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

Overview

Business

Tii Network Technologies, Inc. and subsidiaries (together, "Tii," the "company," "we," "us" or "our") design, manufacture and sell products to 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").

Results of Operations

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

                                  Three months ended June 30,
(dollars in                                                 2008
thousands)                     2009                                                 Dollar             Percent
                                      % of                         % of            increase           increase
                       Amount      Net sales        Amount      Net sales         (decrease)         (decrease)
Net sales            $  6,494          100.0 %    $  9,876          100.0 %      $    (3,382 )            -34.2 %
Cost of sales           4,252           65.5 %       6,353           64.3 %           (2,101 )            -33.1 %
Gross profit            2,242           34.5 %       3,523           35.7 %           (1,281 )            -36.4 %

Operating
expenses:
Selling, general
and
administrative          1,765           27.2 %       2,349           23.8 %             (584 )            -24.9 %
Research and
development               396            6.1 %         501            5.1 %             (105 )            -21.0 %
Total operating
expenses                2,161           33.3 %       2,850           28.9 %             (689 )            -24.2 %

Operating income           81            1.2 %         673            6.8 %             (592 )            -88.0 %

Interest expense           (2 )          0.0 %          (4 )          0.0 %               (2 )            -50.0 %
Interest income             4            0.1 %           9            0.1 %               (5 )            -55.6 %

Income before
income taxes               83            1.3 %         678            6.9 %             (595 )            -87.8 %
Income tax
provision                  36           43.4 %         309           45.6 %             (273 )            -88.3 %
Net income           $     47            0.7 %    $    369            3.7 %      $      (322 )            -87.3 %

                                  Six months ended June 30,
(dollars in
thousands)                     2009                         2008                   Dollar            Percent
                                      % of                         % of           increase          increase
                      Amount       Net sales       Amount       Net sales        (decrease)        (decrease)
Net sales            $ 12,243          100.0 %    $ 18,727          100.0 %     $     (6,484 )          -34.6 %
Cost of sales           7,874           64.3 %      11,922           63.7 %           (4,048 )          -34.0 %
Gross profit            4,369           35.7 %       6,805           36.3 %           (2,436 )          -35.8 %

Operating
expenses:
Selling, general
and
administrative          3,649           29.8 %       4,786           25.6 %           (1,137 )          -23.8 %
Research and
development               834            6.8 %       1,123            6.0 %             (289 )          -25.7 %
Total operating
expenses                4,483           36.6 %       5,909           31.6 %           (1,426 )          -24.1 %

Operating (loss)
income                   (114 )         -0.9 %         896            4.8 %           (1,010 )         -112.7 %

Interest expense           (2 )          0.0 %          (4 )          0.0 %               (2 )          -50.0 %
Interest income             6            0.0 %          26            0.1 %              (20 )          -76.9 %

(Loss) income
before income
taxes                    (110 )         -0.9 %         918            4.9 %           (1,028 )         -112.0 %
Income tax
provision                  75          -68.2 %         399           43.5 %             (324 )          -81.2 %
Net (loss) income    $  (185)           -1.5 %    $    519            2.8 %     $       (704 )         -135.6 %

Net sales for the three months ended June 30, 2009 were $6,494,000 compared to $9,876,000 in the comparable prior year period, a decrease of $3,382,000 or 34.2%. Net sales for the six months ended June 30, 2009 were $12,243,000 compared to $18,727,000 in the comparable prior year period, a decrease of $6,484,000 or 34.6%. The decreases were due to the downturn in economic activity which has negatively impacted the markets for our products across all categories of products.

Gross profit for the three months ended June 30, 2009 was $2,242,000 compared to $3,523,000 in the prior year period, a decrease of $1,281,000 or 36.4%, while gross profit margin decreased to 34.5% from 35.7%. Gross profit for the six months ended June 30, 2009 was $4,369,000 compared to $6,805,000 in the prior year period, a decrease of $2,436,000 or 35.8%, while gross profit margin decreased to 35.7% from 36.3%. The decreases in gross profit margins for the periods was primarily due to product mix.

Selling, general and administrative expenses for the three months ended June 30, 2009 were $1,765,000 compared to $2,349,000 in the comparable prior year period, a decrease of $584,000 or 24.9%. The decrease in the three month 2009 period was primarily attributable to the following:

          Salary and related benefits - decrease in headcount  $ 165,000
          Professional and consulting fees                       154,000
          Sales commissions as a result of decreased sales        70,000
          Travel and entertainment expenses                       50,000
          Advertising costs                                       42,000
          Insurance costs                                         24,000
          Utilities, maintenance and supplies expense             22,000
          Other, net                                              57,000
                                                               $ 584,000

Selling, general and administrative expenses for the six months ended June 30, 2009 were $3,649,000 compared to $4,786,000 in the comparable prior year period, a decrease of $1,137,000 or 23.8%. The decrease in the six month 2009 period is primarily attributable to the following:

         Salary and related benefits - decrease in headcount  $   354,000
         Professional and consulting fees                         333,000
         Sales commissions as a result of decreased sales         109,000
         Travel and entertainment expenses                        107,000
         Advertising costs                                         89,000
         Other, net                                               145,000
                                                              $ 1,137,000

Research and development expenses for the three months ended June 30, 2009 were $396,000 compared to $501,000 for the comparable prior year period, a decrease of $105,000 or 21.0%. Research and development expenses for the six months ended June 30, 2009 were $834,000 compared to $1,123,000 in the comparable prior year period, a decrease of $289,000 or 25.7%. These decreases are primarily attributable to lower spending on product development, in addition to decreases in salaries and related benefits from a reduction in headcount in 2008.

During the three months ended June 30, 2009 and 2008, we recorded a provision for income taxes of $36,000 and $309,000, respectively. During the six months ended June 30, 2009 and 2008, we recorded a provision for income taxes of $75,000 and $399,000, respectively. Our income tax provision for each period consists of amounts necessary to align our year-to-date tax provision with the effective tax rate we expect to achieve for the full year. That rate differs from the U.S. statutory rate primarily as a result of the non-deductibility of certain share-based compensation expense for income tax purposes that has been recognized for financial statement purposes, state taxes and, additionally, in 2009, an increase in the valuation allowance against deferred tax assets for our estimate of state net operating losses that will expire unutilized.

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 did not have a significant effect on our operations during any of the reported periods.

Liquidity and Capital Resources

As of June 30, 2009, we had $20,070,000 of working capital, which included $10,780,000 of cash and cash equivalents, and our current ratio was 9.1 to 1.

The primary reason for the $2,808,000 of cash provided by operating activities in the six months of 2009 compared to the $360,000 cash used in operating activities in the six months of 2008 was a $1,336,000 reduction in inventories in the 2009 period compared to a $3,482,000 temporary build-up of inventories in the 2008 period to fulfill anticipated sales. This was partially offset by a loss of $185,000 in the 2009 six month period compared to a profit of $519,000 in the same 2008 period, and a $458,000 greater reduction in accounts payable and accrued liabilities in the 2009 period than in the 2008 period.

Investing activities in the first six months of 2009 used cash of $239,000, for capital expenditures, primarily for machinery and equipment used in the development of new products, compared to $428,000 used for this purpose in the similar 2008 period.

Financing activities in the first six months of 2009 used cash of $71,000 for repayments of insurance premiums financed with short term debt, while the exercise of stock options provided $100,000 of cash in the similar period of 2008.

In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. (the "amended agreement") which replaced a $5,000,000 credit facility that was expiring. Under the amended agreement, we are entitled to borrow from the bank up to $5,000,000 in the aggregate at any one time outstanding, but limited to a borrowing base, in general, equal to 80% of eligible accounts receivable (as defined), plus the lesser of 30% of eligible inventory (as defined, generally to include, with certain exceptions, inventories at the Company's continental United States warehouse), after certain reserves, or $1,500,000. As of June 30, 2009, our borrowing base was $3,829,000. Loans under the amended agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement as of June 30, 2009.

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

Seasonality

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

Off Balance Sheet Financing

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

Critical Accounting Policies, Estimates and Judgments

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments. A summary of our most critical accounting policies can be found in the Management's Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for year ended December 31, 2008. We regularly evaluate items which may impact our critical accounting estimates and judgments. During the six months ended June 30, 2009, we did not update our critical accounting policies.

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("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 deferred 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 did 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, which we adopted effective January 1, 2009. The adoption of SFAS 157 did not impact our financial position or results of operations.

In November 2007, the FASB Emerging Issues Task Force ("EITF") issued EITF 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock." As a result of EITF 07-5, freestanding warrants containing protective features, which provide for adjustments to the exercise or conversion price if the entity subsequently issues shares or other equity-related contracts to a new investor with more favorable pricing, will no longer be eligible to be recorded in equity. EITF 07-5 became effective for us on January 1, 2009. EITF 07-5 has not impacted us to date as we have no outstanding instruments that contain these protective features. We will assess the impact of EITF 07-5 if and when we issue instruments that contain these protective features.

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) became effective for us on January 1, 2009. SFAS No. 141(R) has not impacted us to date. 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 became effective for us on January 1, 2009. SFAS No. 160 has not impacted us to date as there are no such noncontrolling interests. We will assess the impact of SFAS 160 if and when any noncontrolling interests should arise.

Recently Issued Accounting Standards Not Yet Adopted

In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). SFAS 167 eliminates Interpretation 46(R)'s exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity's status as a variable interest entity, a company's power over a variable interest entity, or a company's obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying Interpretation
46(R)'s provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. SFAS 167 will be effective January 1, 2010. We do not expect the adoption of SFAS 16 to have any impact on our financial statements or results of operations.

In July 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168 establishes the FASB Accounting Standards Codification to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. Rules and

interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supercede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS 168, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 to materially impact our financial statements or results of operations.

Forward-Looking Statements

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

• 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;
• pressure from customers to reduce pricing without achieving a commensurate reduction in costs;
• the ability to market and sell products to new markets beyond our principal copper-based telephone operating company ("Telco") market which has been declining over the last several years, due principally to the impact of alternate technologies;
• exposure to increases in the cost of our products, including increases in the cost of our petroleum-based plastic products and precious metals;
• the ability to timely develop products and adapt our existing products to address technological changes, including changes in our principal market;
• competition in our traditional Telco market and new markets into which we have been seeking to Ex;
• dependence on, and ability to retain, our "as-ordered" general supply agreements with our largest customer and our ability to win new contracts;
• dependence on third parties for certain product development;
• dependence for products and product components from Pacific Rim contract manufacturers, including on-time delivery that could be interrupted as a result of third party labor disputes, political factors or shipping disruptions, quality control and exposure to changes in costs and changes in the valuation of the Chinese Yuan;
• weather and similar conditions, including the effect of typhoons on our assembly facilities in the Pacific Rim, 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;
• the ability to attract and retain technologically qualified personnel; and
• the availability of financing on satisfactory terms.

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