<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>draft092601_10k.txt
<TEXT>

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington. D.C. 20549

                                    FORM 10-K

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

                     FOR THE FISCAL YEAR ENDED JUNE 29, 2001

                          COMMISSION FILE NUMBER 1-8048


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

             Delaware                                    66-0328885
---------------------------------         -----------------------------------
(State or other jurisdiction of          (I.R.S. Employer Identification No.)
incorporation or organization)


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


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


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

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

      Indicate by check mark  whether the  registrant  (l) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

      The  aggregate  market  value  of  the  voting  stock  of  the  registrant
outstanding  as of September 10, 2001 held by  non-affiliates  of the registrant
was  approximately  $8.3  million.  While such market value  excludes the market
value of shares that may be deemed  beneficially owned by executive officers and
directors,  this should not be construed as indicating that all such persons are
affiliates.

      The number of shares of the Common Stock of the registrant  outstanding as
of September 10, 2001 was 11,682,284.

                       DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the registrant's Proxy Statement relating to its
       2001 Annual Meeting of Stockholders are incorporated by reference
                         into Part III of this Report.

<PAGE>

                           FORWARD-LOOKING STATEMENTS

In  order to keep the  Company's  stockholders  and  investors  informed  of the
Company's  future plans,  this Report  contains  and,  from time to time,  other
reports and oral or written statements issued by the Company or on its behalf by
its officers contain, forward-looking statements concerning, among other things,
the  Company's  future  plans  and  objectives  that are or may be  deemed to be
"forward-looking statements." The Company's ability to do this has been fostered
by the Private  Securities  Litigation Reform Act of 1995 which provides a "safe
harbor"  for  forward-looking  statements  to  encourage  companies  to  provide
prospective   information  so  long  as  those  statements  are  accompanied  by
meaningful cautionary statements  identifying important factors that could cause
actual results to differ  materially from those discussed in the statement.  The
Company  believes  that it is in the  best  interests  of its  stockholders  and
potential  investors to take  advantage of the "safe harbor"  provisions of that
Act.  Such  forward-looking  statements  are  subject  to a number  of known and
unknown risks and  uncertainties  that could cause the Company's actual results,
performance or achievements to differ materially from those described or implied
in the forward-looking  statements.  These factors include,  but are not limited
to,  general  economic  and  business   conditions,   including  the  regulatory
environment  applicable  to the  communications  industry;  weather  and similar
conditions;  competition (see "Competition");  potential  technological  changes
(see  "Research and  Development")  including  the  Company's  ability to timely
develop new products and adapt its existing  products to  technological  changes
(see "Products" and "Research and  Development");  potential changes in customer
spending and purchasing  policies and practices;  loss or disruption of sales to
major customers as a result of, among other things,  third party labor disputes,
shipping   disruptions   from   countries  in  which  the   Company's   contract
manufacturers  produce the Company's  products;  the Company's ability to market
its existing,  recently  developed and new products (see "Marketing and Sales");
the risks  inherent in new product  introductions,  such as start-up  delays and
uncertainty of customer  acceptance;  dependence on third parties for certain of
its products and product  components (see "Raw Materials" and  "Manufacturing");
the Company's ability to attract and retain technologically  qualified personnel
(see  "Employees");  the Company's ability to fulfill its growth strategies (see
"Research and Development"); the availability of financing on satisfactory terms
to support the Company's  growth (see  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources");
and other  factors  discussed  elsewhere  in this  Report  and in other  Company
reports hereafter filed with the Securities and Exchange Commission.

<PAGE>

                                     PART I

ITEM 1.   BUSINESS

GENERAL

      TII Industries,  Inc.  ("Company" or "TII") designs,  produces and markets
overvoltage  and  lightning  surge  protection  products  and  systems,  network
interface  devices  ("NIDs")  and  station  electronic  products  for use in the
communications  industry.  The  Company  sells its  products  to  United  States
telephone operating companies ("Telcos"),  including the Regional Bell Operating
Companies ("RBOCs"), as well as original equipment manufacturers ("OEMs"), cable
television  ("CATV")  providers and  competitive  access  providers  ("CAPs") of
communications  services. The Company believes that its products offer superior,
cost-effective   performance  features  and   characteristics,   including  high
reliability,  long life  cycles,  ease of  installation  and optimum  protection
against adverse  environmental  conditions.  This has resulted in TII becoming a
leading supplier of overvoltage surge protectors to the U.S.  Telephone industry
for use at their subscriber locations.

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

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

      As Telcos and other  communications  providers  expand and  upgrade  their
networks  with new  technologies  to provide  users with the expanded  bandwidth
necessary  for  high-speed  transmission  of data and video,  TII has  developed
several  products  to satisfy  these  developing  markets,  including  a station
protector  compatible with digital subscriber lines ("DSL"). DSL is superimposed
over the existing  telephone  lines allowing  high-speed  data to be transmitted
over a telephone line.

      To address the growing demands and complexities of communications networks
in the home, the Company has developed the Digital  Closet(TM),  a multi-service
residential  gateway,  that  will be  offered  for  sale to the  public  through
authorized  dealers in the Fall of calendar 2001.  Residential  gateways connect
broadband  service to an in-home  network  that allows  communications  and data
transfer  between  networked  devices in the home and the Internet.  The Digital
Closet integrates several of the Company's and certain specialty  manufacturer's
proven products and technologies into a unique multi service residential gateway
which includes a whole home surge  protection  system,  network  firewall,  high
speed  Internet  access and local area  networking  utilizing a home's  existing
wiring infrastructure.



                                       2
<PAGE>


      Utilizing the Company's proprietary overvoltage protection technology, the
Digital Closet provides a common ground protection system for all power lines in
the home, as well as  protection  for all incoming  signals  regardless of their
source (telephone,  cable, satellite etc.). This technology is designed not only
to  improve  the  level of  protection  but also to  eliminate  the need for the
multitude of individual  strip surge  protectors  currently used to protect home
electronics.  The Digital  Closet's whole home surge  protection  system is also
designed to minimize  electrical  noise  associated  with ground  differentials,
ensuring signal reception integrity. (See "Business - Products")

      As discussed below,  beginning in fiscal 1999, the Company  realigned some
of its  operations  by  outsourcing  a  significant  portion  of  its  component
assembly,  closing its Dominican Republic  facility,  divesting of its injection
molding and metal  stamping  operations,  workforce  reductions and taking other
cost-cutting   measures.  In  fiscal  2001,  the  Company  began  an  additional
re-alignment  of  its  operations,  including  an  expansion  of  the  Company's
outsourcing strategy with outside manufacturers to produce a substantial portion
of its  remaining  components  and  subassemblies  that the  Company  was  still
manufacturing, additional workforce and production facility reductions and other
cost  saving  measures.  (See  "Business-Business  Strategy"  and  "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")

BUSINESS STRATEGY

      The Company's  business  strategy for increasing its  participation in the
rapidly growing worldwide  communications markets is based upon focusing on: (i)
introducing  and  marketing  new and  innovative  products  that  will  solidify
existing markets and take TII into new markets,  such as the residential gateway
market; (ii) expanding opportunities in broadband communications;  (iii) growing
the core  protection  business by  strengthening  the Company's  sales  presence
within the  independent  telephone  companies;  and (iv) enhancing all marketing
efforts by capitalizing on TII's reputation as a producer of high quality,  high
performance products at competitive prices with on-time delivery.

      The Company's  reputation  among its  customers is one of providing  swift
responses to their needs with creative and effective  solutions  using  products
compliant  with,  and in most cases  superior in  performance  to, the demanding
specifications of Telco customers,  Telcordia (formerly Bellcore),  Underwriters
Laboratory ("UL") and other testing facilities. This approach, combined with the
Company's history of constantly  improving  technology,  improved operations and
effective  collaboration,  allows the Company to bring product  solutions to its
customers faster, more effectively and more competitively priced.

      The Company has successfully  developed  cooperative working relationships
with  several  of the  world's  most  advanced  communications,  technology  and
manufacturing companies. Working with these companies, joint teams are formed to
integrate their combined  talents and  technologies to foster and accelerate new
product development, cost effective manufacturing and effective sales, marketing
and distribution.  Several of the Company's new products have been the result of
these collaborative efforts.

      During  fiscal  1999,  the  Company   initiated  a  strategic   operations
re-alignment in an effort to enhance  operating  efficiencies  and reduce costs.
This  program  included  outsourcing  a  significant  portion  of the  Company's
production,   closing  the  Company's  Dominican  Republic  facility,  workforce
reductions and other  cost-saving  measures  throughout the Company.  Under this
initial  plan,  the  Company  recorded  an  operations  re-alignment  charge  of
approximately  $6.0  million.  (See  Note 2 of Notes to  Consolidated  Financial
Statements.)



                                       3
<PAGE>


      During the third quarter of fiscal 2001, as part of management's continued
strategy to improve profit margins by finding  cost-effective  ways of producing
its  products,  and as a  result  of the  successes  under  the  Company's  1999
re-alignment  plan,  management  committed  to a plan to  further  re-align  its
operations.  A key element of the 2001 plan is the  expansion  of the  Company's
outsourcing  strategy  with  contract  manufacturers  to  produce a  substantial
portion of the remaining components and subassemblies that the Company was still
manufacturing.  Included in this plan are  additional  workforce and  production
facility  reductions,  the  assessment  of future  usage and  recoverability  of
certain  inventories  and  manufacturing  machinery,   equipment  and  leasehold
improvements as certain  manufacturing  activities  conducted in Puerto Rico are
outsourced and products are  eliminated,  and other cost saving  measures.  As a
result, the Company recorded a net operations  re-alignment charge,  including a
write-down of inventories  of $2.7 million,  in the third quarter of fiscal 2001
of  $6.1  million,  net of  reversals.  (See  Note 2 of  Notes  to  Consolidated
Financial Statements.)

PRODUCTS

      LIGHTNING AND OVERVOLTAGE SURGE PROTECTION PRODUCTS.  The Company designs,
produces and markets overvoltage surge protection products and systems,  network
interface devices and station  electronics for the  communications  industry for
use on their  subscribers' home or business  telephone lines.  Surge protectors:
(i) protect the subscribers and their  equipment;  (ii) reduce the  subscribers'
loss of service; (iii) reduce the communications  providers' loss of revenue due
to subscriber  outages;  and (iv) reduce the communications  providers' costs to
replace or repair damaged  equipment.  Overvoltage  surge  protectors  differ in
power capacity, application, configuration and price to meet varying needs.

      In the United States, overvoltage surge protectors are mandated by the NEC
to be installed on the subscriber's telephone lines.

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

      MODULAR STATION PROTECTORS: One of the Company's most advanced overvoltage
surge  protectors,   marketed  under  the  trademark  Totel  Failsafe(R)("TFS"),
combines  the  Company's  three  electrode  gas tube with a  thermally  operated
failsafe  mechanism.  The  three-electrode  gas  tube  is  designed  to  protect
equipment  from  hazardous  overvoltage  surges and the  failsafe  mechanism  is
designed to insure that, under sustained overvoltage  conditions,  the protector
will become  permanently  grounded.  The Company  combines  this TFS  protection
element with a sealing gel making this modular  surge  protector  impervious  to
severe  moisture  or  environmental   contamination   while  providing  advanced
overvoltage  surge  protection.  The Company has developed  several  overvoltage
protectors  for  high-speed   broadband   applications.   These  protectors  are
compatible with a DSL and 10 Base-T  transmissions over the "category 5" cables.
On a  DSL,  high-speed  digital  signals  are  superimposed  over  the  existing
telephone wires. TII is expanding its 10 Base-T product offerings in response to
the  increasing  amount of  "category  5" wiring used in the fast  growing  home
networking market.



                                       4
<PAGE>


      BROADBAND COAXIAL  PROTECTORS:  1999 revisions to the NEC, as it continues
to be adopted by local  jurisdictions,  require  overvoltage surge protection on
all network  powered  subscriber  coax  lines,  a cable  technology  that brings
telephony and broadband services to homes and businesses. As an integral part of
the Company's  broadband  product line, the Company has developed and patented a
high-performance,  75-ohm  Broadband  Coax  Protector  product line to safeguard
coaxial cable lines. While providing overvoltage surge protection, the Company's
in-line  Broadband  Coax  Protectors  are virtually  transparent to the network,
permitting  high-bandwidth signals to be transmitted without adversely affecting
the signal.  The Company's  Broadband Coax Protectors have begun to be installed
in active network  interface  devices  distributed as part of hybrid-fiber  coax
(known as "HFC") broadband network build-outs.  These build-outs,  employing HFC
architecture, connect residential and business customers to an enhanced range of
video,  voice  and  high-speed  data  communication  possibilities,  as  well as
improved signal reliability,  better pictures and superior two-way  transmission
capability over existing and new HFC systems.

      Capitalizing  on the Company's  patent for In-Line(R)  Coaxial Cable Surge
Protectors,  the Company has also  developed  a 50-ohm  Base  Station  Protector
product line which  protects  wireless  service  providers'  cell sites from the
damaging effects of lightning and other surges.

      SOLID STATE AND HYBRID  OVERVOLTAGE  SURGE  PROTECTORS:  Using solid state
components,  the Company has developed a line of solid state  overvoltage  surge
protectors.  While solid state  overvoltage surge protectors are faster than gas
tube  overvoltage  surge  protectors at reacting to surges,  a feature that some
Telcos believe  important in protecting  certain of their  sensitive  equipment,
they have lower  energy  handling  capability  and higher  capacitance  than gas
tubes.  When an overvoltage  surge exceeds the energy  handling  capacity of the
solid state protector,  it fails causing the telephone to cease operating.  High
capacitance  on  a   communication   line   adversely   affects  high  bandwidth
transmission,  distorting the signal.  As a result,  most Telcos use high-energy
handling, low capacitance gas tube protectors at the subscriber location. In the
Telco's switching center,  where lower energy handling and higher capacitance is
not a major  concern,  solid  state  protectors  are used  more  frequently.  As
communications equipment becomes more complex, a protector's reaction speed to a
surge  may  be  perceived  to  be  more  critical   than  its  energy   handling
capabilities.  In response the Company has also combined solid state  protectors
with the  Company's  gas tubes in hybrid  overvoltage  surge  protectors.  While
generally more expensive and complex than gas tube surge protectors,  the hybrid
surge protector can provide the speed of a solid state protector with the energy
handling capability of a gas tube. (See "Business - Competition.")

      AC POWERLINE  PROTECTORS:  TII's  powerline surge  protectors  utilize the
Company's  surge  protection  technology and are  principally  used by Telcos at
their central office  locations  ("CO"'s).  These devices  protect the connected
communication  equipment  against damage or destruction  caused when overvoltage
surges enter  equipment  through the  powerline.  Recent  power line  protection
products   developed  by  the  Company   incorporate  TII's  proprietary  hybrid
overvoltage  surge  protection  technology.  These  products have superior surge
handling  characteristics  compared to the standard strip surge  protectors that
plug into a homeowner's AC outlet.  This technology has been  incorporated  into
TII's whole home surge  protection  system in the Company's  new Digital  Closet
discussed under Home Networking Systems.

      Overvoltage  surge  protectors  sold  separately  from NIDs  accounted for
approximately  56%, 59% and 49% of the  Company's net sales during the Company's
fiscal years 2001, 2000 and 1999, respectively.

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



                                       5
<PAGE>

      To address the demand for voice,  high-speed  data and  interactive  video
services,  Telcos and other communications providers are expanding and upgrading
their networks to accommodate the higher  bandwidth  necessary to transmit these
services.  In response,  TII has developed a line of broadband  NIDs designed to
enclose the Telcos'  technology of choice needed to accommodate higher bandwidth
signals, whether traditional twisted pair lines, high-bandwidth coaxial cable or
fiber optic lines. The Company's broadband NID product line is modular in design
and thus  facilitates  expansion to  accommodate  additional  subscriber  access
lines.  For use in various markets,  the NID product line currently  consists of
enclosures that accommodate from one to twenty-five access lines.  Designed with
future  technologies in mind, the Company's  broadband NIDs can also accommodate
TII's  patented  coaxial  overvoltage  surge  protector,  as well as fiber optic
lines.

      NID sales represented  approximately 39%, 32% and 39% of the Company's net
sales during fiscal 2001, 2000 and 1999, respectively.

      STATION ELECTRONICS AND OTHER PRODUCTS. The Company also designs, produces
and markets  station  electronic  products that are typically  installed with an
overvoltage  surge  protector  within a NID. The Company's  station  electronics
products  allow a Telco to remotely  test the  integrity  of its lines,  thereby
minimizing costly maintenance dispatches.

      The Company also designs,  produces and markets other products,  including
plastic  housings,  wire terminals,  enclosures,  cabinets and various  hardware
products principally for use by Telcos.

      HOME NETWORKING SYSTEMS.  Utilizing the Company's proprietary  overvoltage
protection  technology and  incorporating  the advanced  networking  products of
certain  specialty  manufacturers,  the Company  has  designed  and  developed a
Multi-Service  Residential  Gateway  called the Digital  Closet for the existing
home market.  The Digital Closet  provides a unique  combination of a whole home
surge  protection  system,  high speed Internet access and local area networking
utilizing a homes existing wiring infrastructure.

      The Digital Closet incorporates a Cable or DSL modem (depending on service
availability)  and a router that  utilizes  HomePNA  technology,  thus  allowing
Internet/peripheral/file  sharing  over a home's  existing  phone lines  without
interfering  with normal phone use. This is all done at speeds up to 10 megabits
per second, over 150 times faster than a typical 56k dial-up modem.

      The current configuration of a Digital Closet includes the following major
components:

      DOCIS 1.1 CABLE OR ADSL MODEM - Technologically  advanced modem that field
      results have shown to provide a significant  increase in both upstream and
      downstream  speeds  over a standard  dial-up  modem.

      HPNA ROUTER - Allows  Internet/peripheral/file  sharing between  computers
      within the home's  network by  utilizing  HomePNA  (Home Phone  Networking
      Alliance)  technology  that  allows data to be  transmitted  over a home's
      existing  phone  lines,  permitting  simultaneous  use  of the  phone  and
      computers,  including  Internet access.  HomePNA  technology uses a method
      known  as  frequency-division  multiplexing  ("FDM")  that  puts  data  on
      separate  frequencies  from the voice  signals  being carried by the phone
      line,  thus allowing  voice and data to be carried  simultaneously  on the
      same phone line without interfering with each other.



                                       6
<PAGE>


      PROTECFIREWALL - A security product that employs a combination of hardware
      and software to prevent unauthorized users or traffic on the Internet from
      gaining access to the private area network in the home.

      WHOLE HOME SURGE  PROTECTION  SYSTEM - The Digital  Closet also provides a
      unique  integrated  whole home surge  protection  system  including common
      ground surge  protection  for AC  (electrical),  telephone and coax cable.
      This system provides  homeowners with superior surge  protection for their
      communication  lines and power  lines at the  service  entry of the house,
      while  eliminating  the  need  for  individual  plug-in  surge  protectors
      throughout the home.

      The Digital  Closet is a  professionally  installed  turnkey  solution for
those who want to network  computers  and share a single  Internet line with the
benefit of a whole home surge protection  system,  as well as prepare a home for
advancements  in  technology.  This  includes  head-to-head  gaming,  Voice over
Internet  Protocol  (telephony),  streaming  audio/video  and sharing  files and
peripherals.  The Digital  Closet has completed Beta site testing and is planned
to be offered for sale to the public through authorized dealers beginning in the
Fall of calendar 2001.

RESEARCH AND DEVELOPMENT

      New  product  opportunities  continue  to  arise  in  the  Company's  core
communication  markets as well as in the competitive  access  providers  markets
that provide users with advanced voice, video and data services. The Company has
also begun to evaluate the residential, commercial, industrial and international
surge  protection  markets.  Currently,  the Company's  research and development
("R&D") and related  marketing  efforts  are focused on several  major  projects
including:

      o     Enhancing TII's proprietary whole home surge protection product
            line, providing homeowners with superior surge protection for their
            communication lines and power lines at the service entry of the
            house, while eliminating the need for individual plug-in surge
            protectors throughout the home;

      o     Launching of TII's Home Networking System, the Digital Closet,
            incorporating other manufacturers' advanced networking components
            with TII's whole home surge protection system;

      o     Expanding and enhancing the broadband NID product line to address
            anticipated future requirements of Telcos and other communication
            service providers;

      o     Further developing DSL and coaxial cable overvoltage surge
            protectors for the growing broadband communications markets,
            including Telco, digital satellite television, wireless, paging,
            cellular and PCS networks.

      The Company's R&D department  currently consists of 21 persons skilled and
experienced in various technical disciplines,  including physics, electrical and
mechanical  engineering,  with  specialization  in such  fields as  electronics,
metallurgy and plastics.  The Company  utilizes  advanced  computer aided design
equipment  networked with  collaborative  partners and directly linked to stereo
lithographic modeling capability to accelerate time-to-market.

      The Company's R&D expense was $2.9 million,  $3.1 million and $3.3 million
during fiscal years 2001, 2000 and 1999, respectively.  The reduction in expense
occurred as the Company is benefiting  from  collaborative  engineering  efforts
with its contract manufacturers. (See "Business - Manufacturing")



                                       7
<PAGE>


MARKETING AND SALES

      Prior to selling its products to a customer,  the Company  must  typically
undergo a potentially lengthy product  qualification  process involving approval
agencies  designated by law,  codes and/or  customers.  Thereafter,  the Company
continually submits successive  generations of current products,  as well as new
products, to its customers for qualification.  The Company believes that being a
leading supplier of overvoltage  surge protectors for over 30 years, its current
designation  as a supplier to the RBOCs,  as well as the  independent  telephone
companies,  and its strategy for developing products by working closely with its
customers provide a strong position from which it can market its current and new
products.

      The Company sells to Telcos  primarily  through its direct sales force,  a
network  of  distributors  and  sales  representatives.  TII also  sells to CATV
providers,  CAPs and OEMs, including other NID suppliers,  which incorporate the
Company's overvoltage surge protectors into their products for resale to Telcos.

      The Company is  currently  building a sales,  marketing  and  distribution
organization to distribute Digital Closet to the residential marketplace through
authorized dealers.

      The  following  customers  accounted  for more  than 10% of the  Company's
consolidated  revenues during one or more of the years presented below. The loss
of, or the disruption of shipments, to a customer that accounts for greater than
10% of the  Company's  revenues  could  have a  material  adverse  effect on the
Company's results of operations and financial condition.


                                                        Year Ended
                                            ------------------------------------
                                            June 29,      June 30,      June 26,
                                              2001          2000          1999
                                            --------      --------      --------
Verizon Corporation(1)                        33%            25%           31%
Tyco Electronics Corporation (2)              26%            19%           15%
Corning Cable Systems LLC (3)                  7%            12%            9%
Telco Sales, Inc.                              7%            12%            2%

__________________________
(1)   On June 30, 2000, a wholly-owned  subsidiary of Bell Atlantic  Corporation
      was merged  with and into GTE  Corporation  resulting  in GTE  Corporation
      becoming a wholly-owned  subsidiary of Bell Atlantic. The combined company
      is doing business as Verizon Communications. The Company has made sales to
      Bell Atlantic and a subsidiary of GTE Corporation.
(2)   Tyco  Electronics  Corporation (a successor to Raychem  Corporation) is an
      OEM  that  purchases  certain  overvoltage  protection  products  from the
      Company for inclusion within their products.
(3)   Corning  Cable Systems LLC (formerly  Siecor  Corporation)  is an OEM that
      supplies  NIDs to Telcos and is  required  by certain  Telcos to  purchase
      TII's overvoltage surge protectors for inclusion within their NIDs.

      Purchases of the  Company's  products are  generally  based on  individual
customer  purchase  orders for delivery  within thirty days under general supply
contracts. The Company, therefore, has no material firm backlog of orders.

      The Company's  international  sales equaled  approximately $1.9 million in
fiscal  2001 (5% of  sales),  $1.2  million  in fiscal  2000 (2% of  sales)  and
$967,000 in fiscal 1999 (2% of net  sales).  International  sales have been made
primarily to countries in the Caribbean,  South and Central America, Canada, the
Pacific Rim and Europe.  The Company  requires  foreign  sales to be paid for in
U.S.  currency.  International  sales are  affected by such  factors as exchange
rates, changes in protective tariffs and foreign government import



                                       8
<PAGE>


controls.   The  Company  believes   international  markets  continue  to  offer
additional  opportunities  for its  products  and  continues  to seek methods to
increase these sales.

MANUFACTURING

      While the  Company  continues  to  produce  and  assemble  certain  of its
products at its facility in Puerto Rico, with the  re-alignment of the Company's
operations,  significantly  all the  high  volume  production  of the  Company's
products has been  outsourced and is now being produced by world-class  contract
manufacturers  within the  Pacific  Rim,  principally  Malaysia  and China.  The
Company's contract  manufacturers'  facilities are listed by UL and are ISO 9000
registered. The Company continually evaluates its current and potential contract
manufacturers  to assure the highest  quality  product,  best  delivery and most
competitive pricing.

RAW MATERIALS

      The primary  components of the Company's  products are stamped,  drawn and
formed parts made out of a variety of commonly  available  metals,  ceramics and
plastics.  The  manufacture of the Company's  overvoltage  surge  protectors and
station electronic products use commonly available  components,  printed circuit
boards  and  standard  electrical  components,  such as  resistors,  diodes  and
capacitors.  While the Company has no orders with  suppliers  of the  components
utilized in the manufacture of its products with delivery scheduled later than a
year,  the Company  believes  that the raw  materials  used will  continue to be
available in sufficient supply at competitive prices. The Company depends on its
contract  manufacturers,  to produce the  majority of its  products  for sale to
customers.   These  manufacturers  are  responsible  for  the  purchase  of  raw
materials, which must meet the Company's specifications.

COMPETITION

      The Company faces significant competition across all of its product lines.
Its principal competitors within the Telco market are Corning Cable Systems LLC,
Tyco Electronics  Corporation and Antec, Inc. (formerly Keptel) (see "Business -
Marketing and Sales"). Its principal  competitors in the residential  networking
market are companies that have introduced products  principally for the new home
market.

      The Company's gas tube overvoltage  surge protectors not only compete with
other  companies' gas tube  overvoltage  surge  protectors,  but also with solid
state  overvoltage  surge  protectors.  While solid state surge protectors react
faster to surges,  gas tube overvoltage surge protectors have generally remained
the subscriber  overvoltage  surge protection  technology of choice by virtually
all  Telcos  because  of  the  gas  tube's   ability  to  repeatedly   withstand
significantly  higher  energy  surges than solid state  surge  protectors.  This
enables  gas tubes to  survive  longer  in the  field  than  solid  state  surge
protectors,  reducing  loss of service and costs in  dispatching  a  maintenance
vehicle to replace the failed surge protector.  Further,  solid state protectors
have  significantly   higher  capacitance  than  gas  tube  protectors.   Higher
capacitance  adversely  affects  transmission on a high bandwidth  communication
line by distorting the signal. Solid state overvoltage surge protectors are used
principally in Telcos' central office switching centers where speed is perceived
to be more critical than energy handling capabilities and in regions where there
is a low incidence of lightning.  The Company believes that, for the foreseeable
future,  both gas tube and solid state  protectors  will  continue to be used as
overvoltage surge protectors within the  telecommunication  market.  Solid state
and gas tube protectors are produced from different raw materials, manufacturing
processes and equipment.

      Principal  competitive  factors within the Company's Telco and residential
networking  markets  include  price,  technology,   product  features,  service,
quality,  reliability  and bringing  the product to market



                                       9
<PAGE>

on time. Most of the Company's competitors have substantially greater financial,
sales,  manufacturing and product  development  resources than the Company.  The
Company  believes  that  its  sales,  marketing  and  research  and  development
departments,   its  high  quality,   cost  effective   products,   its  contract
manufacturing  with their  engineering  resources  combined  with the  Company's
overvoltage surge protection  technology,  enable it to maintain its competitive
position.

PATENTS AND TRADEMARKS

      The  Company  owns or has  applied  for a number of  patents  relating  to
certain of its products or  components  thereof and owns a number of  registered
trademarks  which are considered to be of value  principally in identifying  the
Company and its  products.  However,  to maintain  its  industry  position,  the
Company  relies  primarily  on  technical  leadership,  trade  secrets  and  its
proprietary  technology.  While the Company considers its patents and trademarks
to be  important,  especially  in the early  stages  of  product  marketing,  it
believes that,  because of technological  advances in its industry,  its success
depends primarily upon its sales,  engineering and manufacturing  skills and the
effective  collaborations which have accelerated  time-to-market of improved and
new products.

      The  Company has entered  into a license  agreement  pursuant to which the
Company  is the  sole  licensee  of a patent  for a  coaxial  overvoltage  surge
protector.  This license  supplements the Company's use of its own coaxial surge
protector patent. Pursuant to this agreement the Company made a one-time payment
in  fiscal  1987 and will  remit a royalty  based on net  revenues,  subject  to
minimum annual payments. The term of the licensing agreement continues until the
expiration of the patent under the license in 2004 and may be terminated earlier
under  certain  conditions.  TII,  In-Line  and Totel  Failsafe  are  registered
trademarks of the Company.

GOVERNMENT REGULATION

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

      The  NEC  requires  that  an  overvoltage   surge   protector   listed  by
Underwriters  Laboratories or another qualified electrical testing laboratory be
installed on virtually all subscriber  telephone lines.  Listing by Underwriters
Laboratories  has been  obtained by the Company  where  required.  The Company's
products are also  compliant  with the  specifications  of Telco  customers  and
Telcordia ( formerly Bellcore) and other testing facilities.

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

CERTAIN TAX ATTRIBUTES

      Prior to July 1, 2000, the Company had elected the  application of Section
936 of the U.S. Internal Revenue Code of 1986, as amended  ("Code").  Under that
section,  the Company was entitled to a federal tax credit in an amount equal to
the lesser of the United States federal tax  attributable  to its taxable income
arising  from the  active  conduct of its  business  within  Puerto  Rico or the
economic  activity  based  credit



                                       10
<PAGE>

limitation (on a non-consolidated  basis),  provided that in its current and two
preceding  tax years at least 80% of its  gross  income  and at least 75% of its
gross  income from the active  conduct of a trade or  business  were from Puerto
Rico  sources.  Principally  as a result of the  Company's  restructurings,  the
potential for benefits under Section 936 for the Company has been  substantially
reduced.  Accordingly,  in order to optimize the  Company's tax  structure,  the
Company has terminated  its election under Section 936 of the Code.  (See Note 4
of Notes to Consolidated  Financial  Statements for information  relating to the
Company's Net Operating Loss Carryforwards.)

EMPLOYEES

      On  September  10,  2001,  the Company  had  approximately  149  full-time
employees,  of whom 102 were employed at the Company's Puerto Rico facility. The
Company has not experienced any work stoppage as a result of labor  difficulties
and believes it has satisfactory employee relations.  The Company is not a party
to any collective bargaining agreements.

ITEM 2.  PROPERTIES

      The  Company  occupies a single  story  building  and a portion of another
building,  consisting  of an aggregate of  approximately  14,000  square feet in
Copiague,  New York under leases,  which expire in July 2002.  These  facilities
house the Company's principal research and development activities and certain of
its marketing, administrative and executive offices.

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

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

ITEM 3.  LEGAL PROCEEDINGS

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

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

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2001.


                                       11
<PAGE>

                                    Part II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's  Common Stock trades on the Nasdaq National Market under the
symbol "TIII".  The following  table sets forth,  for each quarter during fiscal
2001 and 2000,  the high and low sales prices of the  Company's  Common Stock on
that market.


Fiscal 2001                                        High       Low
                                                   ----       ---
   First Quarter Ended September 29, 2000         $3.000   $1.625
   Second Quarter Ended December 29, 2000          2.000     .938
   Third Quarter Ended March 30, 2001              1.906    1.000
   Fourth Quarter Ended June 29, 2001              1.500     .930

Fiscal 2000                                        High       Low
                                                   ----       ---
   First Quarter Ended September 24, 1999         $2.000   $1.500
   Second Quarter Ended December 31, 1999          1.625    1.000
   Third Quarter Ended March 31, 2000              3.375    1.125
   Fourth Quarter Ended June 30, 2000              4.188    1.625

      As of September  10, 2001,  the Company had  approximately  367 holders of
record of its Common Stock.

      To date,  the  Company  has paid no cash  dividends.  For the  foreseeable
future, the Company intends to retain all earnings generated from operations for
use  in  the  Company's   business.   Additionally,   the  Company's   borrowing
arrangements  prohibit the payment of dividends until such indebtedness has been
repaid in full.

ITEM 6.  SELECTED FINANCIAL DATA

      The following  Selected Financial Data has been derived from the Company's
consolidated  financial  statements  for the five years in the period ended June
29, 2001 and should be read in  conjunction  with  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations,  and the Consolidated
Financial  Statements and the related notes thereto,  included elsewhere in this
Report:


                             SELECTED FINANCIAL DATA
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                               June 29,         June 30,         June 25,       June 26,         June 27,
                                                2001(a)           2000           1999(a)         1998(a)           1997
                                             --------------   -------------    -------------    -----------    -------------
<S>                                               <C>              <C>              <C>             <C>            <C>

    STATEMENTS OF OPERATIONS DATA(b)
    Net sales                                   $39,323          $49,635          $49,284         $50,548         $50,675
    Operating loss                              ($7,589)           ($743)         ($9,211)        ($4,542)          ($892)
    Net loss applicable
      to common stockholders                    ($7,540)         ($1,018)         ($6,402)        ($5,142)          ($856)
    Net loss per share                           ($0.65)          ($0.11)          ($0.79)        ($0.68)          ($0.12)

    BALANCE SHEET DATA
    Working capital                             $13,910          $19,123          $16,488          $15,994        $19,655
    Total assets                                $30,762          $37,316          $41,230          $47,564        $42,823
    Long-term debt and capital leases
       (including current portion)               $1,463           $1,567           $3,077           $5,729         $2,841
    Redeemable preferred stock                   $1,626           $1,626           $2,850           $4,738              -
    Stockholders' investment                    $21,224          $28,761          $24,893          $28,973        $33,011

<FN>
----------

      (a)   See Management's  Discussion and Analysis of Financial Condition and
            Results of  Operations  for a  discussion  of several  factors  that
            affected  the  Company's  results of  operations,  particularly,  in
            fiscal 2001 and 1999.

      (b)   No cash dividends were declared in any of the reported periods.
</FN>
</TABLE>


                                       12
<PAGE>

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
Selected  Financial  Data and the  Consolidated  Financial  Statements and notes
thereto appearing elsewhere in this Report.

BUSINESS

      TII Industries,  Inc.  ("Company" or "TII") designs,  produces and markets
lightning  and  overvoltage  surge  protection  systems  and  products,  network
interface  devices  ("NIDs")  and  station  electronic  products  for use in the
communications  industry. The Company has been a leading supplier of overvoltage
surge protectors to U.S. telephone  operating  companies  ("Telcos"),  including
Regional Bell Operating Companies  ("RBOCs"),  for over 30 years. To address the
growing  demands and  complexities of  communications  networks in the home, the
Company has recently developed the Digital Closet that integrates several of the
Company's and other manufacturers' proven products and technologies into a multi
service  residential  gateway into the home.  The new product  provides a unique
combination of a whole home surge protection system,  high-speed Internet access
and local area  networking,  utilizing a home's existing wiring  infrastructure.
The Digital  Closet has completed Beta site testing and is planned to be offered
for sale to the public through authorized dealers in the Fall of calendar 2001.

GENERAL BUSINESS CONDITIONS

      The  industry-wide  slowdown in capital  spending and the actions taken to
reduce  inventory  levels  by the  telecommunications  service  providers  had a
negative effect on the Company's  fiscal 2001 results.  Management  expects this
slowdown to continue  throughout the first half of fiscal 2002.  Management also
believes that as market conditions  improve,  the Company's  recently  announced
contract  extension  and  expansion  with a major  customer  will  contribute to
increased levels of sales and that the recent  realignments  have positioned the
Company for continued improvements in gross margins.

OTHER FACTORS AFFECTING FISCAL 1999 AND 2001 RESULTS

      In fiscal 1999, the Company's then principal  operating  facilities in Toa
Alta,  Puerto  Rico  and San  Pedro De  Macoris,  Dominican  Republic  sustained
significant  inventory,  equipment and facility damages as a result of Hurricane
Georges.  In  addition,  as a  result  of the  storm,  the  Company  experienced
production  stoppages  during the beginning of the second quarter of fiscal 1999
and periods of less than full  production  continuing into the fiscal 1999 third
quarter.  Both  facilities  became  fully  operational  during the third  fiscal
quarter.  Damaged inventory,  business  interruption losses, fees payable to the
Company's insurance  advisors,  losses to plant and equipment and other expenses
incurred totaled $17.9 million. The Company received insurance payments of $19.3
million  with  respect  to  the  losses   sustained,   including  lost  profits.
Accordingly, insurance proceeds net of hurricane losses and expenses resulted in
a gain of $1.4 million in fiscal 1999.

      In order to focus on its core business, the Company sold substantially all
of the assets of its fiber optic enclosure subsidiary, TII-Ditel, Inc., in March
1999 for $5.3 million.  The resulting  gain of $2.2 million is included in other
income in fiscal 1999. Sales of TII-Ditel,  Inc. represented approximately 6% of
the Company's consolidated sales for fiscal 1999.

      During  fiscal  1999,  the Company also  initiated a strategic  operations
re-alignment in an effort to enhance  operating  efficiencies  and reduce costs.
This  program  included  outsourcing  a  significant  portion  of the  Company's
production,   closing  the  Company's  Dominican  Republic  facility,  workforce
reductions and other  cost-saving  measures  throughout the Company.  Under this
initial  plan,  the  Company  recorded  an



                                       13
<PAGE>

operations  re-alignment  charge of approximately  $6.0 million.  (See Note 2 of
Notes to Consolidated Financial Statements.)

      In the third  quarter of fiscal 2001,  as part of  management's  continued
strategy to improve profit margins by finding  cost-effective  ways of producing
its  products,  and as a result  of the  successes  under  the  Company's  prior
re-alignment  plan,  management  committed  to a plan to  further  re-align  its
operations.  A key element of the 2001 plan is the  expansion  of the  Company's
outsourcing  strategy  with  contract  manufacturers  to  produce a  substantial
portion of the remaining components and subassemblies that the Company was still
manufacturing.  Included in this plan are  additional  workforce and  production
facility  reductions,  the  assessment  of future  usage and  recoverability  of
certain  inventories  and  manufacturing  machinery,   equipment  and  leasehold
improvements as certain  manufacturing  activities  conducted in Puerto Rico are
outsourced and products are  eliminated,  and other cost saving  measures.  As a
result, the Company recorded a net operations  re-alignment charge,  including a
write-down of inventories  of $2.7 million,  in the third quarter of fiscal 2001
of  $6.1  million,  net of  reversals.  (See  Note 2 of  Notes  to  Consolidated
Financial Statements.)

FISCAL YEARS ENDED JUNE 29, 2001, JUNE 30, 2000 AND JUNE 25, 1999

     Net sales for fiscal 2001 decreased $10.3 million or 20.8% to $39.3 million
from $49.6  million in fiscal  2000.  The decrease  was  principally  due to the
telecommunications  industry-wide  slowdown  and actions  taken by  customers to
reduce inventory  levels.  Also  contributing to the lower revenue level was the
loss of sales as a result of the  divestiture  of the Company's  metal  stamping
business in fiscal 2000.  Additionally,  the Company  experienced reduced orders
early in the year from a significant  customer as a result of technical problems
they had with their product unrelated to the Company's components and which have
since been  resolved.  Net sales for fiscal 2000  increased  $351,000 or 0.7% to
$49.6 million from $49.3 million in fiscal 1999.  The nominal  increase in sales
reflected a net increase in sales of newly developed  products over the products
they were replacing.

      Gross  profit in fiscal 2001 was $6.5  million,  or 16.5% of sales or $9.2
million, or 23.3% of sales, excluding the $2.7 million inventory write-down as a
result of the  operations  re-alignment,  compared to $9.5 million,  or 19.1% of
sales,  in fiscal  2000.  The  improved  gross  profit  margins,  excluding  the
inventory write-down, are principally due to the success of the Company's fiscal
1999  operations  re-alignment  and the  introduction  of technically  advanced,
higher margin versions of certain mature  products.  Gross profit in fiscal 2000
was $9.5 million,  or 19.1% of sales, versus $8.5 million, or 17.3% of sales, in
fiscal 1999. The improvement in fiscal 2000 gross profit margins was a result of
the Company's operations re-alignment and the resulting efficiencies and related
cost reductions  achieved,  as well as a better mix of higher margin products as
compared to the prior year.

      Selling,  general and  administrative  expenses for fiscal 2001  increased
$706,000 or 10.0% to $7.8 million from $7.1 million in fiscal 2000. The increase
for the year is principally due to increased  marketing  expenses related to the
introduction  of the  Company's  new  Digital  Closet  product  line.  The costs
associated  with the Digital  Closet are  expected to continue to increase  into
fiscal  2002.  Selling,  general  and  administrative  expenses  for fiscal 2000
decreased  $1.3  million or 15.8% to $7.1  million  from $8.4  million in fiscal
1999. Lower personnel expenses,  due to the Company's  operations  re-alignment,
and lower legal expenses produced a majority of the fiscal 2000 decline.

      Research and development expenses for fiscal 2001 decreased by $254,000 or
8.1% to $2.9 million from $3.1 million in fiscal 2000.  Research and development
expenses for fiscal 2000 decreased by $219,000 or 6.5% to $3.1 million from $3.3
million  in  fiscal  1999.  Although  overall  expenses  are down,



                                       14
<PAGE>

the Company  continues  to  increase  its product  development  activities.  The
reduction  in  research  and  development  expense in both  fiscal 2001 and 2000
occurred as the  Company  has been  benefiting  from  collaborative  engineering
efforts with its contract manufacturers.

      Interest  expense in fiscal 2001  decreased  $114,000  to $100,000  due to
decreased  borrowings under the Company's  credit  facilities and a reduction in
interest rates.  Interest expense in fiscal 2000 decreased  $173,000 to $214,000
due to decreased  borrowings  under the Company's credit  facilities,  offset in
part, by higher average interest rates.

      Interest income in fiscal 2001 decreased $57,000 to $147,000 from $204,000
in  fiscal  2000.  The  decline  was due to lower  comparable  average  cash and
marketable  securities balances held by the Company during fiscal 2001. Interest
income in fiscal 2000  increased  $146,000 to  $204,000  from  $58,000 in fiscal
1999.  The increase was due to higher  comparable  average cash balances held by
the Company during fiscal 2000.

      In the fourth quarter of fiscal 2000, the holder of the Company's $750,000
unsecured  subordinated  note  converted that note into 428,571 shares of Common
Stock at a reduced  conversion price.  This transaction  resulted in a charge of
approximately  $332,000 to Other income  (expense).  Other income  (expense) for
fiscal 1999  includes a $2.2  million  gain on the sale of the  Company's  fiber
optic product line.

INCOME TAXES

      Prior to July 1, 2000, the Company had elected the  application of Section
936 of the U.S. Internal Revenue Code of 1986, as amended  ("Code").  Under that
section,  the Company was entitled to a federal tax credit in an amount equal to
the lesser of the United States federal tax  attributable  to its taxable income
arising  from the  active  conduct of its  business  within  Puerto  Rico or the
economic  activity  based  credit  limitation  (on  a  non-consolidated  basis),
provided  that in its  current and two  preceding  tax years at least 80% of its
gross income and at least 75% of its gross  income from the active  conduct of a
trade or business were from Puerto Rico sources.  Principally as a result of the
Company's  restructurings,  the potential for benefits under Section 936 for the
Company has been substantially  reduced.  Accordingly,  in order to optimize the
Company's tax  structure,  the Company has terminated its election under Section
936 of the Code. (See Note 4 of Notes to Consolidated  Financial  Statements for
information relating to the Company's Net Operating Loss Carryforwards).

LIQUIDITY AND CAPITAL RESOURCES

      The Company's cash and cash equivalents  balance  decreased to $233,000 at
the end of fiscal 2001 from $4.4 million at the end of fiscal 2000. The decrease
resulted  from net cash outflows  from  operations  of $2.1  million,  investing
activities of $2.0 million and financing activities of $102,000. Working capital
decreased to $13.9  million at the end of fiscal 2001 from $19.1  million at the
end of fiscal 2000 due to the effects of the re-alignment charge recorded in the
fiscal 2001 third  quarter,  the  reduction in cash and the increase in accounts
payable and borrowings under the revolving credit facility.

      Operations  used $2.1 million of cash during fiscal 2001, $3.9 million was
used to  fund a net  increase  in  inventories,  resulting  primarily  from  the
industry-wide  slowdown  in capital  spending  and the  actions  taken to reduce
inventory  levels by  telecommunications  service  providers.  This increase was
partially  offset by,  among other  items,  an increase in accounts  payable and
accrued liabilities of $952,000.  Additionally,  the Company incurred a net loss
of $7.5 million that was offset by non-cash  charges  including $6.1 million for
the operations  re-alignment  charge, which includes a write-down of inventories
of $2.7 million, and $1.7 million for depreciation and amortization.



                                       15
<PAGE>

      During  fiscal 2001,  investing  activities  used cash of $2.0 million for
capital  expenditures  and financing  activities  used cash of $105,000 to repay
debt and obligations  under capital leases  partially  offset by $3,000 received
from the exercise of stock options.

      The Company has no commitments  for capital  expenditures,  but expects to
purchase new equipment and incur leasehold  improvements in the normal course of
business,  subject to the maximum amount  permitted  under its revolving  credit
facility.

      The Company has a credit  facility  ("Credit  Facility"),  consisting of a
$6.0 million  revolving  credit  facility and a term loan. The revolving  credit
facility  enables the  Company to have up to $6.0  million of  revolving  credit
loans  outstanding at any one time,  limited by a borrowing base equal to 85% of
the eligible accounts receivable and 50% of the eligible  inventory,  subject to
certain  reserves.  Subject to extension  in certain  instances,  the  scheduled
maturity date of revolving  credit loans is April 30, 2003,  while the term loan
is to be repaid  through March 31, 2003,  subject to mandatory  repayments  from
asset disposition proceeds and insurance proceeds in certain  circumstances.  As
of June 29, 2001,  $683,000 was outstanding under the term loan and $721,000 was
outstanding  under the revolving credit  facility.  The Company is in compliance
with the covenants and terms of the Credit Facility.

      Funds anticipated to be generated from operations, together with available
cash and borrowings under the Credit Facility,  are considered to be adequate to
finance the Company's current  operational and capital needs. If the slowdown in
the  telecommunications  industry  continues for an extended period of time, the
Company  will  most  likely  need to seek  additional  capital  to  support  its
operations.

IMPACT OF INFLATION

      The Company  does not believe its  business is affected by  inflation to a
greater  extent than the general  economy.  The Company  monitors  the impact of
inflation  and  attempts  to  adjust  prices  where  market  conditions  permit.
Inflation has not had a significant  effect on the Company's  operations  during
any of the reported periods.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

      The Company is exposed to market risks,  including  changes in U.S. dollar
interest rates.  The interest  payable under the Company's  credit  agreement is
principally  between 250 and 275 basis points above the London Interbank Offered
Rate ("LIBOR") and,  therefore,  affected by changes in market  interest  rates.
Historically,  the effects of movements in the market  interest  rates have been
immaterial to the consolidated operating results of the Company.

      The Company  requires foreign sales to be paid for in U.S.  currency,  and
generally  requires such payments to be made in advance,  by letter of credit or
by U.S. affiliates of the customer.




                                       16
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To TII Industries, Inc.:

We have audited the accompanying  consolidated balance sheets of TII Industries,
Inc. and  subsidiaries  as of June 29, 2001 and June 30,  2000,  and the related
consolidated statements of operations,  stockholders'  investment and cash flows
for each of the three years in the period ended June 29, 2001.  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 audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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.  An audit
also includes 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 financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of TII  Industries,  Inc. and
subsidiaries  as of June 29,  2001 and June 30,  2000,  and the results of their
operations  and their cash flows for each of the three years in the period ended
June 29, 2001, in conformity with accounting  principles  generally  accepted in
the United States.

Arthur Andersen LLP


San Juan, Puerto Rico
September 26, 2001

Stamp No. 1759707 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.

                                       17
<PAGE>

                      TII INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                   June 29,       June 30,
                                                                                                     2001          2000
                                                                                                  ----------     ---------
<S>                                                                                                  <C>            <C>
                                           ASSETS
Current Assets:
     Cash and cash equivalents                                                                $         233   $     4,446
     Accounts receivable, net                                                                         7,190         7,246
     Inventories                                                                                     13,800        12,825
     Other                                                                                              109           268
                                                                                              -------------    ----------
           Total current assets                                                                      21,332        24,785
                                                                                              -------------    ----------
Property, plant and equipment, net                                                                    8,398        11,223

Other                                                                                                 1,032         1,308
                                                                                              -------------    ----------

Total Assets                                                                                  $      30,762   $    37,316
                                                                                              =============    ==========

     LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
     Current portion of long-term debt and obligations under capital leases                   $         252   $       300
     Borrowings under revolving credit facility                                                         721             -
     Accounts payable                                                                                 4,984         3,685
     Accrued liabilities                                                                              1,128         1,475
     Accrued re-alignment expenses                                                                      337           202
                                                                                              -------------    ----------
           Total current liabilities                                                                  7,422         5,662
                                                                                              -------------    ----------

Long-Term Debt and Obligations Under Capital Leases                                                     490         1,267
                                                                                              -------------    ----------

Series C Convertible Redeemable Preferred Stock, 1,626 shares outstanding at
June 29, 2001 and June 30, 2000, liquidation preference of $1,150 per share                           1,626         1,626
                                                                                              -------------    ----------
Commitments and Contingencies (Note 8)
Stockholders' Investment
     Preferred Stock, par value $1.00 per share; 1,000,000 shares authorized;
         Series C Convertible Redeemable, 1,626 shares
           outstanding at June 29, 2001 and June 30, 2000 Series D Junior
         Participating, no shares outstanding (Note 6)
     Common Stock, par value $.01 per share; 30,000,000 shares authorized;
         11,699,921 and 11,698,121 shares issued; 11,682,284 and 11,680,484
         shares outstanding at June 29, 2001 and June 30, 2000, respectively (Note 5)                   117           117
Warrants and options outstanding                                                                        369           369
Capital in excess of par value                                                                       37,122        37,119
Accumulated deficit                                                                                 (16,103)       (8,563)
                                                                                              -------------    ----------
                                                                                                     21,505        29,042
Less - Treasury stock, at cost; 17,637 common shares                                                   (281)         (281)
                                                                                              -------------    ----------
           Total stockholders' investment                                                            21,224        28,761
                                                                                              -------------    ----------

Total Liabilities and Stockholders' Investment                                                $      30,762    $   37,316
                                                                                              =============    ==========
                 See notes to consolidated financial statements

</TABLE>

                                       18
<PAGE>
<TABLE>
<CAPTION>
                      TII INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                             Fiscal Year Ended
                                                            -----------------------------------------------------
                                                                June 29            June 30,            June 25
                                                                  2001               2000                1999
                                                            ----------------   ---------------    ---------------
<S>                                                                <C>               <C>                <C>
Net sales                                                          $ 39,323          $ 49,635           $ 49,284
Cost of sales                                                        30,145            40,166             40,737
Inventory write-down, resulting from
  operations re-alignment                                             2,700                 -                  -
                                                            ----------------   ---------------    ---------------

        Gross profit                                                  6,478             9,469              8,547
                                                            ----------------   ---------------    ---------------

Operating expenses
     Selling, general and administrative                              7,796             7,090              8,424
     Research and development                                         2,871             3,125              3,344
     Operations re-alignment and cost to
       close facilities, net of reversals                             3,400                (3)             5,990
                                                            ----------------   ---------------    ---------------
        Total operating expenses                                     14,067            10,212             17,758
                                                            ----------------   ---------------    ---------------

        Operating loss                                               (7,589)             (743)            (9,211)

Insurance proceeds, net of hurricane loss                                 -                 -              1,408
Interest expense                                                       (100)             (214)              (387)
Interest income                                                         147               204                 58
Other (expense) income                                                    2              (265)             1,992
                                                            ----------------   ---------------    ---------------

        Net loss                                                     (7,540)           (1,018)            (6,140)

Preferred stock embedded dividend                                         -                 -               (262)
                                                            ----------------   ---------------    ---------------

Net loss applicable to common stockholders                         $ (7,540)         $ (1,018)          $ (6,402)
                                                            ================   ===============    ===============

Basic and diluted net loss per share                                $( 0.65)          $( 0.11)           $( 0.79)
                                                            ================   ===============    ===============

Basic and diluted weighted average shares outstanding                11,682             9,198              8,100
                                                            ================   ===============    ===============

                 See notes to consolidated financial statements
</TABLE>


                                       19
<PAGE>
<TABLE>
<CAPTION>
                      TII INDUSTRIES, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
                             (DOLLARS IN THOUSANDS)

                                                                      Capital in
                                                        Warrants       excess of     Accumulated     Treasury
                                       Common Stock    Outstanding     par value       Deficit         Stock
                                       ------------    -----------     ---------       -------         -----
<S>            <C> <C>                  <C>           <C>                <C>           <C>            <C>
BALANCE.  June 26, 1998                 $     76      $      159         $30,162       $ (1,143)      $ (281)
Exercise of stock options                      1               -             109              -            -
Exercise of warrants                           -             (19)             81              -            -
Conversion of Series C
  Preferred Stock                             12               -           2,138              -            -
Expiration of warrants                         -            (120)            120              -            -
Embedded dividend on Series
  C Preferred Stock                            -               -               -           (262)           -
Net loss for the year                          -               -               -         (6,140)           -
                                       ---------       ---------        --------       --------     --------

BALANCE.  June 25, 1999                       89              20          32,610         (7,545)        (281)
Exercise of stock options                      -               -              53              -            -
Conversion of Series C
  Preferred Stock                              6               -           1,218              -            -
Sale of Common Stock                          18             349           2,160              -            -
Conversion of debt                             4               -           1,078              -            -
Net loss for the year                          -               -               -         (1,018)           -
                                       ---------       ---------        --------       --------     --------

BALANCE.  June 30, 2000                      117             369          37,119         (8,563)        (281)
Exercise of stock options                      -               -               3              -            -
Net loss for the year                          -               -               -         (7,540)           -
                                       ---------       ---------        --------       --------     --------

BALANCE.  June 29, 2001                $     117       $     369        $ 37,122       $(16,103)    $   (281)
                                       =========       =========        ========       ========     ========

                 See notes to consolidated financial statements
</TABLE>

                                       20
<PAGE>
<TABLE>
<CAPTION>
                      TII INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

                                                                                             Fiscal Year Ended
                                                                                             -----------------
                                                                                 June 29,         June 30,        June 25,
                                                                                   2001             2000            1999
                                                                                 --------         --------        --------
Cash Flows from Operating Activities:
<S>                                                                               <C>              <C>              <C>
Net Loss                                                                          ($7,540)         ($1,018)         ($6,140)

Adjustments to reconcile net loss to net cash used in operating activities:
       Depreciation and amortization                                                1,709            1,659            2,432
       Provision for inventory losses                                                 198              396              396
       Induced debt conversion cost                                                     -              332                -
       Operations re-alignment and cost to close facilities, net of
         reversals                                                                  6,100               (3)           5,990
       Gain from sale of subsidiary assets                                              -                -           (2,168)
       Gain from insurance proceeds, net of hurricane loss                              -                -           (1,408)
       Changes in operating assets and liabilities
          Decrease (increase) in accounts receivable, net                              56           (1,657)           1,706
          Increase in inventories, net                                             (3,930)             (70)          (5,121)
          Decrease (increase) in other assets                                         194               (5)             377
          Increase (decrease) in accounts payable and accrued liabilities             952           (3,538)             790
          Increase (decrease) in accrued re-alignment expenses                        135           (1,507)               -
                                                                                  -------           ------           ------
              Net cash used in operating activities                                (2,126)          (5,411)          (3,146)
                                                                                  -------           ------           ------

Cash Flows from Investing Activities
    Capital expenditures, net of dispositions                                      (1,985)          (1,138)          (1,809)
    Net insurance proceeds for hurricane damages                                        -                -           11,190
    Net proceeds from sale of subsidiary's assets                                       -              547            4,518
                                                                                  -------           ------           ------
       Net cash (used in) provided by investing activities                         (1,985)            (591)          13,899
                                                                                  -------           ------           ------

Cash Flows from Financing Activities:
    Proceeds from exercise of options and warrants                                      3               53              172
    Borrowings of debt and obligations under capital leases                             -                -              965
    Payments of debt and obligations under capital leases, net                       (105)            (782)          (3,617)
    Net proceeds from sale of Common Stock                                              -            2,527                -
                                                                                  -------           ------           ------
       Net cash (used in) provided by financing activities                           (102)           1,798           (2,480)
                                                                                  -------           ------           ------

Net (decrease) increase in cash and cash equivalents                               (4,213)          (4,204)           8,273

Cash and cash equivalents, at beginning of year                                     4,446            8,650              377
                                                                                  -------           ------           ------
Cash and cash equivalents, at end of year                                         $   233           $4,446           $8,650
                                                                                  =======           ======           ======

                 See notes to consolidated financial statements
</TABLE>
                                       21
<PAGE>

                      TII INDUSTRIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BUSINESS:  TII Industries,  Inc. and subsidiaries (the "Company")  design,
produce and market lightning and surge protection products and systems,  network
interface devices  ("NIDs")and station electronics for use in the communications
industry.  Sales of  overvoltage  surge  protection  products  to United  States
customers  constitute the majority of the Company's  consolidated sales for each
of the three years ended June 29, 2001.

      FISCAL YEAR: The Company reports on a 52-53 week fiscal year ending on the
last  Friday in June.  Fiscal  2001 and fiscal 1999  contained  52 weeks,  while
fiscal 2000 contained 53 weeks.

      CONSOLIDATION:  The consolidated financial statements include the accounts
of TII  Industries,  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  accounting  principles  generally  accepted in the United States  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.  Actual  results could differ from such
estimates.

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

      PROPERTY AND EQUIPMENT: Depreciation of property and equipment is recorded
on the  straight-line  method  over the  estimated  useful  life of the  related
property  and  equipment   (generally   between  5  and  10  years).   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:  Sales are recorded as products are shipped and title
passes to customers.

      OTHER ASSETS:  The Company follows the policy of deferring  certain patent
costs, which are amortized on a straight-line  basis over the lesser of the life
of the product or the patent. Included within other assets is the cash surrender
value of approximately  $91,000 relating to key-man life insurance policies with
a face amount in excess of $1.1 million.

      NET LOSS PER COMMON  SHARE:  The Company  utilizes  Statement of Financial
Accounting  Standards ("SFAS") No. 128, "Earnings Per Share," which requires the
reporting of basic and diluted  earnings per share.  Since the Company  incurred
losses in all reported periods, all securities


                                       22
<PAGE>


convertible   into,  or  exercisable   for,  the  Company's  Common  Stock  were
anti-dilutive  and excluded from the  computation.  Therefore,  diluted loss per
share equals basic loss per share.  The following table  summarizes  outstanding
securities that are convertible  into, or exercisable  for, the Company's Common
Stock:
<TABLE>
<CAPTION>
                                             June 29, 2001                  June 30, 2000               June 25, 1999
                                        ------------------------- ------------------------------ -----------------------
                                                      Exercise                        Exercise                    Exercise
                                       Quantity        Price          Quantity          Price      Quantity         Price
                                       --------        -----          --------          -----      --------         -----
<S>                                  <C>             <C>            <C>                <C>         <C>             <C>
Stock Option Plans(a)                3,263,241       $ 1.90         2,757,941          $ 2.08      2,474,501       $ 2.18
Investor Option                        100,000         2.50           100,000            2.50        100,000         2.50
Warrants                                     -            -           200,000            7.03        200,000         7.03
Warrants                                10,000         6.15            10,000            6.15         20,000         6.15
Convertible Debt                             -            -                 -               -        300,000         2.50
Warrants(b)                          2,214,000         2.79         2,214,000            2.79              -            -
Unit Purchase Options(b)               414,000         2.69           414,000            2.69              -            -
Convertible Preferred Stock (c)      1,578,641            -           850,474               -      1,781,250            -
                                     ---------                     ----------                     ----------
                                     7,579,882                      6,546,415                      4,875,751
                                    ==========                     ==========                     ==========
<FN>
----------
     (a)  Weighted  average  exercise  price of  outstanding  stock  options  at
          year-end.
     (b)  In June 2000, the Company  completed a private  placement of 1,800,000
          units,  each unit  consisting  of one  share of  Common  Stock and one
          warrant to purchase one share of Common Stock at $2.79.  In connection
          with this private  placement,  the Company issued to certain employees
          of the placement agent 414,000 Unit Purchase  Options  ("UPO"),  at an
          exercise  price of $2.69 per UPO. Each UPO  consisting of one share of
          Common  Stock and one warrant to purchase one share of Common Stock at
          $2.79.
     (c)  Assuming  conversion  of the Series C  Preferred  Shares at 95% of the
          average of the closing bid prices of the Company's Common Stock during
          the ten consecutive trading days immediately  preceding the applicable
          fiscal year end.
</FN>
</TABLE>
      STATEMENTS OF CASH FLOWS:  All highly liquid  instruments with an original
maturity of three months or less are considered cash equivalents.

      FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash
equivalents,  receivables and other current assets,  accounts  payable,  accrued
liabilities and accrued realignment  expenses  approximate fair value because of
the short-term  nature of these items. The carrying amount of the long-term debt
approximates  fair value  because the  interest  rate this  instrument  bears is
equivalent to the current rates offered for debt of similar nature and maturity.

      STOCK BASED  COMPENSATION:  The Company applies the intrinsic value method
in accounting for its stock option plans.  Accordingly,  no compensation expense
has been  recognized  for options  granted to  employees  or  directors  with an
exercise price equal to market value at the date of grant.

      COMPREHENSIVE  INCOME:  The  Company  adopted  SFAS  No.  130,  "Reporting
Comprehensive  Income,"  in the fiscal  year ended June  25,1999.  Comprehensive
income consists of net income and other  comprehensive  income. The adoption had
no impact on net income or total stockholders'  investment.  Other comprehensive
income is immaterial for the three years ended June 29, 2001 and, therefore, the
Company has elected to omit the additional disclosures required by SFAS No. 130.

                                       23
<PAGE>

      SEGMENT INFORMATION:  The Company adopted SFAS No. 131, "Disclosures about
Segments of an  Enterprise  and Related  Information,"  in the fiscal year ended
June 25, 1999.  SFAS No. 131 supersedes  SFAS No. 14,  "Financial  Reporting for
Segments of a Business  Enterprise,"  replacing the "industry  segment" approach
with the "management"  approach. The management approach designates the internal
organization  that is used by  management  for making  operating  decisions  and
assessing  performance as the source of the Company's reportable segments.  SFAS
No. 131 also requires disclosures about products and services,  geographic areas
and major  customers.  The adoption of SFAS No. 131 did not affect the Company's
results  of  operations,  financial  position  or  disclosure  to the  financial
statements.  The Company has evaluated the provisions of SFAS No. 131 and, based
on the management  approach required by this statement,  has determined that its
operating decisions and performance measures are geared towards one segment. The
Company however, has applied the geographic and major customers' requirements of
SFAS No. 131. See Note 7.

      RECENTLY  ISSUED  ACCOUNTING  PRONOUNCEMENTS:  During 1998,  the Financial
Accounting  Standards  Board  issued SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities," which establishes  accounting and reporting
standards for derivative instruments and hedging activities. In addition, during
1999 the Board issued SFAS No. 137  "Accounting  for Derivative  Instruments and
Hedging  Activities-Deferral of Effective Date of FASB Statement No. 133," which
delayed  the  effective  date of SFAS No. 133 for one year.  The  Company is not
involved in hedging activities and has no derivative instruments. Therefore, the
implementation  of SFAS No. 133 has not had a material  impact on the  Company's
consolidated statement of operations or consolidated balance sheet.

      In June 2001, the Financial  Accounting Standards Board approved Statement
of Financial Accounting Standard No. 141, "Business  Combinations," and SFAS No.
142,  "Goodwill  and  Other  Intangible  Assets."  SFAS  No.  141  prospectively
prohibits the pooling of interest method of accounting for business combinations
initiated  after  June  30,  2001.  Any  goodwill  resulting  from  acquisitions
completed  after June 30, 2001 will not be amortized.  Amortization  of existing
goodwill  will cease on December 31, 2001.  SFAS No. 142 also  establishes a new
method of testing  goodwill for  impairment  on an annual basis or on an interim
basis if an event  occurs or  circumstances  change  that would  reduce the fair
value of a reporting  unit below its carrying  value.  The Company does not have
recorded  goodwill and has not been actively  engaged in business  combinations.
Therefore,  the implementation of SFAS No. 141 and 142 is not expected to have a
material  impact  on the  Company's  consolidated  statement  of  operations  or
consolidated balance sheet.

NOTE 2 - OPERATIONS RE-ALIGNMENT:

      During fiscal 1999, the Company  commenced a strategy to improve operating
efficiencies and reduce costs.  This  re-alignment  plan included  outsourcing a
significant portion of the Company's  component assembly,  closing its Dominican
Republic  facility,  the divesting of its injection  molding and metal  stamping
operations,  work force reductions and other cost-savings measures. In the third
quarter of fiscal 2001, as part of  management's  continued  strategy to improve
profit  margins by finding  cost-effective  ways of producing its products,  and
also as a result of the successes  under the Company's  prior year  re-alignment
plan, management committed to a plan to further re-align its operations.

      Under the 1999 plan, the Company reduced its workforce from  approximately
1,165  employees  as of  April  1999  to  approximately  255 by June  30,  2000,
including  reductions  resulting  from the

                                       24
<PAGE>


completion  of the  sale  of  non-core  businesses.  Additionally,  the  Company
assessed the future use of certain  equipment in the Dominican  Republic and the
Company's injection molding facilities in Puerto Rico. The Company estimated the
net  realizable  value  of  the  equipment,  utilizing  its  fair  market  value
assessment adjusted for any estimated costs to dispose or sell the equipment.

      As a result,  during the fourth  quarter of 1999,  the Company  recorded a
charge of  approximately  $6.0 million  included in Operations  re-alignment and
cost to close facilities,  net, on the Consolidated  Statement of Operations for
the fiscal year ended June 25, 1999.  This charge was  comprised of $1.0 million
for  severance  and employee  termination  benefits,  $700,000 for plant closure
costs and $4.3 million to reduce the carrying  value of leasehold  improvements,
plant and equipment to be abandoned or sold to their  estimated  net  realizable
value. The Company substantially  completed this operations re-alignment by June
30, 2000. As disclosed in the table shown below, an additional reserve for plant
closure costs was needed to account for several  miscellaneous  costs related to
the 1999  operations  re-alignment  that  were  underestimated  in the  original
charge.  The effect in operations of this  additional  reserve was offset by the
reversal of excess  reserves for asset  dispositions  and  employee  termination
benefits.  In  addition,  during the  quarter  ended March 30,  2001,  a $96,000
reversal  of an  excess  reserve  for  asset  dispositions  was  recognized  and
classified within the 2001 Operations re-alignment and cost to close facilities,
net, included in the accompanying Consolidated Statements of Operations.

      The activity  during fiscal 2001 in the associated  balance sheet accounts
for the 1999 charge is as follows:
<TABLE>
<CAPTION>
                                                  Reserve for          Employee
                                                     Asset            Termination        Plant Closure
                                                  Dispositions         Benefits              Costs               Total
                                                 ---------------    ----------------    ----------------    ----------------
<S>           <C> <C>                            <C>                <C>                 <C>                 <C>
Balance, June 30, 2000                           $    435,000       $    177,000        $     25,000        $   637,000
 Cash payments during fiscal 2001                           -           (136,000)            (89,000)          (225,000)
 Additional accrual for plant closing
   Costs                                              (23,000)           (41,000)             64,000                  -
 Asset write-downs                                   (316,000)                 -                   -           (316,000)
 Reversal of excess reserve                           (96,000)                 -                   -            (96,000)
                                                 ---------------    ----------------    ----------------    ----------------
Balance June 29, 2001                            $          -       $          -        $          -        $         -
                                                 ===============    ================    ================    ================
</TABLE>
      A key  element  of the  2001  plan  is  the  expansion  of  the  Company's
outsourcing  strategy  with  contract  manufacturers  to  produce a  substantial
portion of the remaining components and subassemblies that the Company was still
manufacturing.  Included in this plan are  additional  workforce and  production
facility  reductions,  the  assessment  of future  usage and  recoverability  of
certain  inventories  and  manufacturing  machinery,   equipment  and  leasehold
improvements as certain  manufacturing  activities  conducted in Puerto Rico are
outsourced  and  products  are  eliminated,  and  other  cost  saving  measures.
Accordingly, during the third quarter of fiscal 2001, the Company recorded a net
re-alignment of operations charge on the Consolidated Statement of Operations of
approximately $6.1 million,  including the inventory write-down of approximately
$2.7 million and net of a reversal of the remaining  reserve of $96,000 from the
1999  re-alignment  charge,  discussed above. The components of the 2001 charge,
the  corresponding  fiscal 2001 activity and the remaining  reserve balances are
reflected in "Property,  plant and equipment, net" and in "Accrued restructuring
expenses" in the accompanying Consolidated Balance Sheets.


                                       25
<PAGE>

      The  total  re-alignment  charge  includes  an  inventory   write-down  of
approximately  $2.7 million for components and  sub-assemblies  that will now be
outsourced or discontinued, product lines to be eliminated and other slow moving
inventories.  Further, the Company assessed the future use and recoverability of
certain machinery, equipment and leasehold improvements ("Equipment") associated
with the production of components and sub-assemblies in Puerto Rico. The Company
estimated the net realizable  value of the Equipment,  utilizing its fair market
value  assessment  adjusted  for any  estimated  costs  to  dispose  or sell the
Equipment,  resulting in a charge of approximately $2.9 million.  Under this new
re-alignment  of  operations  plan,  the  Company  reduced  its  workforce  from
approximately  215 employees as of March 30, 2001 to approximately 145 employees
at June 29, 2001,  resulting  in a charge of $300,000  for employee  termination
benefits.  Additionally,  the Company  recorded  an accrual of $300,000  for the
resulting  excess  manufacturing  space  in the  leased  facilities  related  to
component and  sub-assembly  production.  The activity during fiscal 2001 in the
associated balance sheet accounts for the 2001 charge is as follows:
<TABLE>
<CAPTION>
                                                                         Employee             Excess
                                    Fixed Asset        Inventory        Termination        Manufacturing
                                    Write-downs       Write-down         Benefits             Space             Total
                                   ---------------  ---------------   ----------------   -----------------  ---------------
<S>                                <C>              <C>               <C>                <C>                <C>
Fiscal 2001 restructuring costs
 and asset write-downs             $   2,900,000    $   2,700,000     $     300,000      $     300,000      $ 6,200,000
Cash payments during
  fiscal 2001                                  -                -          (224,000)           (39,000)        (263,000
Non-cash activity                     (2,900,000)      (2,700,000)               -                   -       (5,600,000)
                                   --------------   ---------------   ----------------   -----------------  ---------------
Balance June 29, 2001              $           -     $          -     $      76,000      $     261,000      $   337,000
                                   ===============  ===============   ================   =================  ===============
</TABLE>
NOTE 3 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES:

      The composition of long-term debt and obligations  under capital leases is
as follows:
<TABLE>
<CAPTION>
                                                                                             June 29,           June 30,
                                                                                               2001               2000
                                                                                           --------------    ----------------
<S>           <C> <C>                                                                         <C>              <C>
Term loan, bearing interest at a rate described below (10% at June 29, 2001
     and June 30, 2000, respectively)                                                         $  683,000       $ 1,469,000
Capitalized leases payable through 2004, bearing interest ranging from
     11.0% to 12.0%, secured by assets with a book value of approximately $31,000                 20,000            41,000
Installment notes payable through 2004, bearing interest ranging from 8.0% to 9.5%,
     secured by assets with a net book value of approximately $285,000                            39,000            57,000
                                                                                           --------------    ----------------
                                                                                                 742,000         1,567,000
Current Portion                                                                                 (252,000)         (300,000)
                                                                                           --------------    ----------------
                                                                                               $ 490,000       $ 1,267,000
                                                                                           ==============    ================
</TABLE>
      The Company has a credit facility,  consisting of a $6.0 million revolving
line of credit and a term loan. The revolving line of credit enables the Company
to have up to $6.0 million of  revolving  credit  loans  outstanding  at any one
time,  limited  by a  borrowing  base  equal  to 85% of  the  eligible  accounts
receivable  and 50% of the  eligible  inventory,  subject to  certain  reserves.
Subject to  extension  in certain  instances,  the  scheduled  maturity  date of
revolving  credit loans is April 30,  2003,  while the term loan is to be repaid
through March 31, 2003,  subject to mandatory  repayments from asset disposition
proceeds and insurance proceeds in certain  circumstances.  As of June 29, 2001,
$721,000  was  outstanding  under the  revolving  line of credit  (included as a
current  liability on the Balance Sheet) and $683,000 was outstanding  under the
term loan.

                                       26
<PAGE>

      Outstanding  revolving  line of credit  loans bear  interest at a rate per
annum  based on: (a) a floating  rate (in  general,  equal to the greater of the
bank's prime rate, or 0.50% per annum in excess of a specified  weighted average
of rates on, overnight Federal funds  transactions)  plus, in either case, 0.25%
per annum;  (b) to the extent  selected by the Company,  a fixed rate based upon
the bank's LIBOR rate for specified  loan periods plus 2.50% per annum;  and (c)
to the extent  selected by the Company,  a rate equal to the daily  average of a
published  "one-month"  LIBOR rate plus 2.50% per annum.  Outstanding term loans
bear interest  based at the same rates per annum plus 0.25% per annum.  The loan
agreements also require the payment by the Company of specified fees. The credit
facility is, secured by a lien and security  interest against  substantially all
of the  assets  of the  Company  and its  subsidiaries,  regardless  of  whether
comprising a part of the borrowing  base,  and a pledge of all (or, in one case,
65%) of each subsidiaries' capital stock.

      The related loan  agreements,  as amended,  require,  among other  things,
that: (a) the Company maintain a consolidated tangible net worth, which includes
the value of outstanding Series C Redeemable  Preferred Stock, of at least $19.5
million at June 30, 2001 (with such minimum  amount to be increased  each fiscal
quarter, thereafter, by an amount equal to 50% of the Company's consolidated net
income,  for such  quarter);  (b)  capital  expenditures  of the Company and its
subsidiaries  not to exceed in the  aggregate  $5.8 million for any fiscal year;
and  (c)  no new  operating  leases  be  entered  into  by  the  Company  or its
subsidiaries  if, after,  giving  effect  thereto,  the aggregate  annual rental
payments  for all  leased  property  (excluding  capital  leases)  would  exceed
$750,000 in any one fiscal year. The loan agreements also impose limitations on,
among other things,  dividends on and  redemptions  (and  repurchases) of equity
securities  and the  incurrence  of additional  indebtedness.  The Company is in
compliance with the covenants and terms of the credit facility.

      Future  payments for long term debt and  obligations  under capital leases
are as follows:

                Fiscal Year                               Amount
                -----------                        ----------------
                2002                               $     252,000
                2003                                     480,000
                2004                                      10,000
                                                   ----------------
                Total payments                           742,000
                Less: current portion                   (252,000)
                                                   ----------------
                                                   $     490,000
                                                   ================

      In the fourth quarter of fiscal 2000, the holder of the Company's $750,000
unsecured  subordinated  note  converted that note into 428,571 shares of Common
Stock at a reduced  conversion price.  This transaction  resulted in a charge of
approximately $332,000 to Other income (expense).


NOTE 4 - INCOME TAXES:

      The  Company's  policy is to provide  for income  taxes  based on reported
income,  adjusted for  differences  that are not expected to ever enter into the
computation of taxes under applicable tax laws.

      At June 29, 2001, for U.S. federal income tax purposes, the Company, along
with its  subsidiaries,  had  aggregate  net  operating  loss  carryforwards  of
approximately  $33,275,000  which expire  periodically  through 2021 and general
business  tax credit  carryforwards  of  approximately  $ 466,000  which  expire
periodically  through 2012.  As a result of a private  placement in fiscal 1993,
there was an  ownership  change  within the  meaning of Section  382 of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), which limits the ability
of the Company and its  subsidiaries  to

                                       27
<PAGE>

utilize their net operating losses and tax credit carryforwards that arose prior
thereto.   Included  in  the  above  net  operating   loss   carryforwards   are
approximately $16,921,000,  of net operating losses that were generated prior to
the  ownership   change  that  are  subject  to  the  Section  382   limitation.
Accordingly,  the  maximum  amount  of such net  operating  loss and tax  credit
equivalent  carryforwards  that may be  utilized  in any  year is  approximately
$711,000  per  year.  However,  it is  unlikely  that  $12,859,000  of these net
operating  losses will be utilized  prior to  expiration  due to the Section 382
limitation  discussed above.  Net operating  losses generated  subsequent to the
ownership  change are not subject to the Section 382 annual  limitation  and may
therefore be fully utilized.  As of June 29, 2001, the Company has approximately
$16,354,000  of net  operating  losses  that were  generated  subsequent  to the
ownership  change and remain  available for use through  2021. In addition,  the
Company has available approximately  $1,877,000 in unused Section 382 annual net
operating loss limitation carryforwards.

      Temporary  differences  between income tax and financial  reporting assets
and  liabilities   (primarily  inventory  valuation  allowances,   property  and
equipment and accrued  employee  benefits) and net operating loss  carryforwards
give  rise  to  deferred  tax  assets  as of June  29,  2001  in the  amount  of
approximately $12,688,000 for which a full (100%) offsetting valuation allowance
has been provided due to the  uncertainty of realizing any benefit  therefrom in
the future.

      The  Company  has  exemptions  until  January  2009 of 90% for Puerto Rico
income tax and Puerto Rico property tax purposes and 60% for  municipal  license
tax. The Company also has net operating  loss  carryforwards  available  through
fiscal 2007 to offset any  remaining  Puerto Rico taxable  income.  There are no
limitations  on the  Company's  ability  to  utilize  such  net  operating  loss
carryforwards  to reduce its Puerto Rico  income  tax. A full (100%)  offsetting
valuation  allowance  for the deferred tax assets has also been provided for the
associated  Puerto Rico net operating loss  carryforwards due to the uncertainty
of realizing any benefit in the future.

      Prior to July 1, 2000, the Company had elected the  application of Section
936 of the Code.  Under that section,  the Company was entitled to a federal tax
credit in an  amount  equal to the  lesser  of the  United  States  federal  tax
attributable  to its  taxable  income  arising  from the  active  conduct of its
business within Puerto Rico or the economic activity based credit limitation (on
a  non-consolidated  basis),  provided that in its current and two preceding tax
years at least 80% of its gross income and at least 75% of its gross income from
the  active  conduct  of a trade or  business  were from  Puerto  Rico  sources.
Principally  as a result of the  Company's  restructurings,  the  potential  for
benefits  under  Section  936 for the Company  has been  substantially  reduced.
Accordingly,  in order to optimize the Company's tax structure,  the Company has
terminated its election under Section 936 of the Code.

NOTE 5 - COMMON STOCK:

      The Company is authorized to issue 30,000,000 shares of Common Stock.

      STOCK OPTION PLANS:  The  Company's  1995 Stock Option Plan and 1998 Stock
Option Plan permit each of the Board of Directors and the Compensation Committee
of the Board of  Directors  to grant,  until  September  2005 and October  2008,
respectively,  options to employees  (including  officers and  directors who are
employees)   and   consultants   covering   1,250,000  and   2,500,000   shares,
respectively,  of Common Stock.  Option terms (not to exceed 10 years)  exercise
prices  and  exercise  dates are  determined  by the Board of  Directors  or the
Compensation  Committee.  At June 29, 2001,  options to purchase  1,133,100  and
1,860,741 shares were outstanding under the 1995 Plan and 1998


                                       28
<PAGE>

Plan,  respectively.  Additionally,  49,400  options are  outstanding  under the
Company's  1986 Stock  Option Plan,  although no further  options may be granted
under the Company's 1986 Stock Option Plan.

      The 1994  Non-Employee  Director  Stock Option Plan covers an aggregate of
700,000 shares of Common Stock (with 220,000 options  outstanding as of June 29,
2001) and  provides  that (i)  non-employee  directors  are  granted  options to
purchase 25,000 shares of Common Stock upon their initial  election to the Board
and following each annual meeting of stockholders; (ii) all options granted vest
in full immediately  following their grant; (iii) the term of options granted is
ten years; and (iv) the period  following  termination of service during which a
non-employee  director may exercise an option is twelve  months,  except that an
option shall automatically terminate upon cessation of service as a non-employee
director for cause.

      Certain  information  relating to the employee  stock option plans and the
director plan for the years ended June 29, 2001, June 30, 2000 and June 25, 1999
follows:
<TABLE>
<CAPTION>
                                                                     Fiscal Year Ended
                                      ---------------------------------------------------------------------------------
                                            June 29, 2001              June 30, 2000               June 25,1999
                                      --------------------------  -------------------------   -------------------------
                                                      Weighted                   Weighted                    Weighted
                                                      Average                     Average       Number       Average
                                        Number        Exercise      Number       Exercise      of Shares     Exercise
                                       of Shares       Price       of Shares       Price       Exercisable    Price
                                      ------------   -----------  ------------   ----------   ------------  -----------
<S>                                     <C>               <C>       <C>              <C>        <C>              <C>
Outstanding at beginning of year        2,757,941         $1.90     2,474,501        $2.18      2,306,376        $4.89
Granted                                   759,000          1.39       534,000         1.60      1,115,141         2.27
Exercised                                  (1,800)         1.56       (34,200)        1.56        (21,075)        5.23
Canceled or expired                      (251,900)         2.43      (216,360)        2.10       (925,941)        5.12
                                      ------------   -----------  ------------   ----------   ------------  -----------
Outstanding at end of year              3,263,241         $1.90     2,757,941        $2.08      2,474,501        $2.18
                                      ============   ===========  ============   ==========   ============  ===========

Options exercisable at end of period      859,900                     773,369                     491,110
Shares available for future grant
 at end of period                       1,177,959                     196,059                     555,859
Exercise price per share of options
 exercised during period                    $1.56                       $1.56                  $3.13-5.75
Exercise price per share of options
 outstanding at end of period          $1.03-8.25                  $1.03-8.25                  $1.56-8.25

      The following is additional information relating to options outstanding as
of June 29, 2000:

                                            Weighted        Weighted         Number        Weighted
                               Number        Average        Average            Of          Average
       Exercise                  Of         Exercise      Contractual        Shares        Exercise
      Price Range              Shares         Price       Life (Years)     Exercisable      Price
------------------------    -------------  ------------  ---------------   ------------  -------------
     $1.03  -     $1.50          642,500        $ 1.12          9.3           181,250        $ 1.15
      1.51  -      2.00        1,531,600          1.64          7.7           540,120          1.61
      2.01  -      2.50          959,741          2.31          7.6           467,087          2.31
      2.51  -      8.25          129,400          5.68          4.0           121,900          5.75
                            -------------  ------------  -----------       ------------  -------------
                               3,263,241        $ 1.90          7.7         1,310,357        $ 2.18
                            =============  ============  ===========       ============  =============
</TABLE>
      The Company has adopted the  disclosure-only  provisions  of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been  recognized  for the stock  option  plans as  Accounting  Principles  Board
("APB") Opinion 25 and related  interpretations  in


                                       29
<PAGE>

accounting  for stock options  plans is followed.  If the Company had elected to
recognize  compensation  cost based on the fair value of the options  granted at
grant date, as prescribed by SFAS No. 123, net loss would have been increased to
the pro forma amounts indicated in the table below.

                                          Fiscal Year Ended
                                  ------------------------------------
                                June 29, 2001  June 30, 2001    June 25, 1999
                                -------------  -------------    -------------
Net loss applicable to
  common stockholders:
  As reported                   ($7,540,000)  ($1,018,000)      ($6,402,000)
  Pro Forma                     ($8,619,000)  ($2,105,000)      ($7,430,000)
Net loss per share:
  As reported                        ($0.65)       ($0.11)           ($0.79)
  Pro Forma                          ($0.74)       ($0.23)           ($0.92)

      The weighted  average fair value of options granted were determined  based
on the Black-Scholes model, utilizing the following assumptions:


                                 June 29,       June 30,        June 25,
                                   2001           2000            1999
                               -------------  -------------   -------------
Expected term                       5 Years        6 Years         7 Years
Interest rate                          5.4%           6.0%            6.1%
Volatility                            65.1%          62.3%           54.2%
Dividends                                0%             0%              0%
Weighted average fair
  value of options granted           $1.39          $0.93           $1.32

      OTHER OPTIONS AND WARRANTS  OUTSTANDING:  As of June 29, 2001, the Company
had  outstanding  an option  exercisable  into 100,000 shares of Common Stock at
$2.50 per share  that  expires in July 2003 and  warrants  (in  addition  to the
placed warrants  described below) exercisable into 10,000 shares of Common Stock
at $6.15 per share that expired and unexercised in July 2001.

      In June 2000, the Company completed a private placement of 1,800,000 units
at $1.75 per unit,  each unit  consisting  of one share of Common  Stock and one
warrant to purchase one share of Common Stock.  Each warrant entitles its holder
to purchase,  between December 9, 2000 and December 8, 2004, one share of Common
Stock at an exercise price of $2.79. In connection with this private  placement,
the Company  issued to certain  employees of the  placement  agent 414,000 UPOs.
Each UPO can be exercised at an exercise price of $2.69 per UPO between December
9, 2000 and December 8, 2004. Each UPO consists of one share of Common Stock and
one Warrant to purchase  one share of Common  Stock at $2.79.  Both the warrants
and UPOs are subject to  possible  adjustment  of the number of shares  issuable
upon their exercise and their exercise prices if certain events occur.

      See Note 6 for information  concerning warrants to purchase 200,000 shares
of  Common  Stock at an  exercise  price  of  $7.03  per  share  (which  expired
unexercised on January 25, 2001) issued in connection  with a private  placement
of Preferred Stock in January 1998.

NOTE 6 - PREFERRED STOCK:

      The Company is  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 the Board of Directors.


                                       30
<PAGE>


      SERIES C CONVERTIBLE  PREFERRED STOCK AND WARRANTS  EXPIRING JANUARY 2001:
In January 1998,  the Company  completed a private  placement of 5,000 shares of
its Series C Convertible  Preferred Stock  ("Preferred  Shares") and Warrants to
purchase an aggregate of 200,000 shares of its Common Stock at an exercise price
of $7.03 per share,  all of which  warrants  expired  unexercised on January 25,
2001, for an aggregate  purchase  price of $5.0 million.  After giving effect to
commission and other  issuance costs  aggregating  approximately  $450,000,  net
proceeds were approximately $4.6 million.  The Preferred Shares were issued with
a beneficial  conversion feature that has been valued at $250,000 and recognized
as additional  paid in capital.  The  amortization of both the issuance costs of
$450,000 and the  beneficial  conversion  feature of $250,000 over the period to
the earliest  conversion  date (eight months) has been  recognized as a non-cash
preferred stock embedded  dividend,  increased the net loss applicable to common
stockholders in fiscal 1998 and 1999 and has been added to the Preferred  Shares
balance. The Preferred Shares bear no dividends,  are convertible into shares of
the Company's  Common Stock at a conversion price equal to the lower of $5.58 or
95% of the  average of the  closing  bid prices of the  Company's  Common  Stock
during the ten  consecutive  trading days  immediately  preceding the conversion
date of the Preferred Shares.  The Preferred Shares are redeemable at the option
of the  holders  at a price  equal to $1,150  per share in the event of  certain
business  combinations  of the  Company,  the sale of  substantially  all of the
Company's  assets and in  certain  other  cases,  including  the  failure of the
Company to maintain the effectiveness of a registration  statement  covering the
resale of the  Company's  Common  Stock  underlying  the  Preferred  Shares,  to
maintain the listing of the Company's Common Stock on the Nasdaq National Market
or the Company's failure to convert the Preferred Shares.  Because the Preferred
Shares have  conditions for redemption that are not solely within the control of
the Company,  they have been classified  outside of stockholders'  investment in
the accompanying  consolidated balance sheet. During fiscal 2001, no shares were
converted.  During  fiscal 2000,  1,224  Preferred  Shares were  converted  into
584,815 shares of Common Stock.

      SERIES D JUNIOR  PARTICIPATING  PREFERRED  STOCK: In May 1998, the Company
adopted  a  Stockholder  Rights  Plan  providing  for  the  distribution  to the
Company's  stockholders of one Right  ("Rights") for each share of the Company's
Common Stock issued and  outstanding  at the opening of business on May 21, 1998
(the "Distribution Date") and each subsequent share of Common Stock issued. Each
Right entitles the registered holder of a share of Common Stock to purchase from
the Company 1/1000 of a share of Series D Junior  Participating  Preferred Stock
of the  Company,  par value  $1.00 per  share,  at a price of $30 per Right (the
"Purchase Price"),  subject to adjustment.  The Rights have a term of ten years,
have no voting  power or rights to  dividends,  and are not  detachable  and not
separately  transferable  from the  Company's  Common  Stock  until they  become
exercisable. In general, the Rights become exercisable following an announcement
that a person  or group of  affiliated  or  associated  persons  (an  "Acquiring
Person")  owns,  or the  commencement  of a tender offer or exchange  offer that
would  result  in a person  or group  beneficially  owning,  at least 20% of the
Company's outstanding Common Stock. If any person becomes an Acquiring Person by
acquiring  beneficial  ownership of at least 20% of the Company's  Common Stock,
each  outstanding  Right  (other than those owned by an  Acquiring  Person) will
"flip in" and  become a right to buy,  at the  Purchase  Price,  that  number of
shares of Common Stock of the Company that will have a market value of two times
the Purchase Price.  After a person becomes an Acquiring Person (but before such
Acquiring Person owns 50% or more of the outstanding  Common Stock), the Company
may permit  each Right  (other than those  owned by an  Acquiring  Person) to be
exchanged, without payment of the Purchase Price, for one share of Common Stock.
If (i) the  Company  is  acquired  in a  merger  or other  business  combination


                                       31
<PAGE>

transaction and the Company does not survive or the Company merges, consolidates
or engages in a share  exchange with another  person and does survive but all or
part of its stock is  changed  or (ii) at least 50% of the  Company's  assets or
earning power is sold or  transferred,  then each  outstanding  Right will "flip
over" and become a right to buy, at the Purchase Price, that number of shares of
Common Stock of the acquiring company that will have a market value of two times
the Purchase Price. The Company may redeem the Rights in whole, but not in part,
at a price of $.01 per  Right  at any time  prior to the time a person  acquires
beneficial  ownership  of at least 20% of the  Company's  Common  Stock and,  if
certain  conditions  are met,  within ten days  following  the time a person has
acquired 20% or more of the Common Stock.

NOTE 7 - SIGNIFICANT CUSTOMERS, EXPORT SALES AND GEOGRAPHICAL SEGMENTS:
SIGNIFICANT  CUSTOMERS:


      The  following  customers  accounted  for more  than 10% of the  Company's
consolidated revenues during one or more of the years presented below:

                                                          Fiscal
                                                        Year Ended
                                            ------------------------------------
                                            June 29,      June 30,      June 25,
                                              2001          2000          1999
                                            --------      --------      --------
Verizon Corporation(1)                        33%            25%           31%
Tyco Electronics Corporation (2)              26%            19%           15%
Corning Cable Systems LLC (3)                  7%            12%            9%
Telco Sales, Inc.                              7%            12%            2%
-----------------
      (1)  On  June  30,  2000,  a  wholly-owned  subsidiary  of  Bell  Atlantic
           Corporation was merged with and into GTE Corporation,  as a result of
           which  GTE  Corporation  became  a  wholly-owned  subsidiary  of Bell
           Atlantic.   The  combined   company  is  doing  business  as  Verizon
           Communications.   GTE   Communications   Systems   Corporation  is  a
           subsidiary of GTE Corporation.
      (2)  Tyco Electronics  Corporation (a successor to Raychem Corporation) is
           an original equipment manufacturer that purchases certain overvoltage
           protection  products  from the Company  for  inclusion  within  their
           products.
      (3)  Corning  Cable  Systems  LLC  (formerly  Siecor  Corporation)  is  an
           original  equipment  manufacturer  that  supplies  network  interface
           devices to telephone  companies and is required by certain  telephone
           companies  to  purchase  TII's   overvoltage   surge  protectors  for
           inclusion within their network interface devices.

      EXPORT SALES: For each of the three years ended June 29, 2001 export sales
were less than 10% of consolidated net sales.

      GEOGRAPHICAL  SEGMENTS:  Sales of overvoltage surge protection products to
United States  customers  constitute the majority of the Company's  consolidated
sales for each of the three years ended June 29, 2001. As part of the operations
re-alignment (see Note 2), the Company closed its manufacturing  facility in the
Dominican  Republic,  the only area  considered by the  Company's  management as
foreign,  and, as a result,  there are no  operating  facilities  nor  producing
assets  outside the United States and Puerto Rico.  Consequently,  the Company's
operations  located in Puerto  Rico and  Copiague,  New York are  managed as one
geographic segment.

NOTE 8 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:

      The Company  leases real property and equipment  under various leases with
terms expiring  through April 2006. The leases require  minimum annual  rentals,
exclusive of real property taxes, of approximately $181,000,  $91,000,  $83,000,
$83,000  and  $69,000  in  fiscal  years  2002,  2003,  2004,


                                       32
<PAGE>

2005  and  2006  and  thereafter,  respectively.  Substantially  all of the real
property  leases  contain  escalation  clauses  related to increases in property
taxes.

      Since fiscal year 1982, the Company has leased equipment from PRC Leasing,
Inc.  ("PRC"),  a corporation owned by the Chairman of the Board of the Company.
This lease was amended on July 18, 2001.  The present annual rental is $139,000,
the lease  expires on July 17, 2002 and at June 29, 2001 no accrued rent was due
under this agreement. The equipment under lease from PRC was purchased by PRC at
various times since 1982. The Company is advised that PRC employs a depreciation
schedule that fully depreciates assets over a maximum of 10 years or the asset's
useful life, whichever is shorter,  that the original cost of assets under lease
to the Company at June 29, 2001 was  approximately  $2.0 million  and,  although
fully  depreciated,  those  assets had an  appraised  fair market  value of $1.6
million as of November  12,  1998.  All  equipment  under lease has been of good
quality and most,  if not all,  equipment  is  expected to remain  usable by the
Company  through the end of the lease term.  From time to time, new purchases of
equipment by PRC may replace or be added to the  equipment  under  lease.  It is
both the Company's and PRC's  intention that these purchases will be to maintain
the level of  performance  of the equipment and not to increase the rentals paid
by the Company.

      Rental expense,  including  property taxes, for fiscal 2001, 2000 and 1999
was  approximately  $584,000,  $681,000  and  $781,000  respectively,  including
$139,000 for fiscal 2001 and  $200,000 for fiscal 2000 and 1999  relating to the
equipment leases with PRC.


NOTE 9 - PROFIT SHARING PLAN:

      The  Company  has a defined  contribution  pension  plan  through a 401(k)
profit  sharing  plan.  The plan covers  substantially  all U.S. and Puerto Rico
employees  and  requires  the Company to match  employees'  contributions  up to
specified limitations and subject to certain vesting schedules.


                                       33
<PAGE>
<TABLE>
<CAPTION>
<S>  <C>
NOTE 10 - SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION:

                                                                                     June 29,          June 30,
                                                                                       2001              2000
                                                                                  ---------------   ---------------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
Accounts receivable
     Trade accounts receivable                                                        $7,150,000        $7,329,000
     Other receivables                                                                    98,000            61,000
     Less: allowance for doubtful accounts                                               (58,000)         (144,000)
                                                                                  ---------------   ---------------
                                                                                      $7,190,000        $7,246,000
                                                                                   =============    ==============
Inventories:
     Raw materials and subassemblies                                                  $3,967,000        $8,342,000
     Work in progress                                                                  2,649,000         4,387,000
     Finished Goods                                                                    7,824,000         3,059,000
                                                                                  ---------------   ---------------
                                                                                      14,440,000        15,788,000
     Less: allowance for inventory                                                      (640,000)       (2,963,000)
                                                                                  --------------   ---------------
                                                                                     $13,800,000       $12,825,000
                                                                                  ==============   ===============

Property, plant and equipment:
     Machinery and equipment                                                         $18,405,000       $19,392,000
     Tools, dies and molds                                                             6,757,000         9,655,000
     Leasehold improvements                                                            3,924,000         4,791,000
     Office fixtures, equipment and other                                              2,092,000         2,190,000
                                                                                  --------------   ---------------
                                                                                      31,178,000        36,028,000
     Less: accumulated depreciation                                                  (22,780,000)      (24,805,000)
                                                                                  --------------   ---------------
                                                                                     $ 8,398,000      $ 11,223,000
                                                                                  ==============   ===============
Accrued liabilities:
     Payroll, incentive and vacation                                                 $   375,000      $    584,000
     Accrued payroll taxes                                                                30,000            34,000
     Legal and professional fees                                                         348,000           299,000
     Other                                                                               375,000           558,000
                                                                                  --------------   ---------------
                                                                                     $ 1,128,000      $  1,475,000
                                                                                  ==============   ===============

                                                                                     Fiscal Year Ended
                                                                        ------------------------------------------
                                                                         June 29,        June 30,      June 25,
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION              2001            2000          1999
                                                                        ------------    -----------   ------------

Embedded dividend on Series C Preferred Stock                             $     -        $      -       $   262
                                                                        ============    ===========   ============
Cash paid for interest                                                    $    87        $    215       $   404
                                                                        ============    ===========   ============
</TABLE>
NOTE 11 - DISPOSITIONS:

      In March 1999,  the Company  sold  substantially  all of the assets of its
fiber  optic  products  subsidiary,  TII-Ditel,  Inc.,  for  $5.3  million.  The
resulting gain of $2.2 million is included in other income in fiscal year 1999.


                                       34
<PAGE>

      The  following  table  reflects  the  unaudited  quarterly  results of the
Company for the fiscal years ended June 29, 2001 and June 30, 2000:

<TABLE>
<CAPTION>
NOTE 12 - QUARTERLY RESULTS (UNAUDITED):

                                                                                           Net (Loss)
                                                                                            Income              Diluted
                                                                        Operating          Applicable          Net (Loss)
                                                        Gross            (Loss)            to Common             Income
       Quarter Ended               Net Sales        Profit (loss)        Income           Shareholders         Per Share
-----------------------------    ---------------    --------------   ----------------    ---------------    -----------------
2001 FISCAL YEAR
<S>       <C> <C>                  <C>                 <C>           <C>                     <C>               <C>
September 29, 2000                 $10,510,000         $2,388,000    $      33,000           $  50,000         $ 0.00
December 29, 2000                   10,805,000          2,442,000           36,000              70,000           0.01
March 30, 2001 (a)                   8,228,000           (748,000)      (6,960,000)         (6,937,000)         (0.59)
June 29, 2001                        9,780,000          2,396,000         (698,000)           (723,000)         (0.06)

2000 FISCAL YEAR
September 24, 1999                 $12,973,000         $2,073,000       ($ 637,000)         ($ 587,000)       $ (0.07)
December 31, 1999                   13,189,000          2,269,000         (293,000)           (278,000)         (0.03)
March 31, 2000                      11,853,000          2,533,000           54,000              32,000              -
June 30, 2000                       11,620,000          2,594,000          133,000            (185,000)         (0.02)
<FN>
----------
      (a)  The Net Loss  includes  a net  charge  of $6.1  million  for costs to
           re-align  operations,  $2.7  million  of the  charge  was  due to the
           related inventory write-down and has been reflected as a reduction of
           Gross  Profit  (See  Note  2  to  Notes  to  Consolidated   Financial
           Statements).
</FN>
</TABLE>
                                       35
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
         DISCLOSURES

None.

                                    PART III

      The  information  called  for by Part III (Items 10, 11, 12 and 13 of Form
10-K) is  incorporated  herein by  reference to such  information  which will be
contained in the Company's  Proxy  Statement to be filed  pursuant to Regulation
14A of the  Securities  Exchange Act of 1934 with respect to the Company's  2001
Annual Meeting of Stockholders.



                                       36
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)  Report of Independent Public Accountants..............................17
         Consolidated Balance Sheets at June 29, 2001 and June 30, 2000.......18
         Consolidated Statements of Operations for each of the three
           years in the period ended June 29, 2001............................19
         Consolidated Statements of Stockholders' Investment for each of
           the three years in the period ended June 29, 2001..................20
         Consolidated Statements of Cash Flows for each of the three years
           in the period ended June 29, 2001..................................21
         Notes to Consolidated Financial Statements...........................22

(a)(2)   Report of Independent Public Accountants............................S-1
         Schedule II - Valuation and Qualifying Accounts.....................S-2

   (3)   EXHIBITS

Exhibit
Number                               Description

2              Asset Purchase Agreement, dated February 26, 1999, by and between
               TII-Ditel,  Inc.  and Ditel,  Inc.  Incorporated  by reference to
               Exhibit 2 to the Company's Current Report on Form 8-K dated (date
               of earliest event reported) February 26, 1999. (File No. 1-8048).

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

3(a)(2)        Certificate of Designation,  as filed with the Secretary of State
               of the State of  Delaware on January 26,  1998.  Incorporated  by
               reference  to  Exhibit  4.1 to the  Company's  Report on Form 8-K
               dated (date of earliest event reported)  January 26, 1998.  (File
               No. 1-8048).

3(a)(3)        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 the  Company's  Report on Form 8-K
               dated (date of  earliest  event  reported)  May 7, 1998 (File No.
               1-8048).

3(b)           By-laws of the Company, as amended.  Incorporated by reference to
               Exhibit 4.02 to  Amendment  No. 1 to the  Company's  Registration
               Statement on Form S-3 (File No. 33- 64980).

4(a)           Rights Agreement,  dated as of May 15, 1998,  between the Company
               and  Harris  Trust  &  Savings  Bank  formerly  Harris  Trust  of
               Chicago).  Incorporated  by  reference  to  Exhibit  4.1  to  the
               Company's  Current  Report  on Form 8-K dated  (date of  earliest
               event reported) May 7, 1998 (File No. 1-8048).

4(b)(1)(A)     Revolving Credit, Term Loan and Security  Agreement,  dated April
               30, 1998,  among Company,  TII  Corporation  and GMAC  Commercial
               Credit LLC (successor of BNY Financial  Corporation)  ("Lender").
               Incorporated  by  reference to Exhibit  4(a)(i) to the


                                       37
<PAGE>

               Company's  Quarterly  Report on Form 10-Q for the fiscal  quarter
               ended March 27, 1998 (File No. 1-8048).

4(b)(1)(B)     Consent  and  Amendment  dated as of July 22,  1999  between  the
               Company,   TII  Corporation  and  the  Lender.   Incorporated  by
               reference to Exhibit  4(b)(1)B to the Company's  Annual Report on
               Form10-K for the fiscal year ended June 25, 1999 (File No.8048).

4(b)(1)(C)*    Consent and Amendment  dated as of September 26, 2001 between the
               Company and the Lender.

4(b)(2)        Revolving Credit,  Term Loan and Security Agreement between Crown
               Tool & Die Company, Inc. and Lender. Incorporated by reference to
               Exhibit  4(a)(ii) to the Company's  Quarterly Report on Form 10-Q
               for the fiscal quarter ended March 27, 1998 (File No. 1-8048).

4(b)(3)        Guaranty  of Company  to Lender.  Incorporated  by  reference  to
               Exhibit  4(b)(i) to the Company's  Quarterly  Report on Form 10-Q
               for the fiscal quarter ended March 27, 1998 (File No. 1-8048).

4(b)(4)        Guaranty of TII  International,  Inc. to Lender.  Incorporated by
               reference to Exhibit  4(b)(ii) to the Company's  Quarterly Report
               on Form 10-Q for the fiscal  quarter  ended  March 27, 1998 (File
               No. 1-8048).

4(b)(5)        Guaranty  of  Telecommunications   Industries,  Inc.  to  Lender.
               Incorporated  by reference to Exhibit  4(b)(iii) to the Company's
               Quarterly  Report on Form 10-Q for the fiscal quarter ended March
               27,1998 (File No. 1-8048).

4(b)(6)        Guaranty  of TII  Dominicana,  Inc.  to Lender.  Incorporated  by
               reference to Exhibit  4(b)(iv) to the Company's  Quarterly Report
               on Form 10-Q for the fiscal  quarter  ended  March 27, 1998 (File
               No. 1-8048).

4(b)(7)        Guaranty of TII Corporation to Lender.  Incorporated by reference
               to Exhibit 4(b)(v) to the Company's Quarterly Report on Form 10-Q
               for the fiscal quarter ended March 27, 1998 (File No. 1-8048).

4(b)(8)        Guaranty of TII-Ditel, Inc. to Lender.  Incorporated by reference
               to Exhibit  4(b)(vi) to the  Company's  Quarterly  Report on Form
               10-Q for the  fiscal  quarter  ended  March  27,  1998  (File No.
               1-8048).

4(b)(9)        General Security  Agreement from  Telecommunications  Industries,
               Inc. in favor of Lender.  Incorporated  by  reference  to Exhibit
               4(c)(i) to the  Company's  Quarterly  Report on Form 10-Q for the
               fiscal quarter ended March 27, 1998 (File No. 1-8048).

4(b)(10)       General Security Agreement from TII International,  Inc. in favor
               of Lender.  Incorporated by reference to Exhibit  4(c)(ii) to the
               Company's  Quarterly  Report on Form 10-Q for the fiscal  quarter
               ended March 27, 1998 (File No. 1-8048).

4(b)(11)       General Security Agreement from TII Dominicana,  Inc. in favor of
               Lender.  Incorporated  by reference  to Exhibit  4(c)(iii) to the
               Company's  Quarterly  Report on Form 10-Q for the fiscal  quarter
               ended March 27, 1998 (File No. 1-8048).

4(b)(12)       Stock  Pledge and  Security  Agreement  from  Company in favor of
               Lender.  Incorporated  by  reference  to  Exhibit  4(d)(i) to the
               Company's  Quarterly  Report on Form 10-Q for the fiscal  quarter
               ended March 27, 1998 (File No. 1-8048).


                                       38
<PAGE>

4(b)(13)       Stock Pledge and Security Agreement from TII Corporation in favor
               of Lender.  Incorporated by reference to Exhibit  4(d)(ii) to the
               Company's  Quarterly  Report on Form 10-Q for the fiscal  quarter
               ended March 27, 1998 (File No. 1-8048).

4(b)(14)       Stock Pledge and Security Agreement from TII International,  Inc.
               in  favor  of  Lender.   Incorporated  by  reference  to  Exhibit
               4(d)(iii) to the Company's  Quarterly Report on Form 10-Q for the
               fiscal quarter ended March 27, 1998 (File No. 1-8048).

4(b)(15)       Patent  Collateral  Assignment  and  Security  Agreement  between
               Company and Lender.  Incorporated by reference to Exhibit 4(e)(i)
               to the  Company's  Quarterly  Report on Form 10-Q for the  fiscal
               quarter ended March 27, 1998 (File No. 1-8048).

4(b)(16)       Trademark  Collateral  Assignment and Security  Agreement between
               Company and Lender. Incorporated by reference to Exhibit 4(e)(ii)
               to the  Company's  Quarterly  Report on Form 10-Q for the  fiscal
               quarter ended March 27, 1998 (File No. 1-8048).

10(a)(1)+      1986 Stock Option Plan of the Company,  as amended.  Incorporated
               by reference to Exhibit 10.2 to the Company's Quarterly Report on
               Form 10-Q for the fiscal  quarter ended  September 27, 1996 (File
               No. 1-8048).

10(a)(2)+*     1994 Non-Employee Director Stock Option Plan, as amended.

10(a)(3)+      1995 Stock Option Plan, as amended.  Incorporated by reference to
               Exhibit 10.1 to the Company's  Quarterly  Report on Form 10-Q for
               the fiscal quarter ended December 26, 1997 (File No. 1-8048).

10(a)(4)+*     1998 Stock Option Plan, as amended.

10(b)(1)+      Amended and Restated  Employment  Agreement dated as of August 1,
               1997  between the Company  and Timothy J Roach.  Incorporated  by
               reference to Exhibit  10(b)(1) to the Company's  Annual Report on
               Form 10-K for the  fiscal  year  ended  June 27,  1997  (File No.
               1-8048).

10(b)(2)+      Amended and Restated Employment Agreement dated as of May 1, 1997
               between  the  Company and Carl H.  Meyerhoefer.  Incorporated  by
               reference to Exhibit  10(b)(2) to the Company's  Annual Report on
               Form 10-K for the  fiscal  year  ended  June 27,  1997  (File No.
               1-8048).

10(b)(3)+      Amended and Restated  Employment  Agreement  dated as of March 9,
               1998 between the Company and George S.  Katsarakes.  Incorporated
               by reference to Exhibit  10(b)(6) to the Company's  Annual Report
               on Form 10-K for the fiscal  year  ended June 26,  1998 (File No.
               1-8048).

10(b)(4)+      Employment  Agreement  dated as of  September 5, 2000 between the
               Company and Kenneth A.  Paladino.  Incorporated  by  reference to
               Exhibit  10(b)(7) to the Company's Annual Report on Form 10-K for
               the fiscal year ended June 30, 2000 (File No. 1-8048).

10(b)(5)+      Employment  Agreement  dated  as of June  30,  2000  between  the
               Company and Thomas J. Guzek. Incorporated by reference to Exhibit
               10(b)(8)  to the  Company's  Annual  Report  on Form 10-K for the
               fiscal year ended June 30, 2000 (File No. 1-8048).

10(c)(1)*      Consultant  Agreement  dated as of  January 3, 2001  between  the
               Company and R. Dave Garwood.


                                       39
<PAGE>

10(c)(1)(A)    Equipment  Lease dated July 18, 1991  between PRC  Leasing,  Inc.
               ("PRC") and the  Company.  Incorporated  by  reference to Exhibit
               10(b)(57)  to the  Company's  Current  Report on Form 8-K for the
               month of July 1991 (File No. 1-8048).

10(c)(1)(B)    Amendment  dated July 18, 1992 to Equipment  Lease dated July 18,
               1991  between the Company and PRC.  Incorporated  by reference to
               Exhibit 10(b)(67) to the Company's Annual Report on Form 10-K for
               the fiscal year ended June 25, 1993 (File No. 1- 8048).

10(c)(1)(C)    Second Amendment dated February 25, 1993 to Equipment Lease dated
               July 18,  1991  between  the  Company  and PRC.  Incorporated  by
               reference to Exhibit  10(b)(7) to the Company's  Annual Report on
               Form 10-K for the  fiscal  year  ended  June 25,  1993  (File No.
               1-8048).

10(c)(1)(D)    Restated  Third  Amendment  dated  December 14, 1993 to Equipment
               Lease  dated  July  18,   1991   between  the  Company  and  PRC.
               Incorporated  by reference to Exhibit 4(d) to Amendment  No. 2 to
               the Schedule 13D filed by Alfred J. Roach (File No. 1-8048).

10(c)(1)(E)    Fourth  Amendment  dated June 27, 2000 to  Equipment  Lease dated
               July 18,  1991  between  the  Company  and PRC.  Incorporated  by
               reference to Exhibit  10(C)1(E) to the Company's Annual Report on
               Form10-K   for  the  fiscal   year  ended  June  30,  2000  (File
               No.1-8048).

10(c)(1)(F)*   Fifth Amendment dated July 18, 2001 to Equipment Lease dated July
               18, 1991 between the Company and PRC.

10(d)(1)       Lease  Contract  dated  April 27,  1998  between  the Company and
               Puerto  Rico  Industrial  Development  Company.  Incorporated  by
               reference to Exhibit 10(a) to the Company's  Quarterly  Report on
               Form 10-Q for the fiscal  quarter  ended March 27, 1998 (File No.
               1-8048).

10(e)(1)       Securities Purchase Agreement dated as of January 26, 1998 by and
               among the Company and the investors in the Company's  January 26,
               1998 private placement. Incorporated by reference to Exhibit 99.2
               to the  Company's  Report on Form 8-K/A  dated  (date of earliest
               event reported) January 26, 1998. (File No. 1-8048).

10(e)(2)       Registration Rights Agreement dated as of January 26, 1998 by and
               among the Company and the investors in the Company's  January 26,
               1998 private placement. Incorporated by reference to Exhibit 99.3
               to the  Company's  Report on Form 8-K/A  dated  (date of earliest
               event reported) January 26, 1998. (File No. 1-8048).

10(f)(1)       Form of Warrant  issued to the investors in the Company's June 8,
               2000 private  placement and underlying the Unit Purchase  Option.
               Incorporated  by reference to Exhibit  10(f)(1) to the  Company's
               Form 10-K for the  fiscal  year  ended  June 30,  2000  (File No.
               1-8048).

10(f)(2)       Subscription   Agreement  and  Investor  Information   Statement,
               including  registration rights undertaking of the Company, by and
               among the Company and the investors in the Company's June 8, 2000
               private placement.  Incorporated by reference to Exhibit 10(f)(2)
               to the  Company's  Form 10-K for the  fiscal  year ended June 30,
               2000 (File No. 1-8048).

10(f)(3)       Placement  Agent  Agreement dated as of May 15, 2000 by and among
               the Company and M.H.  Meyerson & Co.,  Inc., as placement  agent,
               with respect to the  Company's  June 8,


                                       40
<PAGE>


               2000  private  placement.  Incorporated  by  reference to Exhibit
               10(f)(3)  to the  Company's  Form 10-K for the fiscal  year ended
               June 30, 2000 (File No. 1-8048).

10(f)(4)       Form of Unit Purchase  Option  issued to the placement  agent for
               Company's  June  8,  2000  private  placement.   Incorporated  by
               reference to Exhibit  10(f)(4) to the Company's Form 10-K for the
               fiscal year ended June 30, 2000 (File No. 1-8048).

21*            Subsidiaries of the Company.

23*            Consent of independent public accountants.

----------
*              Filed herewith.
+              Management contract or compensatory plan or arrangement.

(b)            Reports on Form 8-K

               No Reports on Form 8-K were  filed  during the fourth  quarter of
               the Company's fiscal year ended June 29, 2001.



                                       41
<PAGE>

                                   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 INDUSTRIES, INC.
                                           -----------------------------------

September 26, 2001                         By /s/   Timothy J. Roach
                                           -------------------------------------
                                           Timothy J. Roach, President,
                                           Chief Executive Officer and Director

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.

September 28, 2000                    /s/ Alfred J. Roach
                                      ----------------------------
                                      Alfred J. Roach, Chairman
                                      of the Board and Director

September 28, 2000                    /s/ Timothy J. Roach
                                      ----------------------------
                                      Timothy J. Roach, President,
                                      Chief Executive Officer
                                      (principal executive officer)
                                      and Director

September 28, 2000                    /s/ Kenneth A. Paladino
                                      ------------------------------
                                      Kenneth A. Paladino, Vice
                                      President-Finance and Treasurer
                                      (principal financial officer)


September 28, 2000                    /s/ C. Bruce Barksdale
                                      ----------------------------
                                      C. Bruce Barksdale, Director


September 28, 2000                    /s/ James R. Grover, Jr.
                                      ----------------------------
                                      James R. Grover, Jr., Director


September 28, 2000                    /s/ Joseph C. Hogan
                                      ----------------------------
                                      Joseph C. Hogan, Director


September 28, 2000                    /s/ George S. Katsarakes
                                      ----------------------------
                                      George S. Katsarakes,
                                      Executive Vice President,
                                      Chief Operating Officer and
                                      Director


September 28, 2000                    /s/ Dorothy Roach
                                      ----------------------------
                                      Dorothy Roach, Director


September 28, 2000                    /s/ R. D. Garwood
                                      ----------------------------
                                      R. D. Garwood, Director



                                       42
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To TII Industries, Inc.:

We have audited, in accordance with auditing standards generally accepted in the
United  States,  the  consolidated  balance sheets of TII  Industries,  Inc. and
subsidiaries as of June 29, 2001 and June 30, 2000, and the related consolidated
statements of  operations,  stockholders'  investment and cash flows for each of
the three years in the period  ended June 29,  2001,  included in this Form 10-K
and have issued our report  thereon dated  September  26, 2001.  Our audits were
made for the  purpose of forming  an opinion on the basic  financial  statements
taken as a whole.  The schedule for the years ended June 29, 2001,  June 30, 200
and  June  25,  1999  listed   under  Item  14(a)  of  this  Form  10-K  is  the
responsibility  of the  Company's  management,  is  presented  for  purposes  of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements.  The schedule has been subjected to the auditing
procedures  applied in the audits of the basic financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.


Arthur Andersen LLP

San Juan, Puerto Rico
September 26, 2001.

Stamp No. 1759708 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.



                                      S-1
<PAGE>



                                   SCHEDULE II
                      TII INDUSTRIES, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS

                             ALLOWANCE FOR INVENTORY

<TABLE>
<CAPTION>
                                                  Balance at                                                       Balance
                                                 Beginning of                                                     at End of
             Fiscal Year Ended                       Year               Additions          Dispositions              Year
--------------------------------------------  --------------------  -------------------  ------------------   -------------------
<S>                                                   <C>                  <C>                  <C>                   <C>

June 29, 2001                                          $2,963,000       $  198,000         ($2,521,000)          $  640,000
June 30, 2000                                          $4,467,000          396,000         ( 1,900,000)          $2,963,000
June 25, 1999                                          $2,636,000        9,428,000         ( 7,597,000)          $4,467,000


                              RESTRUCTURING RESERVE


                                                  Balance at           Additions /                                Balance at
             Fiscal Year Ended                   June 25, 1999        (Adjustments)        Reductions           June 30, 2000
--------------------------------------------  --------------------  -------------------  ------------------   -------------------

Property, plant and equipment                          $ 435,000          $ 2,900,000         ($3,335,000)              $      0
Employee severance                                       177,000              123,000            (224,000)                76,000
Plant closure costs                                       25,000              275,000             (39,000)               261,000
                                              --------------------  -------------------  ------------------   -------------------
                                                       $ 637,000          $ 3,298,000         ($3,598,000)             $ 337,000
                                              ====================  ===================  ==================   ===================


                         ALLOWANCE FOR DOUBTFUL ACCOUNTS

                                      Balance at                                                       Balance
                                     Beginning of                                                     at End of
Fiscal Year Ended                       Year               Additions          Dispositions              Year
--------------------------------  --------------------  -------------------  ------------------   -------------------
June 29, 2001                           $144,000                    0             (86,000)             $ 58,000
June 30, 2000                            116,000               44,000             (16,000)             $144,000
June 25, 1999                           $ 62,000             $ 54,000                   0              $116,000

</TABLE>




                                      S-2


</TEXT>
</DOCUMENT>
