UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549 FORM
10-QSB (Mark One)xQUARTERLY REPORT UNDER SECTION 13 OR 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2001 ̈TRANSITION REPORT PURSUANT TO SECTION 13
  OR 15(d) OF THE SECURITIES ACT OF 1934For the transition
  period from ____________ to ____________Commission file number 0-011275TELTONE CORPORATION(Exact name of registrant as
specified in
  its charter)WASHINGTON
  91-0839067(State or other jurisdiction of
  incorporation or organization)
  (I.R.S. Employer Identification No.)22121  20th
  Avenue SE, Bothell, Washington
  98021(Address of principal executive offices)
  (Zip Code)(425) 487-1515
(Registrant's telephone number, including
  area code)N/A(Former name, former address and former
  fiscal year) Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 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. YesxNo ̈ APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check
whether the registrant filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. 
Yes ̈No ̈ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practicable
date. 6,865,503 shares of common stock
  outstanding as of May 14, 2001.
 Transitional Small Business Disclosure Format
(Check One):                   Yes ̈Nox    Index

PART I.
  FINANCIAL INFORMATION (Unaudited)Item 1.
  Balance Sheets at March 31, 2001 and
  June 30, 2000Statements of Operations for
  the three months and nine months ended March 31, 2001 and 2000Statements of Cash Flows for
  the nine months ended March 31, 2001 and 2000Notes to
  Unaudited Financial StatementsItem
  2.
  Managements
  Discussions and Analysis of Financial Condition and Results of OperationsPART II.
  OTHER INFORMATIONItem 1.
  Legal ProceedingsItem 2.
  Changes in
  SecuritiesItem 3.
  Defaults
  Upon Senior SecuritiesItem
  4.
  Submission
  of Matters to a Vote of Security HoldersItem 5.
  Other InformationItem 6.
  Exhibits
  and Reports on Form 8-KSignaturePART 1  FINANCIAL INFORMATION

Item 1.  Financial Information(Unaudited)

Balance
Sheets at March 31, 2001 and June 30, 2000

Statements
of Operations for the three months and nine months ended March 31, 2001 and
2000

Statements
of Cash Flows for the nine months ended March 31, 2001 and 2000

Notes
to Unaudited Financial Statements

TELTONE
CORPORATIONBALANCE SHEETSMarch 31, 2001
and June 30, 2000
(Unaudited)

ASSETS
  March
  31
  2001
  June
  30
  2000Current assetsCash and cash equivalents
  $1,185,917
  $503,592Trade accounts receivable (net of
  allowance for doubtful accounts of 
  $42,738 and $27,248)
  866,423
  1,966,907InventoriesRaw materials
  778,305
  523,227Work in process
  96,115
  157,525Finished goods
  399,715
  445,826Total inventories
  1,274,135
  1,126,479Other current assets
  127,887
  55,629Total current assets
  3,454,362
  3,652,606Property, plant and
  equipment - net
  627,512
  534,376TOTAL
  $4,081,874
  $4,186,982LIABILITIES AND
  STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable - trade
  $328,693
  $536,393Accrued compensation and benefits
  600,642
  703,029Accrued warranty expense
  47,384
  57,911Deferred revenue
  153,111
  76,263Other accrued expenses
  30,892
  54,618Note payable  current portion
  13,709
  31,779Total current liabilities
  1,174,431
  1,459,993Note payable 
  long-term portion
  5,529Stockholders' equityConvertible preferred stock -
  no par value; authorized 6,000,000 shares; 876,684 and 905,364 shares issued
  and outstanding ($1,753,368 and $1,810,728 liquidation preference)
  1,665,236
  1,722,596Common stock - no par value;
  authorized 20,000,000 shares; 6,865,503 and 6,294,323 shares issued and
  outstanding
  3,811,195
  3,583,885Deferred stock compensation
  (73,150)Accumulated deficit
  (2,495,838)
  (2,585,021)Stockholders' equity
  2,907,443
  2,721,460TOTAL
  $4,081,874
  $4,186,982The accompanying notes are an integral
part of these financial statements.

TELTONE
CORPORATIONSTATEMENTS OF OPERATIONSFor the Three
Months and Nine Months Ended March 31, 2001 and 2000
(Unaudited)

Three
  Months
  Ended March 31
  Nine
  Months
  Ended March 312001
  2000
  2001
  2000Net sales
  $1,951,824
  $2,889,273
  $7,085,468
  $8,547,602Cost of goods sold
  937,573
  1,372,199
  3,088,805
  4,005,568Gross margin on sales
  1,014,251
  1,517,074
  3,996,663
  4,542,034Operating expensesSelling, general and administrative
  1,152,945
  1,252,638
  4,185,676
  3,635,843Engineering and development
  525,949
  345,093
  1,392,852
  973,647Total operating
expenses
  1,678,894
  1,597,731
  5,578,528
  4,609,490Loss from operations
  (664,643)
  (80,657)
  (1,581,865)
  (67,456)Other income (expense)
  15,602
  (599)
  51,048
  4,349Gain on sale of
  product line
  
  
  1,620,000(Loss) income before
  tax
  (649,041)
  (81,256)
  89,183
  (63,107)Income tax provisionNet (loss) income
  $(649,041)
  $(81,256)
  $89,183
  $(63,107)Basic net income
  (loss) per common share
  $(.10)
  $(.01)
  $.01
  $(.01)Average common shares
  outstanding
  6,515,503
  6,114,671
  6,455,624
  6,091,871Diluted net (loss)
  income per common and potential common share
  $(.10)
  $(.01)
  $.01
  $(.01)Average common and
  potential common shares outstanding
  6,515,503
  6,114,671
  7,605,523
  6,091,871The accompanying notes are an integral part of these financial statements.

TELTONE
CORPORATIONSTATEMENTS OF CASH FLOWSFor the Nine
Months Ended March 31, 2001 and 2000
(Unaudited)

Nine
  Months
  Ended March 312001
  2000Cash flows from
  operating activities:Net income (loss)
  $89,183
  $(63,107)Adjustments to
  reconcile net income (loss) to net cash used for operating activities:Depreciation
  182,324
  93,221Gain on sale of product line
  (1,620,000)Changes in:Accounts receivable
  1,100,484
  (285,097)Inventories
  (422,840)
  (219,827)Accounts payable and accrued
  liabilities
  (267,492)
  107,097Other current assets
  (72,258)
  (25,122)Cash used for operating
  activities
  (1,010,599)
  (392,835)Cash flows from
  investing activities:Net proceeds from sale of
  product line
  1,895,184Purchase of property, plant and
  equipment
  (275,460)
  (195,845)Cash provided by (used for) investing activities
  1,619,724
  (195,845)Cash flows from
  financing activities:Repayment of note payable
  (23,600)
  (21,823)Employee stock sales, net
  96,800
  47,502Cash provided by financing activities
  73,200
  25,679Increase (decrease) in
  cash
  682,325
  (563,001)Beginning of period
  503,592
  780,590End of period
  $1,185,917
  $217,589The accompanying notes are an integral part of these financial statements.

TELTONE
CORPORATIONNOTES TO UNAUDITED FINANCIAL STATEMENTS



1.BASIS OF PRESENTATION

The unaudited Interim Financial
Statements reflect all adjustments which are, in the opinion of management,
necessary to present fairly the financial condition and the results for the
interim periods.  The results of
operations for the periods ended March 31, 2001, are not necessarily indicative
of operating results to be expected for the full year.  Portions of the accompanying financial
statements are derived from the June 30, 2000 audited financial statements of
the Company.  These interim condensed
financial statements should be read in conjunction with the June 30, 2000 audited
financial statements filed on form 10-KSB.

2.SEGMENT INFORMATION

The operations of the Company have been
organized into three principal business segments, Remote Voice, Telecom
Equipment, and ASICs (Application Specific Integrated Circuits).  The Remote Voice segment includes
software-based telecommuting products. 
The Telecom Equipment segment includes network simulation equipment and
line sharing switches.  The ASIC segment
was a line of semiconductors for telecom applications, which was sold during
the first quarter of fiscal 2001 (see Note 6). 
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in Note 1 to the
annual financial statements.  The
Companys reportable segments have been determined based on the nature of its
operations, products offered to customers, and information used by
management.  Operating results and other
financial data for each segment are as follows (in thousands):

Remote
  Voice
  Telecom
  Equipment
  ASIC
  TotalThree
  Months Ended March 31, 2001 and 2000Net Sales2001
  482
  1,470
  
  1,9522000
  738
  1,543
  608
  2,889Net (Loss) Income2001
  (837)
  188
  
  (649)2000
  (574)
  396
  97
  (81)Depreciation2001
  20
  5Remote
  Voice
  Telecom
  Equipment
  ASIC
  TotalNine
  Months Ended March 31, 2001 and 2000Net Sales2001
  1,347
  5,329
  409
  7,0852000
  1,969
  4,688
  1,891
  8,548Net Income (Loss)2001
  (2,868)
  1,172
  1,785
  892000
  (1,737)
  1,418
  256
  (63)Depreciation2001
  66
  22
  
  88Identifiable Assets2001
  651
  1,781
  
  2,432There were no intersegment sales.  Segment operating results are measured based
on net income or loss.  Assets and
related depreciation were not separated by reportable segment prior to June 30,
2000.  Facilities expense and other
indirect expenses were allocated to reportable segments using various methods
such as percentage of square footage used to total square footage and estimated
allocation of time spent by various personnel. 
Total identifiable assets and related depreciation of the segments do
not equal the financial statement totals at March 31, 2001, because certain
assets are not allocated to the segments, primarily cash and cash equivalents
and common use property and equipment.

3.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 1,900,000 common shares to key employees of the Company.   Of this total, options to purchase
1,280,500 shares of common stock are outstanding and 202,500 shares remain
available for grant at March 31, 2001.  
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 at March 31, 2001. 
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.

4.RESTRICTED STOCK AGREEMENT

On
March 29, 2001, the Company issued 350,000 shares of common stock subject to
certain restrictions to the CEO, resulting in deferred compensation of $73,500
based on fair market value on the date of issuance.  The deferred stock compensation will be amortized over the
three-year vesting period.

5.LEASE COMMITMENTS

The Company was released from its lease
on its headquarters facility on April 1, 2001, and entered into a new lease for
a smaller facility.  The agreement has a
five-year term with provisions for cancellation after three years.  Future minimum lease payments for the years
ending June 30 are as follows:

2002
  
  237,0962003
  
  237,0962004
  
  210,844$685,036

6.FEDERAL INCOME TAX

At March 31, 2001, approximately
$12,119,000 in net operating loss carryforwards were available to offset future
taxable income and expire from 2001 through 2020.  If substantial changes in the Companys ownership should occur,
there may be annual limitations on the utilization of such carryforwards.   Although the Company has adopted the
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, there is no tax asset recognized due to the Companys loss history and
therefore uncertainty regarding future taxable income.



7.NET INCOME (LOSS) PER SHARE

Basic net income (loss) per common share
is based on the weighted average number of common shares outstanding during the
period.  Diluted earnings per share is
computed using the weighted average number of common shares outstanding and
potential common shares outstanding. 
Potential common shares result from the assumed exercise of outstanding
stock options and convertible preferred stock. 
Diluted earnings per share excludes the effect of antidilutive stock
options, and for periods in which there is a loss, the convertible preferred
stock.

A reconciliation of the number of average
common shares outstanding to the number of average common and potential common
shares outstanding is as follows:

Three
  Months
  Ended March 31,
  Nine
  Months
  Ended March 31,2001
  2000
  2001
  2000Average
  common shares outstanding
  6,515,503
  6,114,671
  6,455,624
  6,091,871Dilutive effect of
  potential common shares
  
  
  1,149,899Average
  common and potential common shares outstanding
  6,515,503
  6,114,671
  7,605,523
  6,091,8718.SALE OF ASIC
SEGMENT

In
August 2000 the Company sold assets related to its ASIC segment to CP Clare
Corporation.  Total consideration for
the assets was $1,975,000.

9.RECENT PRONOUNCEMENTS

In
December 1999 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which summarizes the SECs views on applying generally accepted
accounting principles to the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC.  Adoption is currently required by the Company in fiscal
2001.  Management is currently
evaluating the impact that SAB 101 may have on the financial position and
results of operations of the Company.

In June 1998 the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Financial Instruments and for
Hedging Activities (SFAS 133), which provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. SFAS 133 was adopted by the Company effective July 1, 2000.
Adoption of this statement did not have any impact on the Company's financial
position or results of operations because the Company currently holds no
derivative financial instruments and does not currently engage in hedging
activities.

In March 2000 the
Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN)
No. 44, Accounting for Certain Transactions Involving Stock
Compensation.  FIN 44 clarifies and
modifies the application of Accounting Principles Board Opinion No. 25 for
certain issues relating to stock compensation and was adopted by the Company
effective July 1, 2000.  Adoption of
this standard had no impact on the Company's financial position or results of
operations.

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

Statement of Forward-Looking
Information

Statements
contained herein that are not based on historical fact, including without
limitation statements containing the words believes, may, will, estimate,
continue, anticipates, intends, expects and words of similar import,
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, events or
developments to be materially different from any future results, events or
developments expressed or implied by such forward-looking statements.  Such factors include, among others, the
following: general economic and business conditions, both nationally and in the
regions in which the Company operates; technology changes; competition; changes
in business strategy or development plans; the ability to attract and retain qualified
personnel; liability and other claims asserted against the Company; and other
factors referenced in the Company's filings with the Securities and Exchange
Commission.  Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements.  The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future results, events or developments.

Overview

Teltone Corporation designs, develops and
markets industry award-winning remote voice solutions that extend enterprise
communications infrastructure to branch offices and other remote locations.
With the OfficeLink line of products, companies are afforded seamless remote
access to the PBX/ACD as well as CTI and intelligent routing applications.
Teltone also provides a line of award-winning telecom test tools that can meet
the needs of sales and tradeshow demonstration, engineering test and production
test applications. Customers for these products include any manufacturer or
developer of telecom equipment, which provides connectivity to the global
public telephone network.  Established
in 1968, Teltone is a public corporation, listed on the NASD electronic OTC
Bulletin Board (TTNC).

Results of Operations

In
the third quarter of fiscal 2001 net sales decreased 14% over the third quarter
of the prior year after adjustment for the sale of the ASIC segment in August
2000, and gross margin decreased from 53% to 52% due to non-recurring charges
associated with the decision by management to outsource circuit board
assembly.  Gross margin for the quarter
ending March 31, 2001, would have been 57% after adjustment for the costs of
discontinuing the Companys assembly production line.  This change is expected to result in improved gross margin for
the Telecom Equipment segment in future periods.  Operating expenses increased 4% due to increased spending in
research and development on Remote Voice products which was offset by lower
selling, general and administrative expenses as a result of cost containment
efforts. 
During the quarter employment was reduced by 25% to 62 employees;
however, the reduced costs associated with this reduction of approximately $280,000
per quarter will not be realized until the fourth fiscal quarter due to
severance payments.  This reduction
affected all areas of the Company; however, the most significant reductions
were in sales and marketing and in production due to the decision to outsource
assembly.

In
the nine months ended March 31, 2001, net sales and gross margin were unchanged
after adjustment for the ASIC sale when compared to the same period in the
prior year.  Remote Voice sales were
down 32% due to the termination of the Companys private label agreement with
Avaya and Telecom Equipment sales were higher by 14% due to higher sales of
line sharing products to the utility companies. Operating expenses were 20%
higher due to increases in Remote Voice engineering and development costs.  There was a gain of $1,620,000 on the sale
of the ASIC segment.   Management has
made several changes in operating strategies that should result in lower
operating expenses in future quarters. 
These changes, which include outsourced assembly, reduced staff, as well
as the decision to move to a smaller facility, approximate $1,500,000
annually.  On April 1, 2001, the Company
was released from its lease on its headquarters facility in Bothell and entered
into a new lease in the same business park. 
This change reduces the Companys available square footage from 47,000
to 18,000 and reduces its projected facilities costs by over $400,000
annually.  This 62% reduction in square
footage is accomplished through a combination of reduced need for manufacturing
space, reduction in staff, as well as significant use of the Companys
OfficeLink2000 telecommuting product which will enable 27% of  employees to work from home while
maintaining seamless connectivity to the office infrastructure.

The
Company has $12,119,000 in net operating loss carryforwards available to offset
future taxable income which expire from 2001 through 2020.  If substantial changes in the Companys
ownership occur, there may be annual limitations on the utilization of such
carryforwards.  The Company has not
recognized a tax asset for the operating loss carryforwards due to the
uncertainty regarding the amount of future taxable income.

After the sale of the ASIC segment, the
Company now operates in two separate business segments.  Telecom Equipment, which includes simulators
and line sharing products, and the Remote Voice segment, which includes remote
voice products.

Net
  Sales by Segment
  For Nine Months Ended March 31,
  (in thousands)Remote
  Voice
  Telecom
  Equipment
  ASIC
  Total2001
  1,347
  5,329
  409
  7,0852000
  1,969
  4,688
  1,891
  8,548Net
  Income (Loss) by Segment
  For Nine Months Ended March 31,
  (in thousands)Remote
  Voice
  Telecom
  Equipment
  ASIC
  Total2001
  (2,868)
  1,172
  1,785
  892000
  (1,737)
  1,418
  256
  (63)Remote Voice Segment

During the nine months ended March 31,
2001, net sales decreased by 32%.  This
decrease was due to the termination of the Companys private label agreement
with Avaya (formerly Lucent) who has been a reseller of the OfficeLink
2000.  The Companys relationship with
Avaya had not been profitable, and the termination of this agreement resulted
in Managements decision to reduce the level of investment in this segment
commensurate with the lowered expectations for growth in sales with the goal of
profitable results in fiscal 2002.

Telecom
Equipment Segment

The Telecom Equipment segment grew 14%
over the same period of the prior year due to increasing sales of line sharing
products, although profitability was lower as line sharing margins are lower.  In addition, operating expenses were higher
due to the costs associated with the introduction of the Telecom Simulation
Platform (TSP).  The TSP provides T-1
and analog simulation by using software modules running on a standard hardware
platform.

ASIC
Segment

In
August 2000 the Company entered into an agreement to sell assets related to its
ASIC segment to C.P. Clare Corporation. 
Total consideration for the assets was $1,975,000.

Liquidity and Capital Resources

The Company had cash on hand at March 31,
2001, of $1,186,000 in addition to a line of credit agreement for $1,500,000,
renewable in July 2001.  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.  As of March 31, 2001, there were no
borrowings outstanding under this line.

During the first fiscal quarter the ASIC
(Application Specific Integrated Circuits) segment was sold to CP Clare
Corporation.  Gross proceeds were
$1,975,000 and are being used for working capital.  There was a gain on the sale of $1,620,000.

Accounts receivable decreased due to
lower sales levels in the current quarter, as well as the sale of the ASIC segment
in the first quarter.  Cash on hand was
lower due to operating losses year to date.

Options to purchase 192,500 shares of
common stock were exercised during the first nine months of the fiscal year at
prices ranging from $.30 to $.60, which provided the Company with approximately
$97,000 in cash.

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

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

(a)         Exhibits
                                        None

(b)        Form 8-K
                                        None





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
  May 14, 2001
  
  By
  /s/ DEBRA L. GRIFFITHDebra
  L. GriffithPresident
  & Chief Executive OfficerDate
  May 14, 2001
  
  By
  /s/ DEBRA L. GRIFFITHDebra
  L. GriffithActing
  Chief Financial Officer