP SFAS 157-1 removes leasing transactions from the scope of SFAS No. 157, while SFAS No. 157-2 defers the effective date of SFAS 157 to the fiscal year beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. It does not defer recognition and disclosure requirements for financial assets and financial liabilities, or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. Effective January 1, 2008, we adopted SFAS 157, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 did not impact our financial position or results of operations.

In 2006, we adopted the provisions of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current year Financial Statements” (“SAB 108”). SAB 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. In 2006, we changed our method of quantifying errors in accordance with SAB No. 108 and, as a result, recorded a reduction in our accumulated deficit as of January 1, 2006, of $162,000, net of tax.

Recently Issued Accounting Pronouncements – Not Yet Adopted

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. We will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS 160”) which will require noncontrolling interests, previously referred to as minority interests, to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. SFAS 160 is effective for periods beginning on or after December 15, 2008. We will assess the impact of SFAS 160 if and when any noncontrolling interests should arise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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 during the year ended December 31, 2008, 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. We import most of our products from contract manufacturers, principally in Malaysia and China. The increased cost of petroleum has negatively impacted the cost of our products, and we continue to take steps to mitigate the affect on the profit we realize.

We require foreign sales to be paid in U.S. currency, and we are billed by our contract manufacturers in U.S. currency. 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.

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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the
Board of Directors and Stockholders of
TII Network Technologies, Inc.

We have audited the accompanying consolidated balance sheet of TII Network Technologies, Inc. and Subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TII Network Technologies, Inc. and Subsidiaries as of December 31, 2008, and the results of their operations and their cash flows for the year then ended, in conformity with United States generally accepted accounting principles.

/s/ Marcum & Kliegman LLP

Marcum & Kliegman LLP
Melville, New York
March 27, 2009

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
TII Network Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of TII Network Technologies, Inc. and subsidiaries as of December 31, 2007, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TII Network Technologies, Inc. and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in the notes to the accompanying consolidated financial statements, the Company changed its method of quantifying errors in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements, effective December 31, 2006.

/s/ KPMG LLP

Melville, New York
March 31, 2008

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)


	December 31,

	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	8,282		$	3,261
Accounts receivable, net of allowance of $88 and $90 at December 31, 2008 and 2007, respectively		3,906			6,994
Inventories, net		9,031			9,219
Deferred tax assets, net		697			674
Other current assets		175			372

Total current assets		22,091			20,520

Property, plant and equipment, net		8,877			9,680
Deferred tax assets, net		8,599			9,358
Other assets, net		154			93

Total assets	$	39,721		$	39,651


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,090		$	2,301
Accrued liabilities		652			1,856

Total current liabilities and total liabilities		2,742			4,157


Commitments and contingencies

Stockholders’ equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, including 30,000 shares of series D junior participating preferred stock; no shares outstanding		—			—

Common stock, par value $.01 per share; 30,000,000 shares authorized; 13,787,429 shares issued and 13,769,792 shares outstanding as of December 31, 2008, and 13,499,541 shares issued and 13,481,904 shares outstanding as of December 31, 2007		138			135
Additional paid-in capital		42,262			41,358
Accumulated deficit		(5,140	)		(5,718	)

		37,260			35,775
Less: Treasury shares, at cost, 17,637 common shares at December 31, 2008 and December 31, 2007		(281	)		(281	)

Total stockholders’ equity		36,979			35,494


Total liabilities and stockholders’ equity	$	39,721		$	39,651

See notes to consolidated financial statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)


	Years ended December 31,

	2008			2007			2006

Net sales	$	35,190		$	46,846		$	39,104
Cost of sales (includes restructuring charges of $70 in 2008 and $1,076 in 2007)		23,178			32,204			25,730

Gross profit		12,012			14,642			13,374

		34.1	%		31.3	%		34.2	%
Operating expenses:
Selling, general and administrative		8,610			10,926			9,721
Research and development		2,040			2,214			1,899

Total operating expenses		10,650			13,140			11,620


Operating income		1,362			1,502			1,754

Interest expense		(8	)		(12	)		(7	)
Interest income		39			172			226
Other income (expense)		(5	)		9			(2	)


Income before income taxes		1,388			1,671			1,971

Income tax provision (benefit)		810			(4,769	)		(710	)


Net income	$	578		$	6,440		$	2,681


Net income per common share:
Basic	$	0.04		$	0.50		$	0.22

Diluted	$	0.04		$	0.48		$	0.20


Weighted average common shares outstanding:
Basic		13,540			12,821			12,397
Diluted		13,745			13,502			13,474

See notes to consolidated financial statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)


	Common Shares Outstanding	Common Stock		Additional Paid-In Capital			Accumulated Deficit			Treasury Stock			Total Stockholders’ Equity


Balance January 1, 2006	12,344,319	$	124	$	38,277		$	(15,001	)	$	(281	)	$	23,119

Cumulative effect of adjustments resulting from the adoption of SAB No. 108, net of taxes	—		—		—			162			—			162


Adjusted balance at January 1, 2006	12,344,319		124		38,277			(14,839	)		(281	)		23,281


Exercise of stock options	153,350		2		118			—			—			120
Share-based compensation	—		—		743			—			—			743
Restricted stock awards	35,000		—		—			—			—			—
Stock option excess tax benefit	—		—		8			—			—			8
Net income for the year	—		—		—			2,681			—			2,681


Balance December 31, 2006	12,532,669		126		39,146			(12,158	)		(281	)		26,833


Exercise of stock options	893,450		9		1,131			—			—			1,140
Share-based compensation	—		—		1,000			—			—			1,000
Restricted stock awards	55,785		—		68			—			—			68
Stock option excess tax benefit	—		—		13			—			—			13
Net income for the year	—		—		—			6,440			—			6,440


Balance December 31, 2007	13,481,904		135		41,358			(5,718	)		(281	)		35,494


Exercise of stock options	78,500		1		99			—			—			100
Share-based compensation	—		—		807			—			—			807
Restricted stock awards	209,388		2		(2	)		—			—			—
Net income for the year	—		—		—			578			—			578


Balance December 31, 2008	13,769,792	$	138	$	42,262		$	(5,140	)	$	(281	)	$	36,979

See notes to consolidated financial statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Years ended December 31,

	2008			2007			2006

Cash Flows Provided by Operating Activities
Net income	$	578		$	6,440		$	2,681
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,592			1,429			1,284
Share-based compensation		807			1,068			743
Deferred income taxes		736			(4,873	)		(797	)
Loss on write-offs and disposals of capital assets		32			386			158
Excess tax benefits from stock option exercises		—			(13	)		(8	)
Changes in operating assets and liabilities:
Accounts receivable		3,088			(3,926	)		497
Inventories		188			(855	)		118
Other assets		95			(96	)		(19	)
Accounts payable and accrued liabilities		(1,415	)		1,479			(255	)

Net cash provided by operating activities		5,701			1,039			4,402


Cash Flows Used in Investing Activities
Capital expenditures		(780	)		(4,326	)		(4,494	)
Proceeds from sale of capital assets		—			33			—

Net cash used in investing activities		(780	)		(4,293	)		(4,494	)


Cash Flows Provided by Financing Activities
Proceeds from exercise of stock options		100			1,140			120
Excess tax benefits from stock option exercises		—			13			8

Net cash provided by financing activities		100			1,153			128


Net increase (decrease) in cash and cash equivalents		5,021			(2,101	)		36

Cash and cash equivalents, at beginning of year		3,261			5,362			5,326


Cash and cash equivalents, at end of year	$	8,282		$	3,261		$	5,362


Non-cash Investing and Financing Activities
Capital additions included in accounts payable	$	—		$	46		$	—

Cash paid during the year for interest	$	7		$	12		$	7

Cash paid during the year for income taxes	$	152		$	114		$	76

See notes to consolidated financial statements

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Description of Business and Summary of Significant Accounting Policies

Business

TII Network Technologies, Inc. and subsidiaries (together, “Tii,” the “company,” “we,” “us” or “our”) design, manufacture and sell products to the service providers in the communications industry for use in their networks. Our products are typically found outdoor in the service provider’s distribution network, at the interface where the service provider’s network connects to the user’s network, and inside the user’s 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 companies (“Telcos”), multi-system operators (“MSOs”) of communications services, including cable and satellite service providers, and original equipment manufacturers (“OEMs”).

Principles of Consolidation

The consolidated financial statements include the accounts of Tii Network Technologies, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management 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, inventory, deferred income taxes and the fair value of share-based payments. Actual results could differ from such estimates.

Cash Equivalents

All highly liquid investments with an original maturity at the time of purchase of three months or less are considered cash equivalents. Cash equivalents of $8,282,000 and $3,261,000 at December 31, 2008 and December 31, 2007, respectively, consisted of overnight investments in commercial paper.

Concentration of Credit Risk

We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. At December 31, 2008, all of our cash is held at one financial institution.

Inventories

Inventories (materials and applicable overhead) are stated at the lower of cost or market, on the first-in, first-out basis.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 estimated useful lives for each category of property, plant and equipment are as follows:


		Estimated useful life (in years)

Building and building improvemnts		30
Machinery and equipment		5 - 10
Computer hardware and software		3 - 5
Office furniture, fixtures, equipment and other		3 - 5

Leasehold improvements are amortized on a straight-line basis over the term of the respective leases or over their estimated useful lives, whichever is shorter.

Revenue Recognition

Our sales are derived from the sale of our products. We do not provide any services to our customers. Product sales are recorded when there is persuasive evidence of the arrangement, usually a customer purchase order, the products are shipped, title passes to the customer, and the price is fixed and determinable and probable of collection. Once a product is shipped, we have no acceptance or other post-shipment obligations precluding revenue recognition. Accounts receivable as of December 31, 2008 and 2007 are presented net of allowances for doubtful accounts and sales returns of $88,000 and $90,000, respectively, based upon known facts and circumstances and management’s estimate of expected trends.

In the normal course of business, we collect non-income related taxes, including sales and use tax, from our customers and we remit those taxes to governmental authorities. We present revenues net of these taxes.

Other Assets

Included in other assets at December 31, 2008 and 2007 are $146,000 and $81,000, respectively, of patent costs, net of accumulated amortization, which are amortized on a straight-line basis over the lesser of the life of the related products or the patents. Amortization of patent costs was $41,000 for the year ended December 31, 2008 and $36,000 for each of the years ended December 31, 2007 and 2006.

Long-Lived Assets

We review long-lived assets 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 would be recognized in the amount by which the carrying amount of the asset exceeds its fair value. There were no such events or changes in circumstances to require an analysis for 2008.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” (“SFAS 123(R)”) we use the with-and-without approach described in Emerging Issues Task Force (“EITF”) Topic No. D-32, “Intraperiod Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations,” to determine the recognition and measurement of excess tax benefits resulting from tax deductions in excess of the cumulative compensation cost recognized from stock options exercised. For financial statement purposes, certain of our net operating loss carryforwards contain deductions for share-based payments in excess of the related compensation expense recognized. In determining the period in which related tax benefits are realized for book purposes, such excess share-based compensation deductions included in net operating losses are realized after regular net operating losses are exhausted.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if, based on the technical merits of the position, it meets a “more likely than not” threshold that the position will be sustained on examination by the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes and accounting in interim periods and also requires increased disclosures. When the tax law requires interest to be paid on an underpayment of income taxes, we recognize interest, which is classified as tax expense in the consolidated statements of income, in the first period that interest begins to accrue according to relevant provisions of the tax law. The amount of interest to be recognized is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with this interpretation and the amount previously taken or expected to be taken on a tax return. The adoption of FIN 48 did not result in any adjustment to the recognized benefits from our uncertain tax positions.

Net Income Per Common Share

Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders (which for us equals our net income) by the weighted average number of common shares outstanding, with the calculation of diluted EPS adding the dilutive effect of stock options and other common stock equivalents to the denominator. Antidilutive shares aggregating 2,431,000, 1,650,000 and 970,000 have been omitted from the calculation of dilutive EPS for the years ended December 31, 2008, 2007 and 2006, respectively. The calculation of the numerators and denominators of the basic and diluted income per share is as follows:


	Years ended December 31,

	2008		2007		2006

Numerator for diluted EPS calculation:
Net income	$	578,000	$	6,440,000	$	2,681,000

Denominator for diluted EPS calculation:
Weighted average shares outstanding - Basic		13,540,000		12,821,000		12,397,000
Effect of dilutive stock options		205,000		681,000		1,003,000
Effect of stock awards		—		—		74,000

		13,745,000		13,502,000		13,474,000


Basic EPS	$	0.04	$	0.50	$	0.22

Diluted EPS	$	0.04	$	0.48	$	0.20

Advertising Costs

We incur advertising costs for sales and marketing initiatives, including advertisements in magazines, brochures and mailings, promotions, public relations and tradeshows. Advertising costs were $92,000, $239,000 and $203,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

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

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. In February 2008, the FASB issued FASB Staff Positions (“FSP”) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157.” FSP SFAS 157-1 removes leasing transactions from the scope of SFAS No. 157, while SFAS No. 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. It does not defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. Effective January 1, 2008, we adopted SFAS 157, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 did not impact our financial position or results of operations. The adoption of FSP SFAS 157-2 is not expected to have an impact on our financial position or results of operations.

Share-Based Payment

We follow the provisions of SFAS 123(R), which requires that all share based compensation be recognized as an expense in the financial statements and that this cost be measured at the fair value of the award. SFAS 123(R) also requires that excess tax benefits related to stock option exercises be reflected in the consolidated statements of cash flows as financing cash inflows and operating cash outflows. See Note 8 for additional information on shared-based compensation.

Comprehensive Income

Comprehensive income equaled net income for all periods presented.

Segment Information

We have evaluated the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and have determined that we have one reportable segment. We have provided the required geographic, major supplier and major customer information in Note 10.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current year Financial Statements” (“SAB 108”). Prior to 2006, we quantitatively evaluated misstatements using the “roll-over” (income statement) method. As a result of the adoption of SAB 108, we changed our method of quantifying and evaluating errors to a “dual” (income statement and balance sheet) method. The transition provisions of SAB 108 permitted us to adjust for the cumulative effect on accumulated deficit of previously immaterial adjustments relating to prior years. Such adjustments do not require previously filed reports with the SEC to be amended.

Upon adoption of SAB 108 on January 1, 2006, we corrected our consolidated financial statements to reduce the allowance for doubtful accounts receivable by $59,000 and reduce accrued expenses by $158,000 for excess amounts established prior to January 1, 2006. The accrued expense adjustments related to an unreconciled amount of $50,000 and other excess accruals for income taxes payable of $63,000, real estate taxes payable of $29,000 and professional services of $16,000. These adjustments were not considered material to any prior period when evaluated using the roll-over method. As these adjustments were considered to be material under the dual method as of January 1, 2006, we recorded a cumulative effect adjustment to decrease our accumulated deficit as of January 1, 2006 by $162,000, net of tax of $55,000.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures, in its financial statements, the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. We will comply with SFAS 141(R) if and when a future acquisition occurs.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which requires noncontrolling interests, previously referred to as minority interests, to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. SFAS 160 is effective for periods beginning on or after December 15, 2008. We will comply with SFAS 160 if and when any noncontrolling interests should arise.

Note 3 – Puerto Rico Facility Closing

In June 2007, our Board of Directors approved a plan to consolidate the operations of our Puerto Rico leased facility into our new headquarters in Edgewood, New York, resulting in the closure of the Puerto Rico facility. During the year ended December 31, 2008 and 2007, we incurred $70,000 and $1,076,000, respectively, of costs related to this plan. Cumulative costs incurred as of December 31, 2008 were $1,146,000 related to this plan. All of these costs were included in cost of sales for the respective period incurred.

Upon adoption of the provisions of FIN No. 47, “Accounting for Asset Retirement Obligations,” in 2005, we recorded an asset retirement obligation of $109,000 for the estimated cost to restore the leased facility in Puerto Rico to its original condition at the end of the lease. Restoration was completed April 30, 2008. The following presents activity related to this obligation for the year ended December 31, 2008:


Balance, December 31, 2007	$	39,000
Additional charges		70,000
Liabilities settled		(109,000	)

Balance, December 31, 2008	$	—

NOTE 4 – Inventories

The following table represents the cost basis of each major class of inventory as of December 31, 2008 and 2007:


	December 31,

	2008		2007

Raw material and subassemblies	$	1,459,000	$	1,048,000
Work in progress		—		166,000
Finished goods		7,572,000		8,005,000

	$	9,031,000	$	9,219,000

Inventories are net of a reserve of $980,000 and $503,000 at December 31, 2008 and 2007, respectively.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – 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 presents the amounts of each major class of property, plant and equipment as of December 31, 2008 and 2007:


	December 31,

	2008			2007

Land	$	1,244,000		$	1,244,000
Building and building improvements		4,303,000			4,288,000
Construction in progress		118,000			107,000
Machinery and equipment		7,865,000			7,343,000
Computer hardware and software		802,000			753,000
Office furniture, fixtures, equipment and other		764,000			721,000

	$	15,096,000		$	14,456,000
Less: accumulated depreciation and amortization		(6,219,000	)		(4,776,000	)

	$	8,877,000		$	9,680,000

Depreciation and amortization of plant and equipment was $1,551,000, $1,393,000 and $1,248,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

We recorded a loss on the disposal of capital assets of approximately $32,000 for the year ended December 31, 2008 related to the disposal of obsolete equipment. We recorded a loss on the disposal of capital assets of $174,000 for the year ended December 31, 2007 in connection with the move to our new corporate headquarters facility and write-offs of obsolete equipment. Such charges are included in depreciation and amortization within selling, general and administrative expenses. In addition, we recorded accelerated depreciation of $245,000 related to assets that were in use at our Puerto Rico facility and disposed of subsequent to the close of this facility, which is included in cost of sales for the year ended December 31, 2007.

We sold assets from our Puerto Rico facility, which was closed in September 2007 (see Note 3) for a gain of $33,000, which is included in cost of sales for the year ended December 31, 2007.

During 2007, we capitalized $217,000 of costs related to the implementation of a new enterprise resource planning computer software application in accordance with FASB Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.

During 2008, we capitalized $118,000 of costs incurred for the development of machinery and equipment. These costs are classified as construction in progress at December 31, 2008 as the machinery and equipment was not in service at this date. During 2007, we capitalized $61,000 of costs incurred for the development of our new external website in accordance with EITF 00-2, “Accounting for Web Site Development Costs”. These costs were classified as construction in progress and were not being depreciated as of December 31, 2007. During 2008, we capitalized additional costs of $6,000 for the development of our external website which was placed into service and is included in computer hardware and software at December 31, 2008.

NOTE 6 - Revolving Credit Facility

In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. which replaced a $5.0 million credit facility that was expiring. Under the amended credit agreement, we are entitled to borrow from the bank up to $5.0 million 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 $1.5 million. As of December 31, 2008, our borrowing base was $4.6 million. Loans under the credit agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement during 2008.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Outstanding loans under the credit agreement bear interest, at our option, either (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 credit 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 credit 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.

The credit 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 credit agreement requires us to maintain, as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $35.3 million, 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 December 31, 2008, we were in compliance with all financial covenants in the credit agreement.

NOTE 7 - Income Taxes

The components of the income tax expense / (benefit) for the years ended December 31, 2008, 2007 and 2006 are as follows:


	Years ended December 31,

	2008		2007			2006

Current
Federal	$	43,000	$	56,000		$	67,000
State		31,000		47,000			20,000

Total current		74,000		103,000			87,000


Deferred
Federal		592,000		(4,652,000	)		(745,000	)
State		144,000		(220,000	)		(52,000	)

Total deferred		736,000		(4,872,000	)		(797,000	)


Total income tax expense (benefit)	$	810,000	$	(4,769,000	)	$	(710,000	)

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table is a reconciliation from our income tax provision / (benefit) based on the U.S. Federal statutory income tax rate to the income tax expense / (benefit) reported for financial reporting purposes:


	Years ended December 31,

	2008					2007						2006

	Amount		%			Amount			%			Amount			%

Tax at statutory rate	$	472,000		34.0	%	$	568,000			34.0	%	$	670,000			34.0	%
Increase (reduction) in income taxes from:
State and local income taxes, net of federal income tax effect		71,000		5.1	%		41,000			2.5	%		(27,000	)		-1.4	%
Change in state tax rate		60,000		4.3	%		144,000			8.6	%		59,000			3.0	%
Share-based compensation		151,000		10.9	%		155,000			9.3	%		52,000			2.6	%
Meals and entertainment		24,000		1.7	%		28,000			1.7	%		23,000			1.2	%
Change in valuation allowance		30,000		2.2	%		(5,748,000	)		-344.0	%		(1,546,000	)		-78.4	%
Other, net		2,000		0.1	%		43,000			2.6	%		59,000			3.0	%

	$	810,000		58.4	%	$	(4,769,000	)		-285.4	%	$	(710,000	)		-36.0	%

The tax effects of temporary differences and net operating loss and tax credit carryforwards that give rise to deferred tax assets and liabilities are as follows:


	December 31,

	2008			2007

Inventory	$	409,000		$	223,000
Accounts receivable		32,000			32,000
Share-based compensation		612,000			462,000
Other liabilities		—			14,000
Accrued expenses		57,000			330,000
Net operating loss carryforwards		8,230,000			9,121,000
Business and AMT credit carryforwards		422,000			379,000

	$	9,762,000		$	10,561,000
Less: valuation allowance		(175,000	)		(144,000	)

Net deferred tax assets	$	9,587,000		$	10,417,000
Property, plant and equipment		(291,000	)		(385,000	)

Net deferred income tax assets	$	9,296,000		$	10,032,000

Consistent with the provisions of SFAS No. 109, “Accounting for Income Taxes,” we regularly estimate our ability to recover deferred tax assets, and establish a valuation allowance against deferred tax assets that are determined to be “more-likely-than-not” unrecoverable. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning strategies. During the year ended December 31, 2008, our deferred tax asset valuation allowance was increased by $31,000 related to our estimate of state net operating losses that we expect to expire unutilized. During the years ended December 31, 2007 and 2006, based primarily upon positive evidence derived from our sustained levels of historical profitability and our projections for taxable income in the future, we revised our estimate of the amount of deferred tax assets that would more-likely-than-not be unrecoverable and, accordingly, reduced the deferred tax asset valuation allowance, which resulted in income tax benefits of $5.7 million and $1.6 million for the years ended December 31, 2007 and 2006, respectively. As of December 31, 2008, management believes that it is more-likely-than-not that the results of future operations will generate sufficient taxable income to realize the net amount of our deferred tax assets over the periods during which temporary differences reverse and net operating loss carryforwards expire.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2008, our deferred tax valuation allowance of $175,000 related to (i) general business tax credit carryforwards expected to expire unutilized of $144,000 and (ii) state NOLs expected to expire unutilized of $31,000. As of December 31, 2007, our deferred tax asset valuation allowance of $144,000 related to general business tax credit carryforwards expected to expire unutilized.

At December 31, 2008, for U.S. Federal income tax purposes, we had net operating loss carryforwards of approximately $25.0 million which expire from 2019 to 2022. We estimate that it is more likely than not that these net operating loss carryforwards will be utilized prior to their respective expiration periods and, as such, have not provided a valuation allowance against them. It is at least reasonably possible that the actual period that the net operating loss carryforwards are utilized may differ from this estimate. Our net operating loss carryforwards include $1.0 million of excess stock compensation net operating losses that have not been recorded as deferred tax assets, in accordance with SFAS 123(R). If all of our net operating losses are realized in the future, approximately $334,000 of the benefit (related to excess stock compensation net operating losses) would increase our additional paid-in capital, after regular net operating losses are exhausted. As of December 31, 2008, we have Alternative Minimum Tax credit carryforwards of $264,000, which have no expiration date.

During the years ended December 31, 2008 and 2007, a tax benefit of $255 and $13,000, respectively, was allocated to additional paid-in-capital, resulting from the current reduction in income taxes payable relating to excess stock compensation deductions. During 2008, our deferred tax asset valuation allowance was increased by $31,000 related to our estimate of state net operating losses that we expect to expire unutilized. During the year ended December 31, 2007, our deferred tax asset valuation allowance was reduced by $6.1 million, primarily related to (i) the release of a valuation allowance against certain of our deferred tax assets of $5.7 million (ii) a valuation allowance adjustment recorded upon the adoption of FIN 48 of $255,000 and (iii) the impact of a change in our state tax rate to our deferred taxes of $75,000.

NOTE 8 - Common Stock and Stock Awards

On April 3, 2008, our Board of Directors adopted our 2008 Equity Compensation Plan (the “2008 Plan”), subject to stockholder approval, which was obtained May 22, 2008. The 2008 Plan replaces our 1998 Stock Option Plan, under which our ability to grant options expired on October 7, 2008. The 1998 Plan permitted us to grant stock options while the 2008 Plan permits us to grant stock appreciation rights, restricted stock and restricted stock units, as well as stock options, to our employees, directors and consultants. The 2008 Plan authorizes the grant of awards not to exceed 1.0 million shares of the Company’s Common Stock in the aggregate until May 21, 2018. The Compensation Committee of the Board of Directors determines, among other things, award recipients, the type of award, the number of shares to be subject to each share grant or award, exercise prices for options and the base value for stock appreciation rights, vesting periods and conditions to vesting, and the term of the award, which may not exceed 10 years.

On April 3, 2008, we entered into an Employment Agreement with Kenneth A. Paladino, our President and Chief Executive Officer. Pursuant to this agreement, Mr. Paladino was granted a restricted stock award covering 175,000 shares of the Company’s Common Stock under the 2008 Plan. The 2008 Plan and the award to Mr. Paladino were subject to stockholder approval, which was obtained on May 22, 2008. The award vests on April 2, 2013 if Mr. Paladino remains employed by the Company on that date, subject to earlier vesting on a pro rata basis upon certain events as provided in the agreement. The award permits Mr. Paladino full voting rights and dividend participation on these shares prior to vesting. As such, we have reflected these shares as outstanding at December 31, 2008. The total fair value on the date of grant of this award was $329,000. We recorded expense of $40,000 during the year ended December 31, 2008 for this award.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our 1998 Stock Option Plan expired as to the grant of future options in October 2008. As of December 31, 2008, options to purchase 1,589,500 shares were outstanding under the 1998 Plan. Our 1995 Employee Stock Option Plan expired as to the grant of future options in September 2005. As of December 31, 2008, options to purchase 167,550 shares were outstanding under the 1995 Plan.

Our 2003 Non-Employee Director Stock Option Plan, as amended, permits our Board of Directors or the Compensation Committee of the Board of Directors to grant, until September 2013, options to purchase up to 1,000,000 shares of common stock to non-employee directors of the company. On the date a person initially becomes an outside director, that individual is granted an option to purchase 24,000 shares under the 2003 Plan. At each annual stockholders meeting at which directors are elected, each outside director in office after the meeting is automatically granted an option to purchase, under the 2003 Plan, amended by stockholders on December 1, 2005 and June 7, 2007, 10,000 shares plus additional specified shares for serving on Board committees or as chairperson of a committee. 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 have a term of ten years and are exercisable quarterly, beginning immediately on the grant date, except that initial option grants to new outside directors vest quarterly over three years starting one year after the grant date. As of December 31, 2008, options to purchase 490,000 shares of common stock were outstanding under the 2003 Plan, and options to purchase 461,000 shares were available for grant. Our 1994 Non-Employee Director Stock Option Plan expired as to the grant of future options in September 2004. As of December 31, 2008, options to purchase 177,000 shares were outstanding under the 1994 Plan.

Our non-employee directors may elect to receive, in lieu of their $10,000 annual cash retainer ($25,000 in the case of the non-executive Chairman of the Board of Directors), shares of our common stock equal in market value to $11,750 ($29,400 in the case of the non-executive Chairman of the Board of Directors). Market value is determined at the date of the annual meeting of stockholders at which directors are elected for the year to which the retainer pertains. In 2008, three directors elected to receive an aggregate of 18,750 shares having a market value of $35,250, and the non-executive Chairman of the Board of Directors elected to receive 15,638 shares having a market value of $29,400. In 2007, four directors elected to receive an aggregate of 18,216 shares having a market value of $47,000, and the non-executive Chairman of the Board of Directors elected to receive 11,395 shares having a market value of $29,400. The shares are subject to forfeiture in the event that the non-employee director resigns or is removed for cause preceding the next annual meeting following the directors’ election to receive the shares. We recognized expense of $73,000 and $68,000 for these awards for the years ended December 31, 2008 and December 31, 2007, respectively.

Total share-based compensation is attributable to the granting of, and the remaining requisite service period of, stock options and restricted stock awards. Compensation expense attributable to share-based compensation for the years ended December 31, 2008, 2007 and 2006 was $807,000, $1,068,000 and $743,000, respectively. The tax benefit related to such compensation cost was $133,000, $215,000 and $210,000 for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, the total unrecognized compensation cost related to non-vested stock awards was $1.6 million and the related weighted average period over which this remaining expense is expected to be recognized is approximately 2.8 years. It is our policy to issue previously authorized shares to satisfy stock option exercises in the period of exercise.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes stock option activity for the year ended December 31, 2008:


	Common Shares Subject to Options			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Contractual Life Remaining in Years

Outstanding at beginning of year		3,483,375		$	2.15
Granted		254,000			1.85
Exercised		(78,500	)		1.27
Forfeited		(252,100	)		2.16
Expired		(857,725	)		2.31
Cancelled		(125,000	)		2.60

Outstanding at end of year		2,424,050		$	2.06	$	52,000		6.2


Options expected to vest		737,234		$	2.34	$	—		8.1
Options exercisable at end of year		1,664,950		$	1.94	$	52,000		5.3
Shares available for future grant at end of year		1,286,000

The exercise period for all stock options may not exceed ten years from the date of grant. Stock option grants to individuals generally become exercisable in substantively equal tranches over a service period of up to five years.

The total fair value of stock options vested during the years ended December 31, 2008, 2007 and 2006 was $677,000, $978,000 and $708,000, respectively.

The intrinsic value of stock options exercised during the years ended December 31, 2008, 2007 and 2006 was $51,000, $936,000 and $275,000, respectively.

We account for stock-based compensation in accordance with SFAS No. 123(R). The fair value of restricted stock awards is based on the closing market price of our common stock on the measurement date of the award. In order to determine the fair value of stock options on the date of grant, we applied the Black-Scholes-Merton option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and expected term assumptions require a greater level of judgment. We estimate expected stock-price volatility based primarily on historical volatility of the underlying stock using daily price observations over a period equal to the expected term of the option, but also consider whether other factors are present that indicate that exclusive reliance on historical volatility may not be a reliable indicator of expected volatility. With regard to the estimate of expected term, we have concluded that our stock option exercise experience provides a reasonable basis upon which to estimate expected term. Therefore we have refined our method to calculate estimates of the expected term of stock options.

Fair values of options granted were determined based on the following assumptions:


	Years ended December 31,

	2008			2007			2006

Expected term		5.8 - 7.0 years			5.2 - 6.5 years			6.4 years
Interest rate		2.81% - 3.38	%		3.9% - 5.2	%		4.8	%
Volatility		109.8	%		127.3	%		132.9	%
Dividends		—			—			—
Weighted average fair value of options granted	$	1.56		$	2.13		$	2.51

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes activity of our non-vested restricted stock awards during the year ended December 31, 2008:


	Shares			Weighted-average Grant Date Fair Value

Non-vested awards at beginning of year		29,611			$	2.58
Granted		209,388			$	1.88
Vested		(29,611	)		$	2.58

Non-vested awards at end of year		209,388			$	1.88

The future expected expense for non-vested restricted stock awards is $315,000.

NOTE 9 - Preferred Stock

We are authorized to issue up to 1,000,000 shares of preferred stock in series, with each series having such powers, rights, preferences, qualifications and restrictions as determined by our Board of Directors. No shares of preferred stock were outstanding at December 31, 2008 and December 31, 2007.

In May 2008, our Stockholder Rights Plan under which we could have issued Series D junior participating preferred stock expired. In March 2009, we returned the previously authorized Series D junior participating preferred stock to authorized but unissued preferred stock.

NOTE 10 - Significant Customers, Export Sales and Geographical Segments

Significant Customers

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


	Years ended December 31,

	2008		2007		2006

Customer A	33	%	29	%	46	%
Customer B	14	%	13	%	13	%
Customer C		*	15	%		*
Customer D	12	%		*		*

* Less than 10%

As of December 31, 2008, three customers accounted for approximately 32%, 16% and 14% of accounts receivable, respectively. As of December 31, 2007, two customers accounted for approximately 26% and 22% of accounts receivable, respectively.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Export Sales

For each of the years ended December 31, 2008, 2007 and 2006, export sales were less than 10% of consolidated net sales.

Geographical Segments

We do not have any operating facilities outside the United States; however, certain equipment owned by us is utilized by our contract manufacturers in Asia. The net book value of our equipment held by our contract manufacturers at December 31, 2008 and 2007 was approximately $2.1 million and $2.2 million, respectively. As described in Note 3, we closed our facility in Puerto Rico in September 2007. Prior to this, our operations located in Puerto Rico and New York were managed as one geographic segment.

Significant Contract Manufacturers

On May 3, 2000, we entered into an agreement with a contract manufacturer in Malaysia to outsource the manufacturing of certain of our gas tubes used in our products. The agreement is for ten years, but may be terminated by either party with one year’s advance notice. On December 18, 2003, we entered into an agreement that expires in June 2009 with a contract manufacturer in China, which is a subsidiary of a U.S. based corporation, to manufacture and supply products to us. These two contract manufacturers produce a majority of the products that we sell.

NOTE 11 - Commitments, Contingencies and Related Party Transactions

We lease real property and equipment under operating leases with terms expiring through March 2013. Minimum lease rentals, exclusive of real property taxes, during the next five years are approximately:


2009	$	29,000
2010	$	14,000
2011	$	11,500
2012	$	11,500
2013	$	3,000

Rent expense under operating leases was $20,000, $124,000 and $194,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

In September 2007, we closed our operations in Puerto Rico (see Note 3) where we leased a facility under an operating lease that contained a provision that required us to restore the facility to its original condition upon exiting the facility, which primarily involved the removal of leasehold improvements and which was completed in April 2008. We initially recorded an asset retirement obligation of $109,000 in 2005 for this liability and no liability remains as of December 31, 2008.

We are a party to agreements with four executive officers providing that, in the event we should terminate the officer’s employment (other than for cause) or if the officer voluntarily terminates his or her employment for good reason (as defined), the officer will be entitled to at least six months severance pay, the continuation of benefits during the six month period and the acceleration of vesting of stock options. We do not provide our other employees any post-retirement or post-employment benefits, except discretionary severance payments upon termination of employment and their COBRA entitlement.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 2006, the Board of Directors elected Kenneth A. Paladino as our President and Chief Executive Officer and a director to replace Timothy J. Roach, who retired and resigned as President, Chief Executive Officer, director and employee of the company. In connection therewith, we entered into a Consulting Agreement with Mr. Roach which replaced the Third Amended and Restated Employment Agreement between Mr. Roach and the company. Under the Consulting Agreement, among other things, Mr. Roach received compensation for a one-year period at the rate of $300,000 per annum. We expensed this amount during the year ended December 31, 2006. In connection with the departure of another executive of the company, effective August 31, 2006, we provided severance-related benefits, including certain salary, benefit continuation and a one year consulting compensation. We expensed approximately $110,000 in connection with this agreement during the year ended December 31, 2006. These severance obligations were paid during 2007.

In connection with the departure of an executive of the company in January 2008, we provided severance benefits including salary continuation and health benefits for a period of one year. We recorded a charge of $291,000 during the year ended December 31, 2007 for these benefits, exclusive of a bonus of $80,000 that was earned and recorded in 2007. A liability of $11,000 remains in accrued liabilities at December 31, 2008.

In September 2005, we entered into a consulting agreement with Alfred J. Roach, who, at the time ceased being Chairman of the Board of Directors but remains a beneficial owner of more than 5% of our common stock. The consulting agreement provides for Mr. Roach to consult with our executive officers and directors regarding our business and operations, focusing on the sale and marketing of our products. The four year agreement commenced on November 1, 2005 (when he ceased being an employee) and provides for an annual fee of $160,000 per year and 5% commissions on the net sales generated as a result of his efforts related to products sold in specified foreign countries where we are currently not doing any business. We have not recorded any expense for commissions under this agreement through December 31, 2008.

On September 14, 2005, we entered into a one year consulting agreement with Charles H. House, a director and non-executive Chairman of our Board of Directors. Mr. House assisted us in, among other things, the analysis, development and implementation of a comprehensive go-to-market business plan for certain of our products in exchange for 35,000 shares of our common stock. As the award became fully-vested and non-forfeitable upon completion of his consulting services, we recognized expense for these awards based upon the fair value of the vested portion of the award at each reporting date. The expense recognized for these awards was $55,000 for the year ended December 31, 2006.

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.

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 $1.4 million in damages, plus attorney’s fees and costs. We believe this case is without merit and we intend to defend this case vigorously.

NOTE 12 – Employee Benefits

In connection with the closing of our facility and operations in Puerto Rico in September 2007 (see Note 3), we terminated our separate defined contribution plan in which the employees in Puerto Rico participated. All participants were required to take distributions. We currently have one defined contribution plan, which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. This plan covers substantially all U.S. employees who meet eligibility requirements and requires us to match employees’ contributions up to specified limitations and subject to certain vesting schedules. In October 2005, our Board of Directors approved an increase in our voluntary 401(k) matching contribution from 10% to 20% of each participating employee’s deferred contribution commencing January 1, 2006, and in November 2007, approved a further increase from 20% to 40% of each participating employee’s deferred contribution commencing January 1, 2008. Our expense for employer matching contributions was $118,000, $63,000 and $66,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - Accrued Liabilities

Accrued liabilities consist of the following as of December 31, 2008 and 2007:


	December 31,

	2008		2007

Accrued payroll, bonus and vacation	$	402,000	$	1,229,000
Accrued legal and other professional fees		151,000		103,000
Other accrued expenses		99,000		524,000

	$	652,000	$	1,856,000

NOTE 14 - Quarterly Financial Data (Unaudited)

The following table summarizes our unaudited quarterly results for the years ended December 31, 2008, 2007 and 2006:


Quarter ended	Net sales		Gross profit		Operating income (loss)			Net income (loss)			Diluted net income per share (a)

	(in thousands, except per share data)
March 31, 2008	$	8,851	$	3,252	$	223		$	151		$	0.01
June 30, 2008		9,876		3,527		673			369		$	0.03
September 30, 2008		8,521		2,873		311			126		$	0.01
December 31, 2008		7,942		2,360		154			(68	)	$	(0.01	)

March 31, 2007	$	8,427	$	2,792	$	(289	)	$	(157	)	$	(0.01	)
June 30, 2007		13,731		3,547		402			169		$	0.01
September 30, 2007		12,704		3,989		700			372		$	0.03
December 31, 2007		11,984		4,314		688			6,056		$	0.44

March 31, 2006	$	9,428	$	3,187	$	528		$	343		$	0.03
June 30, 2006		11,211		3,761		685			437		$	0.03
September 30, 2006		10,495		3,964		579			399		$	0.03
December 31, 2006		7,971		2,463		(37	)		1,502		$	0.11


(a)	The sum of the unaudited quarterly diluted net income per share amounts do not always equal the annual amount reported because the per share amounts are computed independently for each quarter and the year.


ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.


ITEM 9A(T).	CONTROLS AND PROCEDURES

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 December 31, 2008, 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 regarding 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.

Report of Management on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes policies and procedures pertaining to our ability to record, process and report reliable information. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of our published financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2008, our internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

During the year ended December 31, 2008, there were no changes in the Company’s internal control over financial reporting that have materially and adversely affected, or are reasonably likely to materially and adversely affect, the Company’s internal control over financial reporting.

PART III

The information required by Part III (Items 10, 11, 12, 13 and 14) of Form 10-K is incorporated herein by reference to the information called for by those items which will be contained our Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with respect to our 2009 Annual Meeting of Stockholders.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1) Financial Statements


Reports of Independent Registered Public Accounting Firms		26
Consolidated Balance Sheets at December 31, 2008 and December 31, 2007		28
Consolidated Statements of Income for the years ended December 31, 2008, December 31, 2007 and December 31, 2006		29
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, December 31, 2007 and December 31, 2006		30
Consolidated Statements of Cash Flows for the years ended December 31, 2008, December 31, 2007 and December 31, 2006		31
Notes to Consolidated Financial Statements		32

(2) Financial Statement Schedules

None

(3) Exhibits


Exhibit Number		Description


2(a)	Agreement, dated as of February 27, 2006, by and between The Community Programs Center of Long Island, Inc. and us. Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated (date of earliest event reported) February 27, 2006 (File No. 001-8048).

3(a)(1)	Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 001-8048).

3(a)(2)	Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 001-8048).

3(a)(3)	Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 001-8048).

3(b)	By-laws, as amended. Incorporated by reference to Exhibit 3 to our Current Report on Form 8-K dated (date of earliest event reported) November 13, 2007 (File No. 001-8048).

4(a)(1)	Credit Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).


4(a)(2)		Line of Credit Note, dated December 15, 2006, from us to JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).

4(a)(3)		Amendment to Line of Credit Note and Credit Agreement, dated as of December 30, 2008, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

4(a)(4)		Continuing Security Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(c) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).

4(a)(5)		Continuing Guaranty, dated as of December 15, 2006, by TII Systems, Inc. in favor of JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(d) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).

10(a)(1)(A)+		1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to our Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 001- 8048).

10(a)(1)(B)+		Form of Option Contract under 1994 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(1)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).

10(a)(2)(A)+		1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 001-8048).

10(a)(2)(B)+		Form of Incentive Stock Option Contract, dated June 7, 2005, between us and separately with each of Kenneth A. Paladino and Nisar Chaudhry. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005.

10(a)(2)(C)+		Forms of Option Contracts under our 1995 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(2)(E) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No 001-8048).

10(a)(3)(A)+		1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048).

10(a)(3)(B)+		Incentive Stock Option Contract, dated September 13, 2005 between us and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005.

10(a)(3)(C)+		Forms of Option Contracts under our 1998 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(3)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).

10(a)(4)(A)+		2003 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048).

10(a)(4)(B)+		Forms of Option Contracts under our 2003 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(4)(C) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).

10(a)(5)(A)+		The Company’s 2008 Equity Compensation Plan. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048).


10(a)(5)(B)+		Restricted Stock Contract dated April 3, 2008 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048).

10(a)(5)(C)+*		Forms of Non-Qualified Stock Option, Incentive Stock Option, Stock Appreciation Rights, Restricted Stock and Restricted Stock Unit Contracts under our 2008 Equity Compensation Plan.

10(b)(1)+		Employment Agreement dated April 3, 2008 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048).

10(b)(2)+		Amendment, effective January 1, 2009, to Employment Agreement dated as of April 3, 2008, between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(c)(1)+		Letter Agreement, dated October 18, 2006, between us and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.02 to our Current Report on Form 8-K dated (date of earliest event reported) November 15, 2006 (File No. 001-8048).

10(c)(2)+		Termination Severance Agreement, dated December 15, 2006, between us and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).

10(c)(3)+		Amendment, effective January 1, 2009, to Termination Severance Agreement, dated December 15, 2006, between the Company and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(d)(1)+		Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(d)(2)+		Amendment, effective January 1, 2009, to Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(f)(1)(A)+		Resolution of the Board of Directors adopted on October 14, 2005 amending the cash compensation payable to non-employee directors. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) October 14, 2005 (File No 1-8048).

10(f)(1)(B)+		Reimbursement Policy for Non-Employee Directors dated December 31, 2008. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(f)(2)+		Description of Arrangement to Permit Directors to Accept Shares of Common Stock of the company in Lieu of Annual Directors’ Fees. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No 001-8048).

10(g)+		Consulting Agreement, dated September 14, 2005, between us and Alfred J. Roach. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005 (File No. 001-8048).


10(h)		Severance Agreement, dated January 11, 2008, between us and Martin Pucher. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001-8048).

10(i)		Product Purchase Agreement, effective as of April 1, 2005, between us and Verizon Services Corp. (confidential treatment has been granted with respect to certain portions of this agreement). Incorporated by reference to Exhibit 10(d) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).

14		Code of Ethics for Senior Financial Officers. Incorporated by reference to Exhibit 14.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001- 8048).

21		List of Subsidiaries. Incorporated by reference to Exhibit 21 to our Annual Report on Form 10-K for the fiscal year ended June 28, 2002 (File No. 001-8048).

23(a)*		Consent of Marcum & Kliegman LLP.

23(b)*		Consent of KPMG LLP.

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.



*	Filed herewith.

+	Management contract or compensatory plan or arrangement.

Signatures

Pursuant to the requirements of Section 13 or 15(d) 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.

March 27, 2009	By:	/s/ Kenneth A. Paladino

		Kenneth A. Paladino, President and
		Chief Executive Officer
		(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


March 27, 2009		/s/ Kenneth A. Paladino

		Kenneth A. Paladino, President and
		Chief Executive Officer (Principal
		Executive Officer) and Director

March 27, 2009		/s/ Jennifer E. Katsch

		Jennifer E. Katsch, Vice President-Finance (Principal
		Financial Officer), Treasurer and Chief Financial
		Officer

March 27, 2009		/s/ Mark T. Bradshaw

		Mark T. Bradshaw, Director

March 27, 2009		/s/ Lawrence M. Fodrowski

		Lawrence M. Fodrowski, Director

March 27, 2009		/s/ James J. Grover, Jr.

		James R. Grover, Jr., Director


		Susan Harman, Director

March 27, 2009		/s/ Charles H. House

		Charles H. House, Director

March 27, 2009		/s/ Brian Kelley

		Brian Kelley, Director

Exhibit Index


Exhibit Number		Description


2(a)	Agreement, dated as of February 27, 2006, by and between The Community Programs Center of Long Island, Inc. and us. Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated (date of earliest event reported) February 27, 2006 (File No. 001-8048).

3(a)(1)	Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 001-8048).

3(a)(2)	Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 001-8048).

3(a)(3)	Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 001-8048).

3(b)	By-laws, as amended. Incorporated by reference to Exhibit 3 to our Current Report on Form 8-K dated (date of earliest event reported) November 13, 2007 (File No. 001-8048).

4(a)(1)	Credit Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).

4(a)(2)	Line of Credit Note, dated December 15, 2006, from us to JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).

4(a)(3)	Amendment to Line of Credit Note and Credit Agreement, dated as of December 30, 2008, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

4(a)(4)	Continuing Security Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(c) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).

4(a)(5)	Continuing Guaranty, dated as of December 15, 2006, by TII Systems, Inc. in favor of JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(d) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).

10(a)(1)(A)+	1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to our Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 001- 8048).

10(a)(1)(B)+	Form of Option Contract under 1994 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(1)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).

10(a)(2)(A)+	1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 001-8048).


10(a)(2)(B)+		Form of Incentive Stock Option Contract, dated June 7, 2005, between us and separately with each of Kenneth A. Paladino and Nisar Chaudhry. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005.

10(a)(2)(C)+		Forms of Option Contracts under our 1995 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(2)(E) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No 001-8048).

10(a)(3)(A)+		1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048).

10(a)(3)(B)+		Incentive Stock Option Contract, dated September 13, 2005 between us and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005.

10(a)(3)(C)+		Forms of Option Contracts under our 1998 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(3)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).

10(a)(4)(A)+		2003 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048).

10(a)(4)(B)+		Forms of Option Contracts under our 2003 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(4)(C) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).

10(a)(5)(A)+		The Company’s 2008 Equity Compensation Plan. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048).

10(a)(5)(B)+		Restricted Stock Contract dated April 3, 2008 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048).

10(a)(5)(C)+*		Forms of Non-Qualified Stock Option, Incentive Stock Option, Stock Appreciation Rights, Restricted Stock and Restricted Stock Unit Contracts under our 2008 Equity Compensation Plan.

10(b)(1)+		Employment Agreement dated April 3, 2008 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048).

10(b)(2)+		Amendment, effective January 1, 2009, to Employment Agreement dated as of April 3, 2008, between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(c)(1)+		Letter Agreement, dated October 18, 2006, between us and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.02 to our Current Report on Form 8-K dated (date of earliest event reported) November 15, 2006 (File No. 001-8048).

10(c)(2)+		Termination Severance Agreement, dated December 15, 2006, between us and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048).


10(c)(3)+		Amendment, effective January 1, 2009, to Termination Severance Agreement, dated December 15, 2006, between the Company and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(d)(1)+		Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(d)(2)+		Amendment, effective January 1, 2009, to Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(f)(1)(A)+		Resolution of the Board of Directors adopted on October 14, 2005 amending the cash compensation payable to non-employee directors. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) October 14, 2005 (File No 1- 8048).

10(f)(1)(B)+		Reimbursement Policy for Non-Employee Directors dated December 31, 2008. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048).

10(f)(2)+		Description of Arrangement to Permit Directors to Accept Shares of Common Stock of the company in Lieu of Annual Directors’ Fees. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No 001-8048).

10(g)+		Consulting Agreement, dated September 14, 2005, between us and Alfred J. Roach. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005 (File No. 001-8048).

10(h)		Severance Agreement, dated January 11, 2008, between us and Martin Pucher. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001-8048).

10(i)		Product Purchase Agreement, effective as of April 1, 2005, between us and Verizon Services Corp. (confidential treatment has been granted with respect to certain portions of this agreement). Incorporated by reference to Exhibit 10(d) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048).

14		Code of Ethics for Senior Financial Officers. Incorporated by reference to Exhibit 14.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001- 8048).

21		List of Subsidiaries. Incorporated by reference to Exhibit 21 to our Annual Report on Form 10-K for the fiscal year ended June 28, 2002 (File No. 001-8048).

23(a)*		Consent of Marcum & Kliegman LLP

23(b)*		Consent of KPMG LLP.

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.



*	Filed herewith.

+	Management contract or compensatory plan or arrangement.

NON-QUALIFIED STOCK OPTION

TII NETWORK TECHNOLOGIES, INC.

2008 EQUITY COMPENSATION PLAN

NON-QUALIFIED STOCK OPTION CONTRACT

THIS NON-QUALIFIED STOCK OPTION CONTRACT (this “Contract”) is entered into as of _________________________ between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the “Company”), and ___________________________________ (the “Optionee”).

W I T N E S S E T H:

1.       The Company, in accordance with the allotment made by the Compensation Committee of the Company’s Board of Directors (the “Committee”) and subject to the terms and conditions of the 2008 Equity Compensation Plan of the Company (the “Plan”), grants to the Optionee an option (this “Option”) to purchase an aggregate of _______ shares (subject to adjustment and provided in the Plan), of the Common Stock, $.01 par value per share, of the Company (“Common Stock”) at an exercise price of $_____ per share (subject to adjustment and provided in the Plan), being at least equal to the Fair Market Value of such shares of Common Stock on the date hereof. This Option is not intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). Terms used, but not defined in this Contract, shall have the meaning ascribed to them in the Plan.

2.       This Option shall expire at 5:00 p.m. Eastern Time on _______ ___, subject to earlier termination as provided in the Plan. However, this Option shall not be exercisable until __________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next _________ anniversaries of the date thereof. 1 The right to purchase shares of Common Stock under this Option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of this Option.

3.       This Option shall be exercised by giving written notice to the Company stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate exercise price therefor due on exercise [(i)] in cash and/or by certified or bank cashier’s check, [(ii) [with the authorization of the Committee,] with previously acquired shares of Common Stock having an aggregate Fair Market Value (as defined in the Plan) on the date of exercise equal to the exercise price of options being exercised, (iii) [with the authorization of the Committee,] with a concurrent sale of shares being acquired upon such exercise to the extent permitted by the Plan, and in accordance with, or (iv) some combination of the foregoing; provided, however, that in no case may shares be tendered if such tender would require the Company to incur a charge against its earnings for financial accounting purposes]. The Company shall not be required to issue any shares of Common Stock pursuant to the exercise of this Option until the required payment of the exercise price with respect thereto has been made. In no event may this Option be exercised at any time for less than 100 shares of Common Stock (or the remaining shares subject to this Option which are then exercisable if less than 100 shares) nor may a fraction of a share of Common Stock be purchased under this Option.

_________________________

¹ be modified for varying vesting and/or performance criteria.

4.       The Company and/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this Option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand, including as condition to the exercise of this Option.

5.       (a) It is a condition to the exercise of this Option, and the sale by Optionee of any shares of Common Stock acquired upon exercise of this Option, that either (i) a Registration Statement under the Securities Act of 1933, as amended (the “Securities Act”), shall be effective and current at that time with respect to such exercise or sale of shares of Common Stock in such transaction or (ii) there is an exemption from registration under the Securities Act with respect to such exercise or sale of shares of Common Stock in such transaction. Nothing herein shall be construed as requiring the Company to register shares subject this Option under the Securities Act or to keep any Registration Statement effective or current.

          (b) The Committee may require, as a condition to the issuance of shares of Common Stock upon any exercise of this Option, and the sale by the Optionee of any shares acquired upon exercise of this Option, that the Optionee execute and deliver to the Company such Optionee’s representations, warranties, covenants and documents, in form, substance and scope satisfactory to the Committee, as the Committee may determine to be necessary or appropriate to facilitate the perfection of an exemption from the registration requirements of the Securities Act, applicable state securities laws or other legal requirements with respect to such transaction, but the Committee may require Optionee, in claiming such exemption with respect to any sale or other disposition by the Optionee of any shares acquired upon exercise of this Option, prior to any offer of sale or sale of such shares of Common Stock, to provide the Company with a favorable written opinion of counsel satisfactory to the Company, in form, substance and scope satisfactory to the Company, as to the applicability of such Securities Act exemption to the proposed sale or distribution.

          (c) In addition, if at any time the Committee shall determine that the listing or qualification of the shares of Common Stock subject to this Option on any securities exchange or under any applicable law, or that the consent or approval of any governmental agency or regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of this Option or the issuance of shares of Common Stock hereunder, this Option may not be exercised, in whole or in part, unless such listing, qualification, consent or approval shall have been effected or obtained by the Company free of any conditions not acceptable to the Committee.

          (d) The Company may affix appropriate legends upon the certificates for shares of Common Stock to be issued upon exercise of this Option and may issue such “stop transfer” instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act and (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock.

2

6.       All notices and other communications required or permitted under this Contract shall be in writing and may be given by any of the following methods: (x) personal delivery; (y) United States certified or registered mail return receipt requested; or (z) nationally recognized overnight delivery service, in each case with delivery charges, if any, prepaid. Notices shall be addressed as follows (or to such other address for such party as shall be specified by notice given pursuant to this provision):

(i)

to the Company:

TII Network Technologies, Inc.

Attention: Chief Financial Officer

141 Rodeo Drive

Edgewood, New York 11717-8378

(ii)

if to the Optionee, at the Optionee’s mailing address set forth on the signature page hereof.

All notices and communications given in accordance with this Section 6 shall be deemed given and effective upon (i) in the case of personal delivery, actual receipt thereof by the addressee; (ii) in the case of United States certified or registered mail, five (5) business days after mailing, as evidenced by the postmark; and (iii) in the case of nationally recognized overnight delivery service, on the scheduled date of delivery.

7.       Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any Subsidiary, or interfere in any way with any right of the Company, any Parent or any Subsidiary to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any Subsidiary.

8.       The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern.

9.       This Option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.

10.     This Contract shall be binding upon and inure to the benefit of the parties hereto and the successors, assigns, heirs and legal representatives of the respective parties.

11.     The Plan, and this Contract and all related matters, shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to conflict of law provisions that would defer to the laws of another jurisdiction. Any dispute under the Plan, or under this Contract, shall be adjudicated solely and exclusively in the Federal and State Courts located in Suffolk County, State of New York, and no other Court shall have jurisdiction of this Contract, this Option or any dispute hereunder.

12.     If any provision of this Contract, or part thereof, is determined to be unenforceable for any reason whatsoever, it shall be severable from the remainder of this Contract and shall not invalidate or affect the other provisions of this Contract, which shall remain in full force and effect and shall be enforceable according to their terms. No covenant shall be dependent upon any other covenant or provision herein, each of which stands independently.

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13.     The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan.

14.     Section 409A of the Code (“Section 409A”) imposes certain restrictions on amounts deferred under nonqualified deferred compensation plans and a 20% excise tax on the Optionee on amounts that are subject to, but do not comply with, Section 409A. Section 409A includes a broad definition of nonqualified deferred compensation plans, which includes certain types of equity incentive compensation. It is intended that this Option will comply with an exemption from the requirements of Section 409A and the treasury regulations promulgated thereunder (and any subsequent notices or guidance issued by the Internal Revenue Service). The Company shall not be liable to the Optionee or any other person if this Option is subject to Section 409A or the Optionee or any other person is subject to any additional tax, penalty or interest under Section 409A. The Optionee is solely responsible for the payment of any tax, penalty or interest (other than Company withholding obligations) that may result from this Option.

IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written.

TII NETWORK TECHNOLOGIES, INC.

By:

Name:

Title:

OPTIONEE:

Signature:

Print Name:

Optionee’s Address:

4

INCENTIVE STOCK OPTION

TII NETWORK TECHNOLOGIES, INC.

2008 EQUITY COMPENSATION PLAN

INCENTIVE STOCK OPTION CONTRACT

THIS INCENTIVE STOCK OPTION CONTRACT (this “Contract”) is entered into as of _________________________ between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the “Company”), and ________________________________________ (the “Optionee”).

W I T N E S S E T H:

1.      The Company, in accordance with the allotment made by the Compensation Committee of the Company’s Board of Directors (the “Committee”) and subject to the terms and conditions of the 2008 Equity Compensation Plan of the Company (the “Plan”), grants to the Optionee an option (this “Option”) to purchase an aggregate of _______ shares (subject to adjustment and provided in the Plan) of the Common Stock, $.01 par value per share, of the Company (“Common Stock”) at an exercise price of $_____ per share (subject to adjustment and provided in the Plan), being at least equal1 to the Fair Market Value of such shares of Common Stock on the date hereof. This Option is intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), although the Company makes no representation or warranty as to such qualification. Terms used, but not defined in this Contract, shall have the meaning ascribed to them in the Plan.

2.      This Option shall expire at 5:00 p.m. Eastern Time on _______ ___,2 subject to earlier termination as provided in the Plan. However, this Option shall not be exercisable until __________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next _________ anniversaries of the date thereof. 3 The right to purchase shares of Common Stock under this Option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of this Option.

3.      This Option shall be exercised by giving written notice to the Company stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate exercise price therefor due on exercise [(i)] in cash and/or by certified or bank cashier’s check, [(ii) [with the authorization of the Committee,] with previously acquired shares of Common Stock having an aggregate Fair Market Value (as defined in the Plan) on the date of exercise equal to the exercise price of options being exercised, or (iii) some combination of the foregoing; provided, however, that in no case may shares be tendered if such tender would require the Company to incur a charge against its earnings for financial accounting purposes]. The Company shall not be required to issue any shares of Common Stock pursuant to the exercise of this Option until the required payment of the exercise price with respect thereto has been made. In no event may this Option be exercised at any time for less than 100 shares of Common Stock (or the remaining shares subject to this Option which are then exercisable if less than 100 shares) nor may a fraction of a share of Common Stock be purchased under this Option.

_________________________

¹ For ISOs to be granted to an Optionee who owns, or is deemed to own, more than 10% of the combined voting power of the Company, the Company’s Subsidiaries and the Company’s Parents, insert “110% of.”

2 For ISOs to be granted to an Optionee who owns, or is deemed to own, more than 110% of the combined voting power of the Company, the Company’s Subsidiaries and the Company’s Parents, limit to five years.

3 To be modified for varying vesting and/or performance criteria.

4.      The Company and/or any Subsidiary may withhold cash in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand, including as condition to the exercise of this Option.

5.      In the event of any disposition of the shares of Common Stock acquired pursuant to the exercise of this Option within two years from the date hereof or one year from the date of transfer of such shares to him, the Optionee shall notify the Company thereof in writing within 30 days after such disposition. In addition, the Optionee shall provide the Company on demand with such information as the Company shall reasonably request in connection with determining the amount and character of the Optionee’s income, the applicable deduction and the obligation to withhold taxes or other amount incurred by reason of such disqualifying disposition, including the amount thereof. The Optionee shall pay the Company and/or the Subsidiary, as the case may be, in cash on demand the amount, if any, which the Company determines is necessary to satisfy such withholding obligation.

6.      (a) It is a condition to the exercise of this Option, and the sale by Optionee of any shares of Common Stock acquired upon exercise of this Option, that either (i) a Registration Statement under the Securities Act of 1933, as amended (the “Securities Act”), shall be effective and current at that time with respect to such exercise or sale of shares of Common Stock in such transaction or (ii) there is an exemption from registration under the Securities Act with respect to such exercise or sale of shares of Common Stock in such transaction. Nothing herein shall be construed as requiring the Company to register shares subject this Option under the Securities Act or to keep any Registration Statement effective or current.

         (b) The Committee may require, as a condition to the issuance of shares of Common Stock upon any exercise of this Option, and the sale by the Optionee of any shares acquired upon exercise of this Option, that the Optionee execute and deliver to the Company such Optionee’s representations, warranties, covenants and documents, in form, substance and scope satisfactory to the Committee, as the Committee may determine to be necessary or appropriate to facilitate the perfection of an exemption from the registration requirements of the Securities Act, applicable state securities laws or other legal requirements with respect to such transaction, but the Committee may require Optionee, in claiming such exemption with respect to any sale or other disposition by the Optionee of any shares acquired upon exercise of this Option, prior to any offer of sale or sale of such shares of Common Stock, to provide the Company with a favorable written opinion of counsel satisfactory to the Company, in form, substance and scope satisfactory to the Company, as to the applicability of such Securities Act exemption to the proposed sale or distribution.

         (c) In addition, if at any time the Committee shall determine that the listing or qualification of the shares of Common Stock subject to this Option on any securities exchange or under any applicable law, or that the consent or approval of any governmental agency or regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of this Option or the issuance of shares of Common Stock hereunder, this Option may not be exercised, in whole or in part, unless such listing, qualification, consent or approval shall have been effected or obtained by the Company free of any conditions not acceptable to the Committee.

         (d) The Company may affix appropriate legends upon the certificates for shares of Common Stock is to be issued upon exercise of this Option and may issue such “stop transfer” instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock or (c) permit the Company to determine the occurrence of a “disqualifying disposition,” as described in Section 421(b) of the Code, of the shares of Common Stock transferred upon the exercise of this Option.

7.      All notices and other communications required or permitted under this Contract shall be in writing and may be given by any of the following methods: (x) personal delivery; (y) United States certified or registered mail return receipt requested; or (z) nationally recognized overnight delivery service, in each case with delivery charges, if any, prepaid. Notices shall be addressed as follows (or to such other address for such party as shall be specified by notice given pursuant to this provision):

(i)

to the Company:

TII Network Technologies, Inc.

Attention: Chief Financial Officer

141 Rodeo Drive

Edgewood, New York 11717-8378

(ii)

if to the Optionee, at the Optionee’s mailing address set forth on the signature page hereof.

All notices and communications given in accordance with this Section 7 shall be deemed given and effective upon (i) in the case of personal delivery, actual receipt thereof by the addressee; (ii) in the case of United States certified or registered mail, five (5) business days after mailing, as evidenced by the postmark; and (iii) in the case of nationally recognized overnight delivery service, on the scheduled date of delivery.

8.      Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any Subsidiary, or interfere in any way with any right of the Company, any Parent or Subsidiary to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any Subsidiary.

9.      The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern.

10.    This Option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.

11.    This Contract shall be binding upon and inure to the benefit of the parties hereto and the successors, assigns, heirs and legal representatives of the respective parties.

12.    The Plan, and this Contract and all related matters, shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to conflict of law provisions that would defer to the laws of another jurisdiction. Any dispute under the Plan, or under this Contract, shall be adjudicated solely and exclusively in the Federal and State Courts located in Suffolk County, State of New York, and no other Court shall have jurisdiction of this Contract, this Option or any dispute hereunder.

3

13.      If any provision of this Contract, or part thereof, is determined to be unenforceable for any reason whatsoever, it shall be severable from the remainder of this Contract and shall not invalidate or affect the other provisions of this Contract, which shall remain in full force and effect and shall be enforceable according to their terms. No covenant shall be dependent upon any other covenant or provision herein, each of which stands independently.

14.      The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan.

15.      Section 409A of the Code (“Section 409A”) imposes certain restrictions on amounts deferred under nonqualified deferred compensation plans and a 20% excise tax on the Optionee on amounts that are subject to, but do not comply with, Section 409A. Section 409A includes a broad definition of nonqualified deferred compensation plans, which includes certain types of equity incentive compensation. It is intended that this Option will comply with an exemption from the requirements of Section 409A and the treasury regulations promulgated thereunder (and any subsequent notices or guidance issued by the Internal Revenue Service). The Company shall not be liable to the Optionee or any other person if this Option is subject to Section 409A or the Optionee or any other person is subject to any additional tax, penalty or interest under Section 409A. The Optionee is solely responsible for the payment of any tax, penalty or interest (other than Company withholding obligations) that may result from this Option.

IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written.

TII NETWORK TECHNOLOGIES, INC.

By:

Name:

Title:

OPTIONEE:

Signature:

Print Name:

Optionee’s Address:

4

STOCK APPRECIATION RIGHT

TII Network Technologies, INC.
2008 Equity Compensation PLAN

STOCK APPRECIATION RIGHT CONTRACT

THIS STOCK APPRECIATION RIGHT CONTRACT (this “Contract”) is entered into as of __________________________ between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the “Company”), and _________________________________ (the “Awardee”).

W I T N E S S E T H:

1.      The Company, in accordance with the allotment made by the Compensation Committee of the Company’s Board of Directors (the “Committee”) and subject to the terms and conditions of the 2008 Equity Compensation Plan of the Company (the “Plan”) and this Contract, grants to the Awardee a stock appreciation rights award (“SAR Award”) with respect to an aggregate of _______ shares (subject to adjustment as provided in the Plan) of the Common Stock, $.01 par value per share, of the Company (“Common Stock”) at a Base Value of $_______ per share (subject to adjustment as provided in the Plan), being at least equal to the Fair Market Value of such shares of Common Stock on the date hereof. One SAR represents the right to receive the excess, if any, of the Fair Market Value over the Base Value for one share of Common Stock, payable at the time and in the form provided herein. Terms used, but not defined in this Contract, shall have the meaning ascribed to them in the Plan.

2.      This SAR Award shall expire at 5:00 p.m. Eastern Time on ____________, subject to earlier termination as provided in the Plan. However, this SAR Award shall not be exercisable until ________________________________, at which time it shall become exercisable as to _______ SARs, and as to an additional _______ SARs on each of the next __________ anniversaries of the date thereof.¹ The right to exercise the SARs shall be cumulative, so that if the full number of SARs exercisable in a period shall not be exercised, the balance may be exercised at any time or from time to time thereafter, but not after the expiration of the SAR Award. The number of SARs referenced in this Section is subject to adjustment as provided in the Plan.

3.      This SAR Award shall be exercised by giving written notice to the Company stating that the Awardee is exercising the SAR Award hereunder and specifying the number of SARs being exercised. In no event may this Award be exercised at any time for less than 100 SARs (or the remaining SARs subject to this Award which are then exercisable if less than 100 SARs) nor may this Award be exercised with respect to a fraction of a SAR.

______________________________
1     To be modified for varying vesting and/or performance criteria.

2

4.      On exercise of a SAR, the Awardee shall be entitled to receive, without any payment to the Company (other than required tax withholding amounts), an amount equal to the product obtained by multiplying (a) the number of SARs being exercised by (b) an amount equal to the excess of (i) the Fair Market Value per share of Common Stock on the date of exercise of the SAR over (ii) the Base Value per share of the SAR (the amount so determined, the “SAR Value”). [The SAR Value shall be promptly settled by a payment in cash by the Company.] [The SAR Value shall be promptly settled by (x) the issuance of that number of whole shares of Common Stock (rounded down to the next whole share) determined by dividing (i) the applicable SAR Value by (ii) the Fair Market Value per share of Common Stock on the date of exercise and (y) the payment of cash in lieu of any fractional share.]

5.      The Company and/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Awardee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this SAR Award or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Awardee to pay the Company such amount in cash promptly upon demand, including as a condition to the exercise of this Award.

6.      (a) It is a condition to the exercise of this Award, and the sale by Awardee of any shares of Common Stock acquired upon exercise of this Award, that either (i) a Registration Statement under the Securities Act of 1933, as amended (the “Securities Act”), shall be effective and current at that time with respect to such exercise or sale of shares of Common Stock in such transaction or (ii) there is an exemption from registration under the Securities Act with respect to such exercise or sale of shares of Common Stock in such transaction. Nothing herein shall be construed as requiring the Company to register shares subject this Award under the Securities Act or to keep any Registration Statement effective or current.

(b) The Committee may require, as a condition to the issuance of shares of Common Stock upon any exercise of this Award, and the sale by the Awardee of any shares acquired upon exercise of this Award, that the Awardee execute and deliver to the Company the Awardee’s representations, warranties, covenants and documents, in form, substance and scope satisfactory to the Committee, as the Committee may determine to be necessary or appropriate to facilitate the perfection of an exemption from the registration requirements of the Securities Act, applicable state securities laws or other legal requirements with respect to such transaction, and the Committee may require Awardee, in claiming such exemption with respect to any sale or other disposition by the Awardee of any shares acquired upon exercise of this Award, prior to any offer of sale or sale of such shares of Common Stock, to provide the Company with a favorable written opinion of counsel satisfactory to the Company, in form, substance and scope satisfactory to the Company, as to the applicability of such Securities Act exemption to the proposed sale or distribution.

(c) In addition, if at any time the Committee shall determine that the listing or qualification of the shares of Common Stock subject to this Award on any securities exchange or under any applicable law, or that the consent or approval of any governmental agency or regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of this Award or the issuance of shares of Common Stock hereunder, this Award may not be exercised, in whole or in part, unless such listing, qualification, consent or approval shall have been effected or obtained by the Company free of any conditions not acceptable to the Committee.

3

(d) The Company may affix appropriate legends upon the certificates for shares of Common Stock to be issued upon exercise of this Award and may issue such “stop transfer” instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act and (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Awardee with respect to such shares of Common Stock.

7.       All notices and other communications required or permitted under this Contract shall be in writing and may be given by any of the following methods: (x) personal delivery; (y) United States certified or registered mail return receipt requested; or (z) nationally recognized overnight delivery service, in each case with delivery charges, if any, prepaid. Notices shall be addressed as follows (or to such other address for such party as shall be specified by notice given pursuant to this provision):

(i)

to the Company:

TII Network Technologies, Inc.

Attention: Chief Financial Officer

141 Rodeo Drive

Edgewood, New York 11717-8378

(ii)

if to the Awardee, at the Awardee’s mailing address set forth on the signature page hereof.

All notices and communications given in accordance with this Section 7 shall be deemed given and effective upon (i) in the case of personal delivery, actual receipt thereof by the addressee; (ii) in the case of United States certified or registered mail, five (5) business days after mailing, as evidenced by the postmark; and (iii) in the case of nationally recognized overnight delivery service, on the scheduled date of delivery.

8.       Nothing in the Plan or this Contract shall confer upon the Awardee any right to continue in the employ of the Company, any Parent or any of Subsidiary, or in any way affect the right of the Company, any Parent or any Subsidiary to terminate such employment at any time without notice for any reason whatsoever or no reason without liability to the Company, any Parent or any Subsidiary.

9.       The Company and the Awardee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Awardee and is made a part hereof. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern.

4

10.     This SAR Award is not transferable by the Awardee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Awardee, only by the Awardee.

11.     This Contract shall be binding upon and inure to the benefit of the parties hereto and the successors, assigns, heirs and legal representatives of the respective parties.

12.     The Plan, and this Contract and all related matters, shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to conflict of law provisions that would defer to the laws of another jurisdiction. Any dispute under the Plan, or under this Contract, shall be adjudicated solely and exclusively in the Federal and State Courts located in Suffolk County, State of New York, and no other Court shall have jurisdiction of this Contract, this SAR Award or any dispute hereunder.

13.     If any provision of this Contract, or part thereof, is determined to be unenforceable for any reason whatsoever, it shall be severable from the remainder of this Contract and shall not invalidate or affect the other provisions of this Contract, which shall remain in full force and effect and shall be enforceable according to their terms. No covenant shall be dependent upon any other covenant or provision herein, each of which stands independently.

14.     The Awardee agrees that the Company may amend the Plan and the SARs, subject to the limitations contained in the Plan.

15.     Section 409A of the Code (“Section 409A”) imposes certain restrictions on amounts deferred under nonqualified deferred compensation plans and a 20% excise tax on the Awardee on amounts that are subject to, but do not comply with, Section 409A. Section 409A includes a broad definition of nonqualified deferred compensation plans, which includes certain types of equity incentive compensation. It is intended that this Award will comply with an exemption from the requirements of Section 409A and the treasury regulations promulgated thereunder (and any subsequent notices or guidance issued by the Internal Revenue Service). The Company shall not be liable to the Awardee or any other person if this Award is subject to Section 409A or the Awardee or any other person is subject to any additional tax, penalty or interest under Section 409A. The Awardee is solely responsible for the payment of any tax, penalty or interest (other than Company withholding obligations) that may result from this Award.

5

IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written.

TII NETWORK TECHNOLOGIES, INC.

By:

Name:

Title:

AWARDEE:

Signature:

Print Name:

Awardee’s Address:

5

RESTRICTED STOCK CONTRACT

TII NETWORK TECHNOLOGIES, INC.

2008 EQUITY COMPENSATION PLAN

RESTRICTED STOCK CONTRACT

THIS RESTRICTED STOCK CONTRACT (this “Contract”) is entered into as of ___________________ (the “Award Date”) between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the “Company”), and _________________________________ (the “Awardee”).

W I T N E S S E T H:

1.      The Company, in accordance with the allotment made by the Compensation Committee of the Company’s Board of Directors (the “Committee”) and subject to the terms and conditions of the 2008 Equity Compensation Plan of the Company (the “Plan”), grants to the Awardee a restricted stock award (this “Award”) with respect to an aggregate of _______ shares (subject to adjustment as provided in the Plan, the “Award Shares”) of the Common Stock, $.01 par value per share, of the Company (“Common Stock”). Terms used, but not defined in this Contract, shall have the meaning ascribed to them in the Plan.

2.      (a) The Award Shares shall vest as to ________ Award Shares at the close of business on _________ and as to an additional _______ Award Shares as of the close of business day on each of the next ________ anniversaries of the date thereof (each such date, a “Vesting Date”) provided the Awardee remains continuously in Company Service (as defined below) from the Award Date through the close of business on the applicable Vesting Date. 1 The number of Award Shares referenced in this Section is subject to adjustment as provided in the Plan. If and to the extent Award Shares vest, the Company shall, promptly following the applicable Vesting Date, deliver the Award Shares vested on such Vesting Date to the Awardee. Notwithstanding anything to contrary herein, Award Shares shall only vest and be deliverable as to whole shares and any fraction of a share which would otherwise vest at a Vesting Date shall not vest, but shall be carried forward to the next and subsequent vesting periods, if any, for vesting based on aggregate whole shares at such times; and, if a fractional share would otherwise be vested and deliverable with the last vesting hereunder, such fractional share shall be forfeited

         (b) If the Awardee’s Company Service ceases for any reason on or prior to the close of business on a Vesting Date, any Award Shares that have not vested at such time shall be automatically forfeited to the Company. The period prior to the close of business on the Vesting Date or date on which forfeiture of Award for applicable Award Shares occurs is referred to as the “Period of Restriction”.

         (c) During the Period of Restriction of any Award Shares, such Award Shares shall have the rights and restrictions provided for in Sections 3(b) and 3(c). Award Shares that have vested shall, as of the close of business on the applicable Vesting Date, be free of restrictions and freely transferable (subject to limitations of applicable securities laws) by the Awardee.

_________________________

¹

To be modified for varying vesting and/or performance criteria.

         (d) For purposes hereof, “Company Service” means service as an employee or director of, or a consultant to, the Company, any of its Subsidiaries or a Parent. In determining cessation of Company Service for purposes hereof, transfers between the Company and/or any Subsidiary or a Parent shall be disregarded and shall not be considered a cessation of Company Service, and changes in status between that of an employee, director or consultant shall be disregarded and shall not be considered a cessation of Company Service.

3.      (a) Stock certificate(s) for the Award Shares shall promptly hereafter be issued to, and registered on the Company’s stock transfer books in the name of, the Awardee in certificated, book entry or electronic form, as determined by the Committee. If issued in certificated form, physical possession of the stock certificate(s) shall be deposited with, and held in custody by, the Company until such time as the relevant Award Shares vest (promptly following which the vested Award Shares shall be delivered to the Awardee) or are forfeited (in which event the forfeited Award Shares shall be cancelled by the Company and returned to the status of authorized but unissued Common Stock). The Awardee shall deliver to the Company a stock power executed in favor of the Company with respect to the Award Shares, which stock power may be completed and used by the Company to cancel (i) Award Shares that are forfeited and (ii) any Award Shares that the Company may withhold and cancel pursuant to the last sentence of Section 4. Solely, with respect Award Shares that are forfeited to the Company and Award Shares that the Company may withhold and cancel pursuant to the last sentence of Section 4, the Awardee hereby irrevocably constitutes and appoints those serving from time to time as the Secretary and Assistant Secretary of the Company as the Awardee’s attorney-in-fact, with full power of substitution in the premises and with full power and authority to execute any stock transfer powers or other instruments necessary to transfer such shares on the books of the Company to the Company in the name, place and stead of the Awardee. The power granted hereby is coupled with an interest, is irrevocable, shall survive the death, disability or insanity of the Awardee and shall continue until all Award Shares are delivered to the Awardee or the Company as provided in this Contract.

         (b) During the Period of Restriction with respect to applicable Award Shares, whether or not such Award Shares are vested, the Awardee (i) may exercise full voting rights with respect to the Award Shares in the same manner as any stockholder of the Company and (ii) shall be entitled to receive all dividends and other distributions paid with respect to the Award Shares in cash or in property (other than Common Stock). All dividends and other distributions paid in Common Stock with respect to the Award Shares that have not vested at the time shall be deposited with the Company pursuant to Section 3(a) and shall be considered to be additional Award Shares, subject to the same restrictions on vesting and forfeiture as the Award Shares with respect to which they were paid.

         (c) The Awardee does not have the right to sell, transfer, exchange, pledge, hypothecate or otherwise dispose (other than as provided in Section 9) of this Award or, prior to vesting thereof, any Award Shares. Any attempt to sell, transfer, exchange, pledge, hypothecate or otherwise dispose (other than as provided in Section 9) of this Award, or, prior to vesting thereof, any Award Shares shall be null, void and of no force and effect.

2

         (d) Any Award Shares issued in book entry or electronic form shall be subject to the following restriction, and any certificate(s) evidencing the Award Shares shall bear the following legend during the Period of Restriction:

The sale, transfer, pledge, hypothecation or other disposition of the shares represented by this certificate, whether voluntary, nvoluntary or by operation of law, is subject to certain restrictions on transfer set forth in the 2008 Equity Compensation Plan of TII Network Technologies, Inc., in the rules, regulations and administrative procedures adopted pursuant to such Plan, and in an associated Restricted Stock Contract. A copy of the Plan, such rules, regulations and procedures, and the applicable Restricted Stock Contract may be obtained from the Secretary of TII Network Technologies, Inc.

4.      The Awardee shall provide the Company with a copy of any election made pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the “Code”), and similar provision of state law (collectively, an “83(b) Election”). If the Awardee elects to make a timely 83(b) Election, the Awardee shall immediately pay the Company the amount necessary to satisfy any applicable Federal, state, and local income and employment tax withholding requirements. If the Awardee does not make a timely 83(b) Election, the Awardee shall, either at the time that the Award Shares vest under this Contract or at the time withholding is otherwise required by any applicable law, pay the Company the amount necessary to satisfy any applicable Federal, state, and local income and employment tax withholding requirements or make other arrangements satisfactory to the Company for such payment. The Company shall have the right to retain and withhold as provided herein the amount of taxes required by any government or governmental authority to be withheld or otherwise deducted and paid with respect to the Award Shares. At its discretion, the Committee may require the Awardee to reimburse the Company for any such taxes required to be withheld by the Company and may withhold any distribution, in whole or in part, until the Company is so reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amounts due to or to become due from the Company to the Awardee an amount equal to such taxes required to be withheld by the Company in order to reimburse the Company for any such taxes or to retain and withhold, or cause to be returned to it, a number of Award Shares having a Fair Market Value on the Vesting Date not less than the amount of such taxes and cancel any such Award Shares so withheld or returned, in order to reimburse the Company for any such taxes.

5.     (a) It is a condition to the vesting of this Award, and the sale by the Awardee of any Award Shares acquired upon vesting of this Award, that either (i) a  Registration Statement under the Securities Act of 1933, as amended (the “Securities Act”), shall be effective and current at that time with respect to such vesting or sale in such transaction or (ii) there is an exemption from registration under the Securities Act with respect to such vesting or sale in such transaction. Nothing herein shall be construed as requiring the Company to register Award Shares under the Securities Act or to keep any Registration Statement effective or current.

         (b) The Committee may require, as a condition to the delivery of Award Shares upon any vesting of this Award and the sale by the Awardee of Award Shares, that the Awardee execute and deliver to the Company the Awardee’s representations, warranties, covenants and documents, in form, substance and scope satisfactory to the Committee, as the Committee may determine to be necessary or appropriate to facilitate the perfection of an exemption from the registration requirements of the Securities Act, applicable state securities laws or other legal requirements with respect to such transaction, and the Committee may require the Awardee, in claiming such exemption with respect to any sale or other disposition by the Awardee of any Shares, prior to any offer of sale or sale of such Award Shares, to provide the Company with a favorable written opinion of counsel satisfactory to the Company, in form, substance and scope satisfactory to the Company, as to the applicability of such Securities Act exemption to the proposed sale or distribution.

3

         (c) In addition, if at any time the Committee shall determine that the listing or qualification of the Award Shares on any securities exchange or under any applicable law, or that the consent or approval of any governmental agency or regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of this Award or the issuance of Award Shares hereunder, the Award Shares subject to this Award need not be delivered, in whole or in part, unless such listing, qualification, consent or approval shall have been effected or obtained by the Company free of any conditions not acceptable to the Committee.

         (d) The Company may affix appropriate legends upon the certificates for Award Shares to be delivered to the Awardee and may issue such “stop transfer” instructions to its transfer agent in respect of such Award Shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act and (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Awardee with respect to such Award Shares.

6.      All notices and other communications required or permitted under this Contract shall be in writing and may be given by any of the following methods: (x) personal delivery; (y) United States certified or registered mail return receipt requested; or (z) nationally recognized overnight delivery service, in each case with delivery charges, if any, prepaid. Notices shall be addressed as follows (or to such other address for such party as shall be specified by notice given pursuant to this provision):

(i)

to the Company:

TII Network Technologies, Inc.

Attention: Chief Financial Officer

141 Rodeo Drive

Edgewood, New York 11717-8378

(ii)

if to the Awardee, at the Awardee’s mailing address set forth on the signature page hereof.

All notices and communications given in accordance with this Section 6 shall be deemed given and effective upon (i) in the case of personal delivery, actual receipt thereof by the addressee; (ii) in the case of United States certified or registered mail, five (5) business days after mailing, as evidenced by the postmark; and (iii) in the case of nationally recognized overnight delivery service, on the scheduled date of delivery.

4

7.      Nothing in the Plan or this Contract shall confer upon the Awardee any right to continue in the employ of the Company, any Parent or any Subsidiary, or in any way affect the right of the Company, any Parent or any Subsidiary to terminate such employment at any time without notice for any reason whatsoever or no reason without liability to the Company, any Parent or any Subsidiary.

8.      The Company and the Awardee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Awardee and is made a part hereof. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern.

9.      This Award is not transferable by the Awardee otherwise than by will or the laws of descent and distribution.

10.    This Contract shall be binding upon and inure to the benefit of the parties hereto and the successors, assigns, heirs and legal representatives of the respective parties.

11.    The Plan, and this Contract and all related matters, shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to conflict of law provisions that would defer to the laws of another jurisdiction. Any dispute under the Plan, or under this Contract, shall be adjudicated solely and exclusively in the Federal and State Courts located in Suffolk County, State of New York, and no other Court shall have jurisdiction of this Contract, this Award or any dispute hereunder.

12.    If any provision of this Contract, or part thereof, is determined to be unenforceable for any reason whatsoever, it shall be severable from the remainder of this Contract and shall not invalidate or affect the other provisions of this Contract, which shall remain in full force and effect and shall be enforceable according to their terms. No covenant shall be dependent upon any other covenant or provision herein, each of which stands independently.

13.    The Awardee agrees that the Company may amend the Plan and this Award, subject to the limitations contained in the Plan.

14.    Section 409A of the Code (“Section 409A”) imposes certain restrictions on amounts deferred under nonqualified deferred compensation plans and a 20% excise tax on the Awardee on amounts that are subject to, but do not comply with, Section 409A. Section 409A includes a broad definition of nonqualified deferred compensation plans, which includes certain types of equity incentive compensation. It is intended that this Award will comply with an exemption from the requirements of Section 409A and the treasury regulations promulgated thereunder (and any subsequent notices or guidance issued by the Internal Revenue Service). The Company shall not be liable to the Awardee or any other person if this Award is subject to Section 409A or the Awardee or any other person is subject to any additional tax, penalty or interest under Section 409A. The Awardee is solely responsible for the payment of any tax, penalty or interest (other than Company withholding obligations) that may result from this Award.

5

IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written.

TII NETWORK TECHNOLOGIES, INC.

By:

Name:

Title:

OPTIONEE:

Signature:

Print Name:

Awardee’s Address:



6

RESTRICTED STOCK UNIT CONTRACT

TII NETWORK TECHNOLOGIES, INC.

2008 EQUITY COMPENSATION PLAN

RESTRICTED STOCK UNIT CONTRACT

THIS RESTRICTED STOCK UNIT CONTRACT (this “Contract”) is entered into as of ___________________ (the “Award Date”) between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the “Company”), and _________________________________ (the “Awardee”).

W I T N E S S E T H:

1.       The Company, in accordance with the allotment made by the Compensation Committee of the Company’s Board of Directors (the “Committee”) and subject to the terms and conditions of the 2008 Equity Compensation Plan of the Company (the “Plan”), grants to the Awardee a restricted stock unit award (this “Award”) with respect to an aggregate of _______ shares (subject to adjustment as provided in the Plan, the “Award RSUs”) of the Common Stock, $.01 par value per share, of the Company (“Common Stock”). One Award RSU represents, and has the value of, one share of the Company’s Common Stock. Terms used, but not defined in this Contract, shall have the meaning ascribed to them in the Plan.

2.       (a) The Award RSUs shall vest as to ________ Award RSUs at the close of business on _________ and as to an additional _______ Award RSUs as of the close of business day on each of the next ________ anniversaries of the date thereof (each such date, a “Vesting Date”) provided the Awardee remains continuously in Company Service (as defined below) from the Award Date through the close of business on the applicable Vesting Date. 1 The number of Award RSUs referenced in this Section is subject to adjustment as provided in the Plan. If and to the extent Award RSUs vest, the Award RSUs vested on the applicable Vesting Date, shall be settled as provided in Section 2(c). Notwithstanding anything to contrary herein, Award RSUs shall only vest and be deliverable as to whole shares and any fraction of a share which would otherwise vest at a Vesting Date shall not vest, but shall be carried forward to the next and subsequent vesting periods, if any, for vesting based on aggregate whole shares at such times; and, if a fractional share would otherwise be vested and deliverable with the last vesting hereunder, such fractional share shall be forfeited.

          (b) If the Awardee’s Company Service ceases for any reason on or prior to the close of business on a Vesting Date, any Award RSUs that have not vested at such time shall be automatically forfeited to the Company. The period prior to the close of business on the Vesting Date or date on which forfeiture of Award for applicable Award RSUs occurs, whichever is earlier, is referred to as the “Period of Restriction”.

          (c) All Award RSUs that become vested shall be settled by the payment to the Awardee of _____% thereof, subject to the limitation of applicable securities laws, in shares of the Company’s Common Stock for each vested whole Award RSU and ____% thereof in cash in an amount equal to the Fair Market Value of one share of Common Stock on the Vesting Date for each Award RSU that vests on that Vesting Date. Stock certificate(s) issued for the vested Award RSUs shall be registered on the Company’s stock transfer books in the name of the Awardee in book entry or electronic form or in certificated form as determined by the Committee.

_________________________

¹

To be modified for varying vesting and/or performance criteria.

          (d) For purposes hereof, “Company Service” means service as an employee or director of, or a consultant to, the Company, any of its Subsidiaries or a Parent. In determining cessation of Company Service for purposes hereof, transfers between the Company and/or any Subsidiary or a Parent shall be disregarded and shall not be considered a cessation of Company Service, and changes in status between that of an employee, director or consultant shall be disregarded and shall not be considered a cessation of Company Service.

3.       (a) Until shares of the Company’s Common Stock are issued to the Awardee, the Awardee shall have no voting rights with respect to the Award RSUs.

          (b) During the Period of Restriction, the Awardee shall not be entitled to receive dividends and other distributions paid with respect to the Company’s Common Stock represented by the Award RSUs, but such dividends or distributions shall be accumulated and distributed or paid to the Awardee when, but only when, the Award RSUs to which they pertain vest and are settled. If, during the Period of Restriction, any such dividends or distributions made with respect to the Company’s Common Stock represented by the Award RSUs are paid in shares of the Company’s Common Stock, an additional number of Award RSUs (on a one for one basis) shall be added to the RSUs to reflect such stock dividends or distributions. If, during the Period of Restriction, any such dividends and other distributions made with respect to the Company’s Common Stock represented by the Award RSUs are not distributed in shares of the Company’s Common Stock, the value thereof shall be deemed converted to additional Award RSUs based on the Fair Market Value of a share of the Company’s Common Stock on the date of payment or distribution of the dividend or distribution to stockholders and the amount of cash or fair market value of other property distributed, all as determined by the Committee.

          (c) The Awardee does not have the right to sell, transfer, exchange, pledge, hypothecate or otherwise dispose (other than as provided in Section 9) of this Award or any Award RSUs. Any attempt to sell, transfer, exchange, pledge, hypothecate or otherwise dispose (other than as provided in Section 9) of this Award or any Award RSUs shall be null, void and of no force and effect.

4.       The Company shall have the right to retain and withhold as provided herein the amount of taxes required by any government or governmental authority to be withheld or otherwise deducted and paid with respect to the Award RSUs. At its discretion, the Committee may require the Awardee to reimburse the Company for any such taxes required to be withheld by the Company and may withhold any distribution, in whole or in part, until the Company is so reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amounts due to or to become due from the Company to the Awardee an amount equal to such taxes required to be withheld by the Company in order to reimburse the Company for any such taxes or to retain and withhold, or cause to be returned to it, a number of shares of Common Stock having a Fair Market Value on the Vesting Date not less than the amount of such taxes and cancel any such shares so withheld or returned, in order to reimburse the Company for any such taxes.

2

5.       (a) It is a condition to the vesting of this Award, and the sale by the Awardee of any shares of Common Stock acquired upon vesting of this Award, that either (i) a Registration Statement under the Securities Act of 1933, as amended (the “Securities Act”), shall be effective and current at that time with respect to such vesting or sale in such transaction or (ii) there is an exemption from registration under the Securities Act with respect to such vesting or sale in such transaction. Nothing herein shall be construed as requiring the Company to register shares of Common Stock under the Securities Act or to keep any Registration Statement effective or current.

          (b) The Committee may require, as a condition to the delivery of shares of Common Stock upon any vesting of this Award and the sale by the Awardee of shares of Common Stock, that the Awardee execute and deliver to the Company the Awardee’s representations, warranties, covenants and documents, in form, substance and scope satisfactory to the Committee, as the Committee may determine to be necessary or appropriate to facilitate the perfection of an exemption from the registration requirements of the Securities Act, applicable state securities laws or other legal requirements with respect to such transaction, and the Committee may require the Awardee, in claiming such exemption with respect to any sale or other disposition by the Awardee of any shares of Common Stock, prior to any offer of sale or sale of such shares of Common Stock, to provide the Company with a favorable written opinion of counsel satisfactory to the Company, in form, substance and scope satisfactory to the Company, as to the applicability of such Securities Act exemption to the proposed sale or distribution.

          (c) In addition, if at any time the Committee shall determine that the listing or qualification of the shares of Common Stock subject to the Award RSUs on any securities exchange or under any applicable law, or that the consent or approval of any governmental agency or regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of this Award or the issuance of shares of Common Stock hereunder, the shares of Common Stock subject to the Award RSUs need not be delivered, in whole or in part, unless such listing, qualification, consent or approval shall have been effected or obtained by the Company free of any conditions not acceptable to the Committee.

          (d) The Company may affix appropriate legends upon the certificates for shares of Common Stock to be delivered to the Awardee and may issue such “stop transfer” instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act and (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Awardee with respect to such Award RSUs.

6.       All notices and other communications required or permitted under this Contract shall be in writing and may be given by any of the following methods: (x) personal delivery; (y) United States certified or registered mail return receipt requested; or (z) nationally recognized overnight delivery service, in each case with delivery charges, if any, prepaid.

3

Notices shall be addressed as follows (or to such other address for such party as shall be specified by notice given pursuant to this provision):

(i)

to the Company:

TII Network Technologies, Inc.

Attention: Chief Financial Officer

141 Rodeo Drive

Edgewood, New York 11717-8378

(ii)

if to the Awardee, at the Awardee’s mailing address set forth on the signature page hereof.

All notices and communications given in accordance with this Section 6 shall be deemed given and effective upon (i) in the case of personal delivery, actual receipt thereof by the addressee; (ii) in the case of United States certified or registered mail, five (5) business days after mailing, as evidenced by the postmark; and (iii) in the case of nationally recognized overnight delivery service, on the scheduled date of delivery.

7.       Nothing in the Plan or this Contract shall confer upon the Awardee any right to continue in the employ of the Company, any Parent or any Subsidiary, or in any way affect the right of the Company, any Parent or any Subsidiary to terminate such employment at any time without notice for any reason whatsoever or no reason without liability to the Company, any Parent or any Subsidiary.

8.       The Company and the Awardee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Awardee and is made a part hereof. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern.

9.       This Award is not transferable by the Awardee otherwise than by will or the laws of descent and distribution.

10.     This Contract shall be binding upon and inure to the benefit of the parties hereto and the successors, assigns, heirs and legal representatives of the respective parties.

11.     The Plan, and this Contract and all related matters, shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to conflict of law provisions that would defer to the laws of another jurisdiction. Any dispute under the Plan, or under this Contract, shall be adjudicated solely and exclusively in the Federal and State Courts located in Suffolk County, State of New York, and no other Court shall have jurisdiction of this Contract, this Award or any dispute hereunder.

12.     If any provision of this Contract, or part thereof, is determined to be unenforceable for any reason whatsoever, it shall be severable from the remainder of this Contract and shall not invalidate or affect the other provisions of this Contract, which shall remain in full force and effect and shall be enforceable according to their terms. No covenant

4

shall be dependent upon any other covenant or provision herein, each of which stands independently.

13.     The Awardee agrees that the Company may amend the Plan and this Award, subject to the limitations contained in the Plan.

14.     Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), imposes certain restrictions on amounts deferred under nonqualified deferred compensation plans and a 20% excise tax on the Awardee on amounts that are subject to, but do not comply with, Section 409A. Section 409A includes a broad definition of nonqualified deferred compensation plans, which includes certain types of equity incentive compensation. It is intended that this Award will comply with an exemption from the requirements of Section 409A and the treasury regulations promulgated thereunder (and any subsequent notices or guidance issued by the Internal Revenue Service). The Company shall not be liable to the Awardee or any other person if this Award is subject to Section 409A or the Awardee or any other person is subject to any additional tax, penalty or interest under Section 409A. The Awardee is solely responsible for the payment of any tax, penalty or interest (other than Company withholding obligations) that may result from this Award.

IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written.

TII NETWORK TECHNOLOGIES, INC.

By:

Name:

Title:

OPTIONEE:

Signature:

Print Name:

Awardee’s Address:

5

	(i)	to the Company:

		TII Network Technologies, Inc.
		Attention: Chief Financial Officer
		141 Rodeo Drive
		Edgewood, New York 11717-8378

	(ii)	if to the Optionee, at the Optionee’s mailing address set forth on the signature page hereof.