<PAGE>
                      SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C.  20549

                                 FORM 10Q-SB

           [X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended                September 30, 1998    
                               -----------------------------------------------

                                      OR

        [  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                            SECURITIES ACT OF 1934

For the transition period from                        to                      
                                ---------------------    ----------------------
Commission file number                      0-11275                         
                       --------------------------------------------------------


                             TELTONE CORPORATION
          ------------------------------------------------------
          (Exact name of registrant as specified in its charter)


       WASHINGTON                                              91-0839067     
-------------------------------                           --------------------
(State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization)                            Identification No.)


  22121 - 20th Avenue SE, Bothell, Washington                       98021  
  -------------------------------------------                    ----------
   (Address of principal executive offices)                      (Zip Code)


                                  (206) 487-1515        
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

                                      N/A      
              ----------------------------------------------------
              (Former name, former address and former fiscal year)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

     6,006,796 shares of common stock outstanding as of September 30, 1998.   



<PAGE>

PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS


                              TELTONE CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                  September 30        June 30
                                                      1998             1998  
ASSET                                             (Unaudited)
------------------------------------------------------------------------------
<S>                                               <C>             <C>
Current assets
   Cash  . . . . . . . . . . . . . . . . . .      $   423,502     $    304,875
   Trade accounts receivable (net of 
      allowance for doubtful accounts of 
      $40,212 (unaudited) and $34,289) . . .        1,477,585        1,391,004
   Inventories 
      Raw materials. . . . . . . . . . . . .          506,028          489,133
      Work in process. . . . . . . . . . . .          212,761          157,168
      Finished goods . . . . . . . . . . . .          315,462          402,060
                                                  -----------      -----------
         Total inventories . . . . . . . . .        1,034,252        1,048,361
                                                  -----------      -----------
   Other current assets. . . . . . . . . . .           28,426           14,574
                                                  -----------      -----------
         Total current assets. . . . . . . .        2,963,765        2,758,814
                                                  -----------      -----------
Property, plant and equipment - at cost. . .        2,474,634        2,448,646
   Less accumulated depreciation . . . . . .       (2,235,086)      (2,197,586)
                                                  -----------      -----------
         Property, plant and equipment - net          239,548          251,060
 
TOTAL    . . . . . . . . . . . . . . . . . .      $ 3,203,313      $ 3,009,874
                                                  -----------      -----------
                                                  -----------      -----------
   
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------

Current liabilities
   Accounts payable - trade. . . . . . . . .     $    460,889      $   587,199
   Accrued compensation and benefits . . . .          418,930          369,696
   Accrued warranty expense. . . . . . . . .           52,174           35,510
   Other accrued expenses. . . . . . . . . .           41,278          101,620
                                                  -----------      -----------
      Total current liabilities. . . . . . .          973,271        1,094,025
                                                  -----------      -----------

Stockholders' equity
   Convertible preferred stock - no par value; 
      authorized 6,000,000 shares; 1,075,641 
      shares issued and outstanding. . . . .        2,063,149        2,063,149
   Common stock - no par value; authorized 
      20,000,000 shares; 6,606,796 and 
      5,606,796 shares issued at outstanding        3,202,685        2,998,685
   Deficit . . . . . . . . . . . . . . . . .       (3,035,792)      (3,145,985)
                                                  -----------      -----------
       Stockholders' equity. . . . . . . . .        2,230,042        1,915,849
                                                  -----------      -----------

TOTAL    . . . . . . . . . . . . . . . . . .      $ 3,203,313      $ 3,009,874
                                                  -----------      -----------
                                                  -----------      -----------
</TABLE>

See Notes to Financial Statements

                                                                              2
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (continued)



                             TELTONE CORPORATION

                            STATEMENTS OF OPERATIONS
                                 (Unaudited)
<TABLE>
<CAPTION>

                                                        Three Months    
                                                     Ended September 30
                                                    1998            1997
------------------------------------------------------------------------------
<S>                                               <C>             <C>
Net sales. . . . . . . . . . . . . . . . . .      $2,632,096      $2,239,469 
Cost of goods sold . . . . . . . . . . . . .       1,340,147       1,291,165 
                                                  ----------      ----------
Gross margin on sales. . . . . . . . . . . .       1,291,949         948,304 
                                                  ----------      ----------


Operating expenses
   Selling, general and administrative . . .         906,238         691,711
   Engineering and development . . . . . . .         274,980         426,016
                                                  -----------     ----------
       Total operating expenses. . . . . . .       1,181,218       1,117,727
                                                  -----------     ----------
Income (loss) from operations. . . . . . . .         110,731        (169,423)

Other expense - net. . . . . . . . . . . . .             538          18,946 
                                                  -----------     ----------
Income (loss) before tax . . . . . . . . . .         110,193        (188,369)
                                                  ----------      ----------
Income tax provision . . . . . . . . . . . .               -               - 
                                                  ----------      ----------
Net income (loss). . . . . . . . . . . . . .      $  110,193      $ (188,369)
                                                  ----------      ----------
                                                  ----------      ----------
Basic net income (loss) per common share . .      $      .02      $     (.03)
                                                  ----------      ----------
                                                  ----------      ----------
Diluted net income (loss) per common and
    common equivalent share. . . . . . . . .      $      .02      $     (.03)
                                                  ----------      ----------
                                                  ----------      ----------

Average common shares 
    (including preferred) outstanding. . . .       6,930,410       6,682,437 

Average common and common
    equivalent shares outstanding  . . . . .       7,192,352       6,682,437 

</TABLE>

                                                                              3



<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (continued)



                             TELTONE CORPORATION

                           STATEMENTS OF CASH FLOWS
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                          Three Months 
                                                       Ended September 30
                                                     1998             1997
-------------------------------------------------------------------------------
<S>                                                <C>              <C>
Cash flows from operating activities:
Net income (loss)  . . . . . . . . . . . . .       $ 110,193        $(188,369)
Adjustments to reconcile net income (loss) 
   to net cash (used for) provided by
   operating activities:
     Depreciation. . . . . . . . . . . . . .          37,500           34,853  
Changes in:
   Accounts receivable . . . . . . . . . . .         (86,581)         (69,600)
   Inventories . . . . . . . . . . . . . . .          14,109          237,690  
   Accounts payable and accrued items. . . .        (120,754)          31,555  
   Other . . . . . . . . . . . . . . . . . .         (13,852)         (12,095)
                                                   ---------        ---------
     Cash (used for) provided by operating 
       activities. . . . . . . . . . . . . .         (59,385)          34,034 
                                                   ---------        ---------

Cash flows from investing activities:
   Investment in property, plant and 
     equipment . . . . . . . . . . . . . . .         (25,988)         (17,460)
                                                   ---------        ---------
     Cash used for investing activities. . .         (25,988)         (17,460)
                                                   ---------        ---------

Cash flows from financing activities:
   Note payable to bank. . . . . . . . . . .                         (200,000)
   Employee stock purchase . . . . . . . . .         204,000                -
                                                   ---------        ---------
     Cash provided by (used for) financing 
       activities. . . . . . . . . . . . . .         204,000         (200,000)
                                                   ---------        ---------

Increase (decrease) in cash and equivalents.         118,627         (183,426)
Cash and cash equivalents, beginning of 
   period. . . . . . . . . . . . . . . . . .         304,875          530,074 
                                                   ---------        ---------
Cash and cash equivalents, end of period . .       $ 423,502        $ 346,648 
                                                   ---------        ---------
                                                   ---------        ---------
</TABLE>


                                                                             4



<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (continued)


                             TELTONE CORPORATION


                        NOTES TO FINANCIAL STATEMENTS
                                 (Unaudited)


1.   STOCKHOLDERS' EQUITY

     The Company has two active stock option plans.  The 1992 Employees Stock
     Option Plan provides for the grant of options to purchase up to 1,050,000
     common shares to key employees of the Company, of which 250,000 shares are
     subject to shareholder approval at the October 29, 1998, regularly
     scheduled shareholders' meeting.  Of this total, options to purchase
     662,000 shares of common stock are outstanding and 388,000 shares remain
     available for grant.   The Nonemployee Directors Stock Option Plan provides
     for the grant of options to purchase up to 320,000 common shares to outside
     directors of the Company.  Of this total, options to purchase 200,000
     shares of common stock are outstanding and 120,000 shares remain available
     for grant.  All options are granted at the fair market value of the stock
     on the date of grant and vest over a four year period.  The maximum term of
     an option may not exceed six years.  

     In August 1998 Richard  Soshea, Chief Executive Officer of the Company,
     exercised options to purchase 400,000 shares of common stock at $.51 per
     share.


2.   FEDERAL INCOME TAX

     At September 30, 1998, approximately $12,348,000 in net operating loss
     carryforwards were available to offset future taxable income and expire
     from 2000 through 2013.  If substantial changes in the Company's ownership
     should occur, there may be annual limitations on the utilization of such
     carryforwards.  The Company also has investment tax credit as well as
     research and development tax credit carryforwards of $290,000 and 
     $753,000, respectively, available to offset future income tax liabilities 
     through 2000.  Of this amount, $860,000 expires (to the extent not 
     utilized) at June 30, 1999.  Although the Company has adopted the 
     Statement of Financial Accounting Standards No. 109 Accounting for Income 
     Taxes, there is no tax asset recognized for the net operating loss 
     carryforwards and tax credits due to the Company's loss history and 
     therefore uncertainty regarding future taxable income.


The unaudited Interim Financial Statements reflect all adjustments which are, 
in the opinion of management, necessary to present a fair statement of the 
results for the interim periods.  The results of operations for the period 
ending September 30, 1998, are not necessarily indicative of operating 
results to be expected for the full year.  These interim condensed financial 
statements should be read in conjunction with the June 30, 1998, audited 
financial statements filed on form 10-KSB.

                                                                              5


<PAGE>

TELTONE CORPORATION

PART I.   FINANCIAL INFORMATION

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

Statements in this report covering future performance, developments, 
expectations or events, including the discussion of the Company's product 
development and introduction plans, and resulting expectations for its 
growth, constitute forward-looking statements which are subject to a number 
of known or unknown risks and uncertainties that might cause actual results 
to differ materially from those expressed or implied by such statements.  All 
forward-looking statements reflect management's expectations at the time of 
this report, and the Company disclaims any responsibility to revise or update 
any such forward-looking statement except as may be required by law.

RESULTS OF OPERATIONS

In the first quarter of fiscal 1999, ending September 30, 1998, Teltone 
maintained profitability for the third consecutive quarter. First quarter 
profits were $110,000 on sales of $2,632,000, compared to a loss of $188,000 
on sales of $2,239,000 for the first quarter of 1998. Net sales increased 18% 
over the first quarter of fiscal year 1998. Gross margins increased from 42% 
to 49% due to increasing sales of recently introduced software-based 
products. 

Sales increased in all major product areas except semiconductors, which 
Management expects may decline in the future. (The Company is, however, 
introducing a new line of lower-cost call progress detectors, which is 
expected to contribute higher gross margins on the reduced sales of 
semiconductor products.) Market acceptance of OfficeLink 2000, the Company's 
latest telecommuting product, also increased.

First quarter operating expenses increased 6% over the same quarter in the 
prior year. However, engineering and development expense decreased 35% in the 
first quarter of fiscal 1999 due to unusually high expenditures last year on 
the development of a new line of call progress detectors and the OfficeLink 
2000 project. Sales and marketing expenses increased in the first quarter as 
the Company shifted resources to the growing markets for telecommuting and 
remote agent solutions for call centers.

At September 30, 1998, approximately $12,348,000 in net operating loss 
carryforwards were available to offset future taxable income and expire from 
2000 through 2013.  If substantial changes in the Company's ownership should 
occur, there may be annual limitations on the utilization of such 
carryforwards. The Company also has investment tax credit as well as research 
and development tax credit carryforwards of $290,000 and $753,000, 
respectively, available to offset future income tax liabilities through 2000. 
 Of this amount, $860,000 expires (to the extent not utilized) at June 30, 
1999.  Although the Company has adopted the Statement of Financial Accounting 
Standards No. 109 Accounting for Income Taxes, there is no tax asset 
recognized for the net operating loss carryforwards and tax credits due to 
the Company's loss history and therefore uncertainty regarding future taxable 
income.

The Company has implemented a Year 2000 project to address potential problems 
arising from the use of two digits rather than four to define the year in 
some computer programs.  This is an issue which substantially all users of 
automated data processing and information systems are faced. Management has 
completed its review of the Company's products and has determined them to be 
Year 2000 compliant.  In addition, a section of the Company's website 
(www.teltone.com) contains detailed information about each product and the 
Company's compliance program.  The evaluation and testing of the Company's 
internal systems is underway and approximately 40% complete with a goal of 
completion by the end of fiscal 1999.  Management does not expect that the 
cost of its Year 2000 compliance program will be material to its financial 
condition or results of

                                                                              6



<PAGE>

operations or that its business will be adversely affected in any material 
respect.  Nevertheless, achieving Year 2000 compliance is dependent on many 
factors, some of which are not completely within the Company's control.  
Should either the Company's internal systems or the systems of one or more 
significant suppliers fail, the Company's business and its results of 
operations could be adversely affected and, as a result, a contingency plan 
is being prepared.
 
LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1998, the Company had cash on hand of $424,000 and no 
borrowings outstanding on its line of credit agreement described below.  The 
Company's working capital position has increased to $1,990,000, a 24% 
increase over the prior year.

In August 1998 Richard Soshea, Chief Executive Officer of the Company, 
exercised options to purchase 400,000 shares of common stock at $.51 per 
share, which provided the Company with $204,000 in cash for use in its 
operations.

Management has renewed it's lease agreement on its headquarters facility in 
Bothell, Washington, through February 2004.  The lease renewal provides for 
the elimination of excess square footage in the factory and results in lower 
rent expense.  This change will contribute to reduced overhead costs 
beginning in February 1999.  Management plans to enhance the Company's 
telecommunications and internal networking systems which will require an 
increase in capital spending during fiscal 1999 compared to fiscal 1998.

The Company has a line of credit agreement for $1,500,000, renewable in July 
of 1999.  The agreement is collateralized by eligible accounts receivable, 
inventory, and other tangible and intangible assets and contains financial 
covenants including working capital and debt ratios, as well as maximum loss 
provisions. 

Cash on hand, cash generated from operations, as well as the line of credit 
should enable the Company to meet its operating and working capital needs 
during the next twelve months.

                                                                             7


<PAGE>

PART II.  OTHER INFORMATION

          Item 1.   LEGAL PROCEEDINGS

                    None

          Item 2.   CHANGES IN SECURITIES

                    None

          Item 3.   DEFAULTS UPON SENIOR SECURITIES

                    None

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

                    None

          Item 5.   OTHER INFORMATION

                    None

          Item 6.   EXHIBITS AND REPORTS ON FORM 8-K

                    None


                                                                              8



<PAGE>

SIGNATURES

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.


                                       TELTONE CORPORATION
                                       (Registrant)



Date  October 26, 1998                 By  /s/ RICHARD W. SOSHEA    
                                           -----------------------------------
                                           Richard W. Soshea
                                           President & Chief Executive Officer




Date  October 26, 1998                 By  /s/ DEBRA L. GRIFFITH       
                                           ------------------------------------
                                           Debra L. Griffith
                                           Vice President Finance & 
                                           Chief Financial Officer


                                                                             9