U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

COMMISSION FILE NUMBER: 0-17893

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of November 14, 2003, there were 7,729,736 shares of the Registrant’s Common Stock outstanding.

1

INDEX

2

PART I — FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS (Unaudited)

TELTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

TELTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS — Continued

LIABILITIES AND SHAREHOLDERS’ DEFICIENCY

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

TELTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

TELTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

TELTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

Teltronics, Inc. (“Teltronics” or “Company”), a Delaware corporation, designs, develops, installs, manufactures and markets electronic hardware and application software products, and engages in electronic manufacturing services primarily in the telecommunication industry.

The accompanying condensed consolidated financial statements include the accounts of the Company and are comprised of its wholly-owned subsidiaries TTG Acquisition Corp., Teltronics, S.A. de C.V., and 36371 Yukon Inc. In July 2002, the Company sold ownership of its Interactive Solutions, Inc. (“ISI”) subsidiary and converted all debt and obligations owed to the Company by ISI to 50,000 shares of Series A Preferred stock of ISI, which were pledged as collateral to Finova Mezzanine Capital Inc. In connection with the sale of ISI, the Company’s common stock ownership of ISI was reduced from 85% to 15%. Management of the Company determined the value of the Series A Preferred stock to not be material, as a result, no gain on the sale of ISI was recognized. The Company’s sale of ISI enables the Company to focus on our core business. All significant intercompany transactions and balances have been eliminated in consolidation.

Effective May 30, 2003, the Company closed on its acquisition of the Vortex technology and related assets from Tri-Link Technologies Inc. (“Tri-Link”). Tri-Link designed a pure soft switch that utilizes Ethernet LAN to provide voice over internet protocol (“VoIP”). Our new product offering derived from this technology, Cypreon™, is the first IP-PCX solution to deliver advanced telephone, videoconferencing, and LAN capabilities in an easily-installed system. Cypreon was installed at a beta site during September 2003. The Vortex technology and assets are being held in 36371 Yukon Inc.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

Other Matters Affecting Operations
The Company has incurred net losses for the past two years and the nine month period ended September 30, 2003. The Company has also experienced negative cash flows for the nine month period ended September 30, 2003. In addition, the Company has limited additional borrowing capacity under its existing debt agreements.

During the past year, the Company has reduced its operating expenses and has engaged the investment banking firm of Atlantic American Capital Advisors, LLC as its financial advisor to assist the Company in developing and exploring strategic alternatives that include raising capital, mergers, acquisitions, strategic partnerships or joint ventures. Management is continuing its focus on these items. The Company is also focusing on increasing its sales levels and is introducing new products in the fourth quarter of 2003. There is no assurance that we will raise any additional capital, consummate any strategic alternatives or that the introduction of the new products will result in increased sales.

8

Seasonality
The Company has experienced seasonality due in part to purchasing tendencies of our customers during the fourth and first quarters of each calendar year. Consequently, net sales for the fourth and first quarters of each calendar year are typically not as strong as results during the other quarters. The net sales of the Company continued to be impacted by the general slowdown of telecommunications expenditures.

NOTE 2 — ACCOUNTING FOR STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. The Company has chosen to account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, because the grant price equals the market price on the date of grant for options issued by the Company, no compensation expense is recognized for stock options issued to employees.

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation.

Had compensation cost for the Company’s stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, the Company’s net income (loss) and net income (loss) per share would have been as follows:

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

9

NOTE 3 —COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) is as follows:

NOTE 4 — NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss), adjusted for preferred stock dividends, by the weighted average number of issued common shares outstanding during the applicable period. Diluted net income (loss) per share is computed by dividing net income (loss), adjusted for preferred stock dividends, by the weighted average number of issued common shares and potential common shares. Potential common shares consist of convertible preferred stock, stock options (vested and unvested) and warrants and are computed using the treasury stock method. Certain potential common shares for 2003 and 2002 were anti-dilutive and were not included in the calculation of diluted net income (loss) per share.

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

10

Options to purchase 1,048,000 shares of common stock for the three month period ended September 30, 2003 were not included for all or a portion of the computation of diluted net income per common share because those options’ exercise prices were greater than the average market price of the common shares, and therefore the effect would be anti-dilutive.

NOTE 5 — COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Costs and estimated earnings on uncompleted contracts includes unbilled revenue of approximately $217,000 and $321,000 as of September 30, 2003 and December 31, 2002, respectively.

NOTE 6 — INVENTORIES

The major classes of inventories are as follows:

The valuation allowance for slow moving inventories was $1,353,000 and $2,151,000 as of September 30, 2003 and December 31, 2002, respectively.

11

NOTE 7 — OTHER INTANGIBLE ASSETS

The Company’s other intangible assets are as follows:

Amortization is provided over the estimated useful lives of the respective assets using the straight-line method. Amortization expense related to intangible assets was $15,185 and $16,685 for the three months ended September 30, 2003 and 2002, respectively. Amortization expense related to intangible assets was $45,555 and $50,054 for the nine month period ended September 30, 2003 and 2002, respectively. Estimated amortization expense related to other intangible assets for each of the five years in the period ending December 31, 2008 and thereafter is: 2003 - $15,185; 2004 - $44,396; 2005 - $26,079; 2006 - $14,510; 2007 - $14,510; 2008 - $14,510; thereafter - $78,830.

12

NOTE 8 — DEBT

Debt consists of the following:

Secured promissory note - payable to Harris Corporation in monthly installments of $96,805 with interest at 8% commencing May 1, 2002 with a balloon payment of $7,196,801 due May 2006.

Bank line of credit - On December 22, 1998, the Company's principal lender, The CIT Group/Business Credit, Inc. ("CIT") amended the Company's existing Line of Credit Facility and Term Loan whereby, the interest rate was 2.0% above prime rate, maximum credit was $5,500,000 and an early termination fee was assessed at 1.5%. On October 28, 2000, the Line of Credit Facility was extended to October 28, 2002. A director of the Company had personally guaranteed a portion of the facility. On October 16, 2002, the Company entered into the Thirteenth Amendment to Loan and Security Agreement (the "Amendment") with CIT. This Amendment extended the term from October 28, 2002 to October 28, 2004 and modified the interest rate from prime plus 2.0% to prime plus 2.5%. The applicable margin (2.5%) may vary from 2.0% to 3.0% depending on the Company's financial results for the year ended December 31, 2002 and the year ending December 31, 2003. At September 30, 2003, the Company's interest rate was 7.0%. The maximum credit remained at $5,500,000 while the early termination fee was modified from 1.5% to 1.0% of the maximum credit. In connection with this Amendment, CIT has released a director of the Company from any and all obligations under any guaranty agreement or arrangement in favor of CIT.

Substantially all of the Company's present and future assets, except for fixed assets, are pledged as collateral with borrowings limited to certain gross availability formulas based on accounts receivable and inventory as defined in the agreement. The facility provides for minimum loan fees, unused line fees and renewal term fees. The outstanding borrowings are classified as a current liability. At September 30, 2003, the Company had $607,000 available, pursuant to this facility. The availability of this unused line of credit is restricted based on availability formulas.

Senior Secured Promissory Note - On September 9, 2003, the Company entered into a Fifth Amended and Restated Senior Secured Promissory Note with a revised maturity date of February 1, 2004, interest at 14% and monthly principal and interest payments of $55,000, commencing September 1, 2003.

Note payable to Tri-Link in quarterly principal installments of $187,500 plus interest at 6.5% commencing August 1, 2003, with final payment due May 2006.

Notes payable to finance companies, payable in monthly installments of $7,000 with interest at approximately 5%. The notes mature through March 2008 and are collateralized by vehicles.

13

The Company maintains a promissory note to Harris Corporation (“Harris”) related to the acquisition of the 20-20® Product Line, which was restructured on March 27, 2002, under a Master Restructuring Agreement. Under this restructuring, the principal and capitalized interest total was stated at $9,196,801. The Company made principal payments of $500,000 during the three month period ended March 31, 2002. Monthly payments of $96,805 in principal and interest commenced in May 2002 and continue until May 2006 at which time a balloon payment of the remaining unpaid balance of $7,196,801 will be due. The interest rate is 8%. In conjunction with the restructuring, Harris agreed to convert $4,000,000 of accrued expenses owed by the Company for additional inventory and services provided in connection with the transition of the 20-20® Switching Product Line to the Company, to 40,000 shares of Preferred Series C Convertible stock. The Note is secured by a first lien on certain of the acquired assets and a lien on the Company’s other assets.

On February 25, 1998, the Company entered into Senior Secured Loans (“Loans”) for $1,000,000 and $280,000. Interest was initially paid quarterly starting May 15, 1998. On May 12, 2000, the Company amended and restated the $1,000,000 Loan Agreement originally entered into on February 25, 1998 with Finova Mezzanine Capital Corp. (“Finova”) and originally due February 25, 1999 to extend the maturity to February 13, 2002. On May 1, 2002, Finova and the Company entered into a Third Amended and Restated Senior Secured Promissory Note. On September 30, 2002, Finova and the Company entered into a Fourth Amended and Restated Senior Secured Promissory Note. Under the terms of this note, monthly principal and interest payments of $55,000 were required commencing October 1, 2002 until August 13, 2003 at which time a balloon payment of the remaining unpaid balance of $303,000 would be due. The interest rate was increased from 12% to 14%. On September 9, 2003, the Company and Finova entered into a Fifth Amended and Restated Senior Secured Promissory Note (“Note”). Under the terms of the Note, monthly principal and interest payments of $55,000 are required commencing September 1, 2003 until February 1, 2004 (maturity date). The interest rate remained at 14%.

The Holder of the Loans previously received 890,000 warrants to purchase the Company’s Common stock at an exercise price of $2.75 per share. These warrants were exercisable in whole, or in part, at any time during a five-year holding period beginning on the date of issuance. In connection with the Third Amended and Restated Senior Secured Promissory Note, Finova and the Company entered into an Amended and Restated Stock Purchase Warrant that modified the terms of the 890,000 previously issued warrants to change the exercise price to $1.00 per share and extend the exercise period to February 26, 2004. As a result of modifying the exercise price and extending the exercise period of the 890,000 warrants, the Company recorded a deferred financing fee of approximately $160,200 in May 2002. This fee was expensed as a financing cost in our condensed consolidated statements of operations in 2002.

The covenants in the Secured Promissory Note, Loan and Security Agreement and the Senior Secured Promissory Note restrict certain sales of assets; mergers and acquisitions; borrowings and guarantees; dividends and redemptions; creation of liens; investments; issuance of subsidiary shares; and transactions with affiliates.

The consideration for the assets purchased from Tri-Link was $2,500,000, of which $250,000 was paid at closing with the remaining balance of $2,250,000 being paid in quarterly principal installments of $187,500 plus interest at 6.5%. The note is collateralized primarily by the Vortex technology and technology assets. Tri-Link shall be entitled, at its sole option, to convert at any time and from time to time, up to $750,000 of the balance of the purchase price then remaining unpaid into shares of the Company’s voting common stock at prices ranging from $0.22 per share to $1.00 per share.

On October 24, 2003, the Company issued 375,000 shares of Common stock to Tri-Link Technologies, Inc. as consideration for the conversion of $82,500 of the Company’s obligation to Tri-Link Technologies, Inc.

The Company is in the process of obtaining a valuation for the assets acquired from Tri-Link. The purpose of the valuation is to apportion the value to the various assets acquired.

NOTE 9 — EXIT ACTIVITY

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 required recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a

14

commitment to an exit or disposal plan. Costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity.

The Company reduced its work force by approximately 15% at June 30, 2003. The reduction in force was part of an overall effort by the Company to reduce its expenses to better align them with the current sales levels. The reduction in force was across the Company and affected the majority of employee groups and locations. As a result of the reduction in force, the Company recognized a one time termination benefit charge of approximately $250,000. This charge has been allocated to cost of goods sold and the various operating expense categories that it related to.

The changes in the Company’s termination benefit obligation for the nine months ended September 30, 2003 are as follows:

The Company leases office space for a research and development facility in Dallas, Texas. The lease expires in December 2006. In December 2002, the Company closed its facility in Dallas, Texas. Teltronics will continue to incur rental costs under the Dallas lease agreement without receiving any future economic benefit.

Teltronics early adopted the provisions of SFAS No. 146 in 2002, and as a result, the Company recorded an expense of approximately $437,000 in December 2002 that represented the present value of our liability (lease obligation) as of December 31, 2002. This expense was reported as a general and administrative expense in our consolidated statements of operations for 2002. Prior to the closing of our Dallas facility, our Dallas rental expenses were reported as a research and development expense. Commencing January 1, 2003, our Dallas rental expenses are reported as a general and administrative expense.

The changes in the Company’s lease obligation for the nine months ended September 30, 2003 are as follows:

NOTE 10 — WARRANTY

The Company provides currently for the estimated cost that may be incurred under product warranties. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company provides a limited warranty on its products, for a period from 3 to 18 months (depending on the product), under which the Company agrees to repair or replace, in the Company’s sole discretion, units defective in material or workmanship, provided the equipment has not been subjected to alteration or abuse.

Changes in the Company’s product liability during the nine months ended September 30, 2003 are as follows:

15

NOTE 11 — SHAREHOLDERS’ EQUITY

The total number of shares of all classes of capital stock, which the Company has the authority to issue is 50,000,000 shares divided into three classes of which 5,000,000 shares, par value $.001 per share are designated Preferred stock, 40,000,000 shares, par value $.001 per share are designated Common stock and 5,000,000 shares, par value $.001 per share, are designated Non-Voting Common stock.

(A)        Preferred stock — The Preferred Series A stock are restricted securities owned by the Company’s Director and Senior Vice President of Business Development and subject to resale restrictions including the right of the Company to approve or disapprove any sale, transfer or disposition to any third party not controlled by the Director. Each share is entitled to 400 votes and is not entitled to any dividends. Accordingly, this would give the Senior Vice President voting control of the Company.

The Preferred Series B Convertible stock provided for a $12 per share annual dividend, payable quarterly and increasing to $20 in May 2002. On April 22, 2002, the terms of the Preferred Series B Convertible stock were modified, whereby the annual dividend rate increased from $12 per share to $16 per share, payable quarterly, effective February 26, 2002. The annual dividend rate will increase to $18 per share on February 27, 2004 and to $20 per share on February 27, 2005. The holder of the Preferred Series B Convertible stock initially had the right at its option to convert to the Company’s Common stock at $2.75 per share. The Company adjusted the conversion price on April 22, 2002 for the Preferred Series B Convertible stock from $2.75 to $1.75 per share in conjunction with the Third Amended and Restated Senior Secured Promissory Note. Commencing in May 2002, the Company has the right to redeem the Preferred Series B Convertible stock in full at 100% of the face value plus accrued and unpaid dividends. The Preferred Series B Convertible stock contains certain covenants.

The Company issued 40,000 shares of Preferred Series C Convertible stock to Harris Corporation in March 2002 in connection with the Master Restructuring Agreement. The Preferred Series C Convertible stock provides for a $10 per share annual dividend, payable quarterly beginning May 15, 2002. The annual dividend increases to $20 per share beginning April 1, 2007. The holder of the Preferred Series C Convertible stock has the right at its option to convert to the Company’s Common stock at $2.75 per share subject to adjustment. The Company has the right to redeem all or a portion of the then outstanding Preferred Series C Convertible stock at any time at 100% of the face value plus accrued and unpaid dividends.

(B)        Common stock — The Company recorded the issuance of 1.0 million shares of Common stock with a fair value of $200,000 as deferred compensation for 2003 services by its Board of Directors. The deferred compensation will be expensed as a general and administrative expense in our condensed consolidated statements of operations commencing January 1, 2003 through December 31, 2003. As of September 30, 2003, the deferred compensation of $50,000 is included in shareholders’ deficiency of our condensed consolidated balance sheets.

In April 2003, the Company issued 362,184 shares with a fair value of $42,958 in connection with the Employee Stock Purchase Plan.

In June 2003, the Company issued 62,311 shares with a fair value of $33,648 to the Savings Plan (“401(k) plan”).

(C)        Warrants — In connection with the Third Amended and Restated Senior Secured Promissory Note, Finova and the Company entered into an Amended and Restated Stock Purchase Warrant that modified the terms of the 890,000 previously issued warrants to change the exercise price to $1.00 per share and extend the exercise period to February 26, 2004.

In connection with our financial advisory and investment banking agreement entered into in September 2002 with Atlantic American Capital Advisors, LLC, the Company issued warrants to purchase 300,000 shares of its Common stock at an exercise price of $1.00 per share. The exercise period of the warrants is five years.

16

NOTE 12 — SEGMENT INFORMATION

The Company’s operations are classified into three reportable segments, Teltronics, ISI and Mexico. As further described in Note 1, ISI was sold in July 2002. Each reportable segment is staffed separately, requires different technology and marketing strategies and sells to different customers.

The accounting policies of the segments are the same. Company management evaluates performance based on segment profit (loss), which is net income (loss) before taxes, excluding nonrecurring gains or losses.

The following table presents information about reportable segment operations and assets.

17

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

References in this report to the “Company,” “Teltronics,” “we.” or “us” mean Teltronics, Inc. together with its subsidiaries, except where the context otherwise requires. A number of statements contained in this Quarterly Report on Form 10-Q are forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” or words of similar import. Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the timely development and market acceptance of products and technologies, competitive market conditions, successful integration of acquisitions, the ability to secure additional sources of financing, the ability to reduce operating expenses, and other factors described in the Company’s filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements that have been prepared under generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates because the estimates represent judgments made at specific dates for events that are ongoing. We have identified the following critical accounting policies that affect the more significant judgments and estimates used in preparing our consolidated financial statements. The consolidated financial statements and the related notes thereto should be read in conjunction with the following discussion of our critical accounting policies.

Our critical accounting policies and estimates are as follows:

Revenue recognition. The revenue recognition process requires management to make assumptions based on historical results, future expectations, changes in credit-worthiness of customers, and other relevant factors. Teltronics generates revenues through different sources.

Contract Manufacturing. Revenues from sales of product including our contract manufacturing business are recognized when the product is shipped. The Company’s policy is to recognize revenue and related costs when the order has been shipped from our facilities, which is also the same point that title passes under the terms of the purchase order. Based on the Company’s history of providing contract manufacturing services, we believe that collectibility at September 30, 2003 is reasonably assured.

Performance of Construction-Type Contracts. The Company’s policy is to recognize revenue and related costs on the construction-type contracts in accordance with Statement of Position 81-1 Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). SOP 81-1 provides two generally accepted methods of accounting for construction or production type contracts: (1) the percentage of completion method and (2) the completed contract method. The determination of which of the two methods is preferable is based on a careful evaluation of circumstances because the two methods should not be acceptable alternatives for the same circumstances.

18

The percentage of completion method recognizes revenue and related costs as work on a contract progresses. The progress of a contract in terms of recognizing revenue and related costs is based on satisfying the milestones for the specified contract.

The completed contract method recognizes revenue and related costs when the contract is completed and all costs and related revenues are reported as deferred items in the balance sheet until that time.

Our primary construction-type contracts are with the Board of Education of the City of New York. We accepted the assignment of a contract from Harris Corporation in connection with the Company’s acquisition of Harris Corporation’s 20-20® Switching Product Line in June 2000. This contract, with the Board of Education of the City of New York (“the Board”), specified that the Contractor (Teltronics) would provide telephone systems and peripheral equipment and cabling including systems maintenance and support.

Maintenance and service. Revenue from support and maintenance activities is recognized ratably over the term of the maintenance period and the unrecognized portion is included in deferred revenue. Costs from support and maintenance activities are recognized when the related revenue is recognized or when those costs are incurred, whichever occurs first.

Allowance for doubtful accounts. A considerable amount of judgment is required when we assess the ultimate realization of receivables, including assessing the probability of collection and the current credit-worthiness of each customer. We maintain an allowance for doubtful accounts based on management’s assessment of the age of the receivables and financial stability of the customer. We evaluated our allowance for doubtful accounts based on the recent downturn in the economy and increased them as we saw necessary. If the financial condition of any of our customers deteriorates, we may record additions to our allowance for doubtful accounts in the future.

Slow moving inventory. We write down our slow moving inventory equal to the difference between the carrying value of the inventory and the estimated market value based on assumptions about future product life cycles, product demand and market conditions. If actual product life cycles, product demand or market conditions are less favorable than those projected by management, additional inventory write-down may be required.

Impairment of Intangible and Long-Lived Assets. Long-lived assets consist primarily of fixed assets. We periodically evaluate the recovery of long-lived assets when impairment indicators are present. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions, estimated future cash flows, expected useful life of long-lived assets and the operational performance of our business. Future events could cause us to conclude that impairment indicators exist and that long-lived assets associated with our business are impaired.

Warranty and Service. The Company provides a limited warranty on most of its products, for a period of 3 to 18 months (depending on the product), under which the Company agrees to repair or replace, at the Company’s sole discretion, units defective in material or workmanship, provided the equipment has not been subjected to alteration or abuse. The Company’s technical service and engineering staff provide support services over the telephone to customers with installation or operational questions. Warranty and other repair services are provided by the Company.

Contingencies and Litigation. We are subject to proceedings, lawsuits and other claims related to class action lawsuits and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. These estimates are often initially developed substantially earlier than when the ultimate loss is known. In each accounting period, a determination of the amount of loss accrual required, if any, for these contingencies is made after careful review of each individual issue. We are often initially unable to develop a best estimate of loss, and therefore, the minimum amount, which could be zero, is recorded. The required accruals may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. Occasionally, a best estimate is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.

19

Seasonality

The Company has experienced seasonality due in part to purchasing tendencies of our customers during the fourth and first quarters of each calendar year. Consequently, net sales for the fourth and first quarters of each calendar year are typically not as strong as results during the other quarters. The net sales of the Company continued to be impacted by the general slowdown of telecommunications expenditures.

RESULTS OF OPERATIONS

The following unaudited tables set forth certain data, expressed as a percentage of net sales, from the Company’s unaudited condensed consolidated Statements of Operations for the three and nine month periods ended September 30, 2003 and 2002.

Net Sales

Net sales decreased $1.1 million and $6.9 million for the three month and nine month periods ended September 30, 2003, respectively, as compared to the same periods in 2002. The decrease in net sales for both periods was primarily attributable to a slow down in the telecommunications market as evidenced by a decrease in net sales from our five largest customers in the three month and nine month periods ended September 30, 2003 as compared to the same periods in 2002 of approximately $947,000 or 11.7% and $6.1 million or 22.6%, respectively.

20

Gross Profit Margin

Gross profit margin increased by 2.10 and 2.60 percentage points for the three month and nine month periods ended September 30, 2003, respectively, as compared to the same periods in 2002. Our gross profit margin for the three month periods ended September 30, 2003 and 2002 was 40.8% and 38.7%, respectively. Our gross profit margin for the nine month periods ended September 30, 2003 and 2002 was 39.8% and 37.2%, respectively. The increase in our gross profit margin was caused by changes in product mix and an improvement in our project management of certain projects that require additional attention due to the nature and extended time of the project.

Operating Expenses

Operating expenses decreased $952,000 and $1,014,000 for the three month and nine month periods ended September 30, 2003, respectively, as compared to the same periods in 2002. In June 2003, the Company eliminated positions to reduce its costs. The related severance costs of approximately $175,000 for the eliminated positions were recorded at June 30, 2003.

General and administrative expenses increased $217,000 and $523,000 for the three month and nine month periods ended September 30, 2003, respectively, as compared to the same periods in 2002. The increase for the three month and nine month periods ended September 30, 2003 were primarily a result of increases in severance, medical claims, provision for doubtful accounts and deferred compensation for the Board of Directors, which were partially offset by a decrease in 401(k) expense caused by the discontinuance of matching contributions effective October 1, 2002.

Sales and marketing expenses decreased $561,000 and $1,530,000 for the three month and nine month periods ended September 30, 2003, respectively, as compared to the same periods in 2002. The decrease for the three month period ended September 30, 2003 was directly related to severance expense caused by the reductions in force in June 2003 and the fourth quarter of 2002. The decrease for the nine month period ended September 30, 2003 was primarily a result of the severance benefits associated with two employees terminated in the first quarter of 2002 of approximately $280,000 and reductions in force implemented during the fourth quarter of 2002 and June 2003.

Research and development expenses decreased $546,000 and increased $94,000 for the three month and nine month periods ended September 30, 2003, respectively, as compared to the same periods in 2002. The decrease for the three month period ended September 30, 2003 was primarily related to the reduction in force related to closing the Dallas office in December 2002 and the reduction in force in June 2003. The increase for the nine month period ended September 30, 2003 was primarily related to increased costs associated with the development of new products, specifically Cypreon, and the severance costs related to the reduction in force in June 2003, which were offset by the decrease in payroll costs related to the reduction in force due to closing the Dallas office in December 2002.

Other Expenses

Other expenses increased $108,000 and $8,000 for the three month and nine month periods ended September 30, 2003, respectively, as compared to the same periods in 2002. For the three month period ended September 30, 2003, financing costs decreased approximately $15,000, interest expense increased $73,000, and other expenses increased $50,000. The decrease in financing costs for the three month period ended September 30, 2003 was directly related to a $67,000 financing expense for the re-pricing of the Finova warrants in 2002. This decrease was offset by the increased financing costs in the three month period ended September 30, 2003 related to Atlantic American’s services. The increase in interest expense for the three month period ended September 30, 2003 was primarily a result of the interest on the Tri-Link debt. The increase in other expenses is due to an overall increase in the loss on currency exchange and miscellaneous expenses.

For the nine month period ended September 30, 2003, financing costs decreased approximately $16,000, interest expense increased $8,000, litigation costs decreased $16,000 and other expenses increased $32,000. The decrease in financing costs for the nine month period ended September 30, 2003 was primarily a result of the financing expense for the re-pricing of the Finova warrants in 2002, which was partially offset by Atlantic American’s

21

services in 2003. The increase in interest expense for the nine month period ended September 30, 2003 was primarily a result of the interest on the Tri-Link debt, interest on increased borrowings on our line of credit in 2003, which were offset by reductions in interest expense associated with our Harris and Finova debt. The Company began making principal and interest payments commencing in May 2002 on the Harris and Finova debt.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows for the nine months ended September 30, 2003

Operating Activities

Net cash flows used in operating activities were $1,096,000 for the nine month period ended September 30, 2003. The $1,096,000 was comprised of the following items: (1) net loss of $1,480,000, (2) non-cash expenses of $1,786,000, and (3) a net decrease in working capital of $1,402,000. The reduction in working capital resulted primarily from the use of cash on uncompleted projects and timing of our collection on outstanding receivables during 2003 as compared with the fourth quarter of 2002. Generally, working capital requirements will increase or decrease with sequential changes in quarterly revenue levels and the timing of expenditures on uncompleted projects, collections on outstanding receivables, and payments on payables. We are continuing to focus on reducing our working capital requirements through more favorable billing terms, our collection efforts and expense reductions.

Investing Activities

Net cash flows used in investing activities were $667,000 for the nine month period ended September 30, 2003 as the Company acquired property and equipment to support its operations including service vehicles and manufacturing equipment.

Financing Activities

Net cash flows provided by financing activities were $1,117,000 for the nine month period ended September 30, 2003. The $1,117,000 was comprised of the following items: (1) net borrowings of $2,038,000 on the line of credit, (2) net repayments of $813,000 on loans, notes and capital leases, (3) proceeds of $43,000 related to the Employee Stock Purchase Plan, and (4) dividends paid of $151,000 on Preferred Series B and C Convertible stock.

Liquidity

We have historically funded our liquidity needs with cash from operations and bank borrowings. At September 30, 2003, our principal sources of liquidity consisted of cash and available borrowings under our line of credit. As of September 30, 2003, the Company had cash and cash equivalents of $148,514 as compared to $791,020 as of December 31, 2002. Working capital (deficit) as of September 30, 2003 and December 31, 2002 was $(1,179,506) and $1,187,075, respectively.

Our principal obligations as of September 30, 2003, consisted primarily of the following items: (1) a secured promissory note payable to Harris Corporation of $8.6 million, of which $534,000 is due and payable within the next twelve months, (2) a senior secured promissory note in the amount of $303,000 payable to Finova that matures on February 1, 2004, (3) dividends on our Series B and Series C Preferred Stock, of which $909,000 will be due and payable within the next twelve months, (4) a bank line of credit payable to CIT of $3.1 million, and (5) a secured promissory note for $2,062,500 aggregate principal amount payable to Tri-Link, of which $750,000 is due and payable within the next twelve months.

On September 9, 2003, the Company and Finova entered into a Fifth Amended and Restated Senior Secured Promissory Note (“Note”). Under the terms of the Note, monthly principal and interest payments of $55,000 are required commencing September 1, 2003 until February 1, 2004 (maturity date). The interest rate remained at 14%. We are in arrears on our September note payments to Harris Corporation and Finova in the amounts of $97,000 and $55,000 respectively as of September 30, 2003.

22

We have 12,625 shares of Series B and 40,000 shares of Series C Preferred Stock outstanding as of September 30, 2003. Holders of shares of our Series B Preferred Stock are entitled to receive annual dividends of $16 per share, payable quarterly and increasing to $18 per share on February 27, 2004, and to $20 per share on February 27, 2005. Holders of shares of our Series C Preferred Stock are entitled to receive annual dividends of $10 per share, payable quarterly and increasing to $20 per share beginning April 1, 2007. As of September 30, 2003, we were in arrears on dividend payments on our Series B and Series C Preferred Stock in the amounts of $103,000 and $205,000, respectively, which amounts include interest thereon. If we are in arrears on four quarterly dividend payments on our Series B Preferred Stock (whether or not consecutive) or any part thereof, including interest, then the number of directors comprising our Board of Directors shall be increased to a number that allows the holders of our Series B Preferred Stock to elect a majority of our Board of Directors.

We have a credit facility with CIT, as described in the notes to our condensed consolidated financial statements. The credit facility has a maximum credit limit of $5.5 million with an interest rate of 2.5% above prime. The applicable margin (2.5%) may vary from 2.0% to 3.0% depending on the Company’s financial results for the year ended December 31, 2002 and the year ending December 31, 2003. The amount available under this credit facility is subject to restriction based on availability formulas. The availability formulas relate primarily to the eligibility of accounts receivable as part of the Company’s borrowing base. As a result of the foregoing availability restrictions, the amount available under this credit facility as of September 30, 2003, was $607,000. The CIT credit facility is secured by a lien on substantially all our assets and a pledge of substantially all the capital stock of our subsidiaries.

On June 4, 2003, we completed the acquisition of Vortex technology and related assets from Tri-Link Technologies of Burnaby, British Columbia, pursuant to an Agreement of Purchase and Sale (the “Agreement”) of Vortex Technology dated October 31, 2002, as amended on May 30, 2003, for approximately $2.5 million. We also agreed to pay to Tri-Link Technologies royalties on the net revenues derived by us from certain components of the Vortex technology. We paid $250,000 of the purchase price, in cash, at the closing. We paid the remainder of the purchase price, excluding royalties, by delivering our secured promissory note for $2,250,000 aggregate principal amount. Our secured promissory note in favor of Tri-Link is payable in twelve equal quarterly principal payments of $187,500 plus interest at 6.5%, beginning on August 1, 2003. Our note in favor of Tri-Link is secured by a lien on the Vortex technology and related technology assets. If we fail to make any quarterly payment on this promissory note by the end of the tenth day after such payment is due, then on the fortieth day after such payment was due, we must issue to Tri-Link that number of shares of our common stock equal to 22,500 times the number of days (not to exceed 30) by which the applicable payment default exceeds ten days. In addition, if we fail to make payments on this note when due, Tri-Link may seek to obtain a judgment and attempt to seize our assets securing this note to satisfy such past-due payments. Tri-Link may convert portions of the outstanding balance of our promissory note into a maximum of 1,125,000 shares of our common stock at the prices and on the terms and conditions set forth in the Agreement, as amended.

The Company has incurred net losses for the past two years and the nine month period ended September 30, 003. The Company has also experienced negative cash flows for the nine month period ended September 30, 2003. In addition, the Company has limited additional borrowing capacity under its existing debt agreements; however, we estimate that our cash on hand as of September 30, 2003, totaling $148,514, future cash flows that we expect to generate from operations, and availability under our bank line with CIT will be sufficient to fund our operations and our debt obligations through December 31, 2003.

During the past year, the Company has reduced its operating expenses and has engaged the investment banking firm of Atlantic American Capital Advisors, LLC as its financial advisor to assist the Company in developing and exploring strategic alternatives that include raising capital, mergers, acquisitions, strategic partnerships or joint ventures. Management is continuing its focus on these items. Atlantic American engaged Early Bird Capital, LLC in May of 2003 to assist them in their efforts. The Company is also focusing on increasing its sales levels and is introducing new products in the fourth quarter of 2003. There is no assurance that we will raise any additional capital, consummate any strategic alternatives or that the introduction of the new products will result in increased sales. On the other hand, if we are able to raise such additional funds through public or private equity financings or from other sources, any financing we obtain may dilute your ownership interests. If we raise additional funds through equity financings, we must repay all or a portion of our promissory notes in favor of Harris and Finova based on the amount of our gross proceeds from any such equity financing.

23

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material changes to the disclosure under the caption “Quantitative and Qualitative Disclosures About Market Risks” in our Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report (the “Evaluation Date”).

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the Evaluation Date.

24

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company is a party to litigation, which arises, in the normal course of business.

There have been no changes to the legal proceedings as previously reported on Form 10-K for the year ended December 31, 2002. Management is not aware of the commencement of any new legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of September 30, 2003, we were in arrears on dividend payments on our Series B and Series C Preferred Stock in the amounts of $103,000 and $205,000, respectively, which amounts include interest thereon. We were also in arrears on debt payments on our Senior Secured Promissory Note with Finova and our Secured Promissory Note with Harris Corporation in the amounts of $55,000 and $97,000, respectively.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None

ITEM 5. OTHER INFORMATION - None

ITEM 6(a). EXHIBITS

Second Amendment to Loan and Security Agreement and Fifth Amended and Restated Senior Secured Promissory Note dated September 9, 2003 between Teltronics, Inc. and Finova Mezzanine Capital Inc.

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

ITEM 6(b). REPORTS ON FORM 8-K

The Company filed one report on Form 8-K during the quarter ended September 30, 2003. Information regarding the item reported on is as follows:

Item Reported On

On August 19, 2003, the Company issued a press release reporting its financial results for its fiscal quarter ended June 30, 2003.

25

        Pursuant to the requirements 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.

26

EXHIBIT INDEX

Description

Second Amendment to Loan and Security Agreement and Fifth Amended and Restated Senior Secured Promissory Note dated September 9, 2003 between Teltronics, Inc. and Finova Mezzanine Capital Inc.

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

27