# U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-Q

(Mark One)

|[ X ]                                        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
|-------------------------------------------- |  | -----------------------------------------------------------------------------------------
|For the Quarterly Period Ended June 30, 2004
|[   ]                                        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _____________________________________________
 to __________________________________________________________

# COMMISSION FILE NUMBER:    0-17893

# TELTRONICS, INC.(Exact name of registrant as specified in its charter)

|Delaware
(State or other jurisdiction of Incorporation or organization) | 59-2937938
(IRS Employer Identification Number)
|----------------------------------------------------------------------- | -----------------------------------------------

# 2150 Whitfield Industrial Way, Sarasota, Florida          34243
(Address of principal executive offices including zip code)

# Issuer's telephone number, including area code:          (941) 753-5000

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 Exchange Act Rule 12-b-2 of the Exchange Act.) Yes [   ] No [
 X ]

As of August 12, 2004, there were 7,861,539 shares of
 the Registrant's Common Stock, par value $.001, outstanding.

Exhibit index appears on page 34.

---

# TABLE OF CONTENTS

|              |                                                                                                                             | PAGE
|------------- | --------------------------------------------------------------------------------------------------------------------------- | ----
|PART I        | FINANCIAL INFORMATION                                                                                                       |     
|ITEM 1.       | FINANCIAL STATEMENTS                                                                                                        |     
|              | Condensed Consolidated Balance Sheets at June 30, 2004(Unaudited) and December 31, 2003                                     | 3-4 
|              | Condensed Consolidated Statements of Operations (Unaudited)for the Three months and Six months ended June 30, 2004 and 2003 | 5   
|              | Condensed Consolidated Statements of Cash Flows (Unaudited)for the Six months ended June 30, 2004 and 2003                  | 6-7 
|              | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                            | 8   
|ITEM 2.       | MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS                                        | 22  
|ITEM 3.       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK                                                                   | 30  
|ITEM 4.       | CONTROLS AND PROCEDURES                                                                                                     | 30  
|PART II       | OTHER INFORMATION                                                                                                           |     
|ITEM 1.       | LEGAL PROCEEDINGS                                                                                                           | 31  
|ITEM 2.       | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                                   | 31  
|ITEM 3.       | DEFAULTS UPON SENIOR SECURITIES                                                                                             | 31  
|ITEM 4.       | SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS                                                                          | 32  
|ITEM 5.       | OTHER INFORMATION                                                                                                           | 32  
|ITEM 6.       | EXHIBITS AND REPORTS ON FORM 8-K                                                                                            | 32  
|SIGNATURE     |                                                                                                                             | 33  
|EXHIBIT INDEX | 34                                                                                                                         

-2-

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# PART I  FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

# TELTRONICS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

# ASSETS

|                                                            | June 30,

2004 
(Unaudited) | December 31, 
2003
|----------------------------------------------------------- | --------------------------- | ------------------
|Current assets:                                             |                             |                   
|Cash and cash equivalents                                   | $     393,275               | $     146,277     
|Accounts receivable, net of allowance for doubtful accounts
|of $386,450 at June 30, 2004 and $266,106 at               
|December 31, 2003                                           | 7,830,434                   | 3,560,936         
|Costs and estimated earnings in excess of billings on      
|uncompleted contracts                                       | 160,417                     | 539,663           
|Inventories, net                                            | 4,453,484                   | 5,491,472         
|Prepaid expenses and other current assets                   | 640,724                     | 433,955           
|                                                           
|Total current assets                                        | 13,478,334                  | 10,172,303        
|Property and equipment, net                                 | 4,484,282                   | 5,469,801         
|Goodwill                                                    | 241,371                     | 241,371           
|Other intangible assets, net                                | 576,063                     | 192,835           
|Other assets                                                | 301,536                     | 243,294           
|                                                           
|Total assets                                                | $19,081,586                 | $16,319,604       
|                                                           

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

-3-

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# TELTRONICS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS - Continued

# LIABILITIES AND SHAREHOLDERS DEFICIENCY

|                                                          | June 30,

2004

(Unaudited) | December 31,

2003
|--------------------------------------------------------- | --------------------------- | ------------------
|Current liabilities:                                      |                             |                   
|Current portion of long-term debt, including notes       
|payable in default                                        | $ 3,581,089                 | $ 11,225,868      
|Current portion of capital lease obligations              | 25,207                      | 24,163            
|Accounts payable                                          | 8,627,334                   | 5,609,512         
|Billings in excess of costs and estimated earnings       
|on uncompleted contracts                                  | 149,475                     | 469,210           
|Accrued expenses and other current liabilities            | 2,494,663                   | 2,274,693         
|Deferred revenue                                          | 1,709,668                   | 1,457,852         
|                                                         
|Total current liabilities                                 | 16,587,436                  | 21,061,298        
|                                                         
|Long-term liabilities:                                   
|Long-term debt, net of current portion                    | 9,083,278                   | 1,290,685         
|Capital lease obligations, net of current portion         | 78,388                      | 92,010            
|                                                         
|Total long-term liabilities                               | 9,161,666                   | 1,382,695         
|                                                         
|Commitments and contingencies                            
|Shareholders' deficiency:                                
|Common stock, $.001 par value, 40,000,000 shares         
|authorized, 7,841,539 and 7,729,736 issued and           
|outstanding at June 30, 2004 and December 31, 2003,      
|respectively                                              | 7,842                       | 7,730             
|Non-voting common stock, $.001 par value, 5,000,000      
|shares authorized, zero shares issued and outstanding     | --                          | --                
|Preferred Series A stock, $.001 par value, 100,000 shares
|authorized, 100,000 shares issued and outstanding         | 100                         | 100               
|Preferred Series B Convertible stock, $.001 par value,   
|25,000 shares authorized, 12,625 shares issued and       
|outstanding                                               | 13                          | 13                
|Preferred Series C Convertible stock, $.001 par value,   
|50,000 shares authorized, 40,000 shares issued and       
|outstanding                                               | 40                          | 40                
|Additional paid-in capital                                | 24,299,826                  | 24,169,538        
|Accumulated other comprehensive loss                      | (36,262)                    | (42,485)          
|Accumulated deficit                                       | (30,939,075)                | (30,259,325)      
|                                                         
|Total shareholders' deficiency                            | (6,667,516)                 | (6,124,389)       
|                                                         
|Total liabilities and shareholders' deficiency            | $ 19,081,586                | $ 16,319,604      
|                                                         

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

-4-

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# TELTRONICS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

|                                    | Three Months Ended June 30, |                 | Six Months Ended June 30,
|----------------------------------- | --------------------------- | --------------- | -------------------------
|
|Net sales                           |                             |                 |                          
|Product sales and installation      | $  9,627,899                | $ 10,628,422    |                          
|Maintenance and service             | 2,516,415                   | 2,340,817       |                          
|                                   
|                                    | 12,144,314                  | 12,969,239      |                          
|Cost of goods sold                  | 7,634,954                   | 8,039,172       |                          
|                                   
|Gross profit                        | 4,509,360                   | 4,930,067       |                          
|                                   
|Operating expenses:                
|General and administrative          | 1,189,362                   | 1,543,271       |                          
|Sales and marketing                 | 2,040,870                   | 2,521,233       |                          
|Research and development            | 773,295                     | 1,565,027       |                          
|Depreciation and amortization       | 294,384                     | 323,466         |                          
|                                   
|                                    | 4,297,911                   | 5,952,997       |                          
|                                   
|Income (loss) from operations       | 211,449                     | (1,022,930)     |                          
|                                   
|Other income (expense):            
|Interest                            | (419,197)                   | (297,916)       |                          
|Financing                           | (95,479)                    | (84,798)        |                          
|Other                               | 2,293                       | 926             |                          
|                                   
|                                    | (512,383)                   | (381,788)       |                          
|                                   
|Loss before income taxes            | (300,934)                   | (1,404,718)     |                          
|Provision for income taxes          | 1,698                       | 3,900           |                          
|                                   
|Net loss                            | (302,632)                   | (1,408,618)     |                          
|Dividends on Preferred Series      
|B and C Convertible stock           | 156,813                     | 150,500         |                          
|                                   
|Net loss available to              
|common shareholders                 | $    (459,445)              | $ (1,559,118)   |                          
|                                   
|Net loss per share:                
|Basic and Diluted                   | $         (0.06)            | $        (0.24) |                          
|                                   
|Weighted average shares outstanding | 7,838,686                   | 6,514,821       |                          
|                                   

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

-5-

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# TELTRONICS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

# (Unaudited)

|                                                                  | Six Months Ended June 30,
|----------------------------------------------------------------- | -------------------------
|
|OPERATING ACTIVITIES:                                             |                          
|Net loss                                                          | $  (369,282)             
|Adjustments to reconcile net loss to net cash                    
|provided by (used in) operating activities:                      
|Provision for doubtful accounts                                   | 114,043                  
|Provision for slow moving inventories                             | 116,422                  
|Depreciation and amortization                                     | 1,042,349                
|Amortization of other intangible assets                           | 48,725                   
|Amortization of deferred financing costs                          | 66,900                   
|Fair value of Common stock issued for 401(k) plan                 | --                       
|Gain on disposal of property and equipment                        | --                       
|Amortization of deferred compensation costs                       | --                       
|Severance expense for employee stock option                       | 3,480                    
|Changes in operating assets and liabilities net of acquisition:  
|Accounts receivable                                               | (4,411,144)              
|Costs and estimated earnings in excess of billings on             |                          
|uncompleted contracts                                             | 379,246                  
|Inventories                                                       | 1,062,381                
|Prepaid expenses and other current assets                         | (206,769)                
|Other assets                                                      | (71,742)                 
|Accounts payable                                                  | 2,545,662                
|Billings in excess of costs and estimated earnings on            
|uncompleted contracts                                             | (319,735)                
|Accrued expenses and other current liabilities                    | 216,815                  
|Deferred revenue                                                  | 251,816                  
|                                                                 
|Net cash flows provided by (used in) operating activities         | 469,167                  
|                                                                 
|INVESTING ACTIVITIES:                                            
|Acquisition of property and equipment                             | (56,830)                 
|Proceeds from sale of property and equipment                      | --                       
|Payments for inventories and customer contracts and relationships
|of SMARTCALL                                                      | (259,818)                
|                                                                 
|Net cash flows used in investing activities                       | (316,648)                
|                                                                 
|FINANCING ACTIVITIES:                                            
|Net borrowings on line of credit                                  | 229,367                  
|Net principal repayments on loans, notes and capital leases       | (94,131)                 
|Proceeds from issuance of Common stock                            | 3,520                    
|Dividends paid on Preferred Series B and C Convertible stock      | (50,500)                 
|                                                                 
|Net cash flows provided by financing activities                   | 88,256                   
|                                                                 
|Effect of exchange rate changes on cash                           | 6,223                    
|                                                                 
|Net increase (decrease) in cash and cash equivalents              | 246,998                  
|Cash and cash equivalents  beginning of period                   | 146,277                  
|                                                                 
|Cash and cash equivalents - end of period                         | $    393,275             
|                                                                 

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

-6-

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# TELTRONICS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

# (Unaudited)

|                                                              | Six Months Ended June 30,
|------------------------------------------------------------- | -------------------------
|
|SUPPLEMENTAL NONCASH FINANCING AND                            |                          
|INVESTING ACTIVITIES:                                        
|Capital lease obligation incurred                             | $         --             
|Fair value of Common stock issued for compensation of        
|$200,000 less amortization expense of $100,000,              
|included in deferred compensation                             | --                       
|Purchase of Vortex technology for debt                        | --                       
|Unpaid dividends on Preferred Series B and C Convertible     
|stock included in accounts payable                            | 256,813                  
|Unpaid dividends on Preferred Series B and C Convertible     
|stock included in accrued expenses                            | 3,155                    
|Fair value of Common stock issued for SMARTCALL              
|Limited acquisition                                           | 70,000                   
|Fair value of consideration for SMARTCALL Limited acquisition
|included in accounts payable                                  | 215,347                  
|Fair value of accounts receivable exchanged as consideration 
|for inventories from SMARTCALL Limited acquisition            | 27,603                   
|Financing fee included in amortization of deferred           
|financing costs, as a result of modifying terms of certain   
|warrants                                                      | 53,400                   

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

-7-

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# 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., 36371 Yukon Inc. and Teltronics Limited. 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 Company released Cypreon in the fourth quarter of 2003.

Effective February 1, 2004, the Company through its
 UK subsidiary, Teltronics Limited, entered into a Business Sale and Purchase Agreement (Business Agreement)
 with SMARTCALL Limited (SMARTCALL).

The Company and its UK subsidiary also entered into
 a Restrictive Covenant and Consultancy Agreement (Consultancy Agreement) with Beck & Cook Management
 Services with an effective date of February 1, 2004.

The Company through the execution of the Business Agreement
 and Consultancy Agreement, collectively referred to as the Acquisition, acquired the 20-20 maintenance
 business and the related service inventories of SMARTCALL located in the UK.

This acquisition will enable the Company to change its
 operating model in the UK and Europe from a pure distributor sales model to a supported sales model
 selling through distribution and direct. The acquisition will also help the Company fund expansion of
 its operations in the UK and Europe through the existing maintenance revenues of the business acquired.

The final allocation of the $572,000 USD purchase price
 to the fair values of assets acquired and liabilities assumed is summarized below. The preliminary purchase
 price allocation has changed since March 31, 2004 based on completion of the Companys analysis. 
 At March 31, 2004, $432,000 was preliminarily allocated to goodwill.

| | Inventories                          | $ | 140,000  
| | ------------------------------------ | - | ---------
| | Customer contracts and relationships |   | 432,000  
| |                                      | $ | 572,000  
| | Consideration payable                | $ | (502,000)
| | Fair value of Common stock issued    |   | (70,000) 
| |                                      | $ | (572,000)

-8-

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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 months and six months ended June 30, 2004, are not necessarily indicative
 of the results that may be expected for the year ending December 31, 2004.

The balance sheet at December 31, 2003 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, 2003.

# NOTE 2 - OPERATIONAL MATTERS

The condensed consolidated financial statements have
 been prepared assuming the Company will continue as a going concern. The Company had incurred net losses
 of approximately $3.3 million, $4.6 million and $6.7 million for the years ended December 31, 2003,
 2002, and 2001, respectively, and as discussed below, was in arrears on three significant debt obligations.
 As a result of the items noted above, which conditions existed as of December 31, 2003, the Report of
 Independent Certified Public Accountants for the year ended December 31, 2003 indicated that there was
 substantial doubt regarding the Companys ability to continue as a going concern.

Operations

Sales have decreased over 15% and 14% from 2001 to 2002
 and 2002 to 2003, respectively. This has primarily been the result of a weak telecommunications market
 during the period. Due to the fixed nature of a majority of the Companys expenses, the Company implemented
 cost cutting measures which resulted in a reduction of operating expenses of $3.2 million from 2001
 to 2002 and $2.7 million from 2002 to 2003. The cost cutting measures also contributed to increased
 gross profit margin percentages in 2002 and 2003. As a majority of the expense reductions in 2003 were
 made in June 2003, we expect to continue to realize the benefits from these reductions during 2004.

We released two new product offerings late in the fourth
 quarter of 2003. Although not yet realized, we believe that these products should contribute additional
 sales to the Company and not result in significant additional costs. If sales dont meet the forecasted
 amounts, the Company will continue to evaluate various operational and financing alternatives.

Secured Promissory Note

On August 16, 2004, the Company entered into a Patent
 Transfer Agreement with Harris Corporation (Harris) under which the Company conveyed and transferred
 all of its rights, title and interest in certain patents initially acquired from Harris in exchange
 for consideration consisting of the following items: (i) a credit in the amount of $578,022 of accrued
 and unpaid interest as of June 1, 2004 owed to Harris under the terms of the Secured Promissory Note
 (Secured Note), (ii) a credit in the amount of $406,792 of unpaid and past due scheduled principal
 payments as of June 1, 2004 owed to Harris under the terms of the Secured Note, and (iii) a credit of
 $290,414 representing interest and regularly scheduled principal payments that will be due under the
 terms of the Secured Note for the period from July 1, 2004 through September 1, 2004. The interest rate
 will revert from the default rate of 12.5% to the original rate of 8.0%, effective June 1, 2004. Consequently,
 the Company has classified $8.2 million of the Secured Note in long-term debt as of June 30, 2004.

-9-

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The Secured Note with Harris requires a monthly payment
 that is due on the first of each month, but no later than the fourth of each month. Certain machinery,
 equipment and inventory represent the security on the Secured Note. As of December 31, 2003, the Company
 had been unable to make all payments on the Secured Note since September 2003. Harris had all the rights
 of a secured party including:

- declaring the entire unpaid balance of the secured note,
 together with interest accrued thereon, if any and all other sums due from us to be immediately due
 and payable;
immediately taking possession or control of the collateral;
notifying any and all creditors of such event of default
 and of Harris enforcement of any rights under the security agreement; or
selling, assigning or otherwise liquidating, or directing
 Teltronics to sell, assign or otherwise liquidate any or all of the collateral and to take possession
 of the proceeds of any such sale or liquidation;
- immediately taking possession or control of the collateral;
notifying any and all creditors of such event of default
 and of Harris enforcement of any rights under the security agreement; or
selling, assigning or otherwise liquidating, or directing
 Teltronics to sell, assign or otherwise liquidate any or all of the collateral and to take possession
 of the proceeds of any such sale or liquidation;
- notifying any and all creditors of such event of default
 and of Harris enforcement of any rights under the security agreement; or
- selling, assigning or otherwise liquidating, or directing
 Teltronics to sell, assign or otherwise liquidate any or all of the collateral and to take possession
 of the proceeds of any such sale or liquidation;

For the six months ended June 30, 2004, the Company
 paid Harris $84,000 that was applied to past due interest payments. In April 2004, the Company and Harris
 agreed to offset $234,000 of a February 2004 product sale by Teltronics to Harris against past due interest
 payments.

As of December 31, 2003, the entire outstanding balance
 on the Secured Note had been classified in the current portion of long-term debt.

The Company is also in arrears on five quarterly dividend
 payments due to Harris on the Preferred Series C Convertible stock at June 30, 2004 that totaled $500,000,
 excluding interest. The Company was in arrears on three quarterly dividend payments at December 31,
 2003 that totaled $300,000, excluding interest. The per share amount of dividends in arrears at June
 30, 2004 and December 31, 2003 was $12.50 and $7.50, respectively.

Senior Secured Promissory Note

For the period October 2003 through March 2004, the
 Company had been unable to make any payments on the Senior Secured Promissory Note (Senior Note) with
 Finova. On April 30, 2004, the Company and Finova entered into a Forbearance Agreement (Agreement)
 through June 30, 2004. In connection with the Agreement, the Company paid $50,000 to Finova on April
 30, 2004. The payment represented $8,582 of accrued interest through April 27, 2004, a fee of $7,000,
 and principal of $34,418.

The Company is evaluating various financial alternatives
 to repay Finova, including the use of future cash flows from operations. If the Company is unsuccessful
 with satisfying the Senior Note to Finova, it would attempt to renegotiate the terms of the Senior Note
 or obtain an extension of the Agreement. There is no assurance that the Company will be successful in
 renegotiating the terms of the Senior Note or the extension of the Agreement. The holders of the Senior
 Note have rights similar to those listed for the Secured Note above. The Senior Note is secured by certain
 machinery and equipment. If we are unsuccessful in satisfying the Senior Note, renegotiating the terms
 of the Senior Note or the extension of the Agreement, Finova could elect to pursue one or all of the
 rights described above. If the Company does not have sufficient liquidity to satisfy the Senior Note,
 the Company could seek protection under the United States Bankruptcy laws.

As of June 30, 2004 and December 31, 2003, the entire
 outstanding balance on the Senior Note has been classified in the current portion of long-term debt.

The Company is also in arrears on three quarterly dividend
 payments due to Finova on the Preferred Series B Convertible stock at June 30, 2004 that totaled $157,813,
 excluding interest. The Company was in arrears on two quarterly dividend payments at December 31, 2003
 that totaled $101,000, excluding interest. The per share amount of dividends in arrears at June 30,
 2004 and December 31, 2003 was $12.50 and $8.00, respectively.

-10-

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If the Company is unable to settle, extend or renegotiate
 the Finova Senior Note, this could constitute an event of default under the Companys agreement with
 CIT. The occurrence of an event of default can result in CIT accelerating the indebtedness outstanding
 under our bank line of credit with CIT and demanding immediate repayment, and unless we cure the defaults,
 CIT could seek a judgment and attempt to seize our assets to satisfy the debt to them. The security
 for our bank line of credit facility consists of substantially all of the Companys present and future
 assets, except for fixed assets.

# Note payable to Tri-Link

The Company was unable to make its scheduled quarterly
 installments in November 2003, February 2004, and May 2004 on the Note Payable (Note) to Tri-Link.
 The Note does not provide for an acceleration of all outstanding amounts if a payment is claimed to
 be past due and therefore, $720,000 of this Note is classified as long-term debt as of June 30, 2004.
 At December 31, 2003, $1,080,000 of this Note was classified as long-term debt. The Company is currently
 in arbitration with Tri-Link regarding various claims against each other, including the non-payment
 of the November 2003, February 2004, May 2004, and August 2004 scheduled quarterly installments on the
 Note (see Note 10).

# NOTE 3 - 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 loss and net loss per share would have been as follows:

|                              | Three Months Ended June 30, | Six Months Ended June 30,
|----------------------------- | --------------------------- | -------------------------
|
|Net loss  as reported        | $                           | (302,632                 
|Stock-based employee compen- 
|sation cost if the fair value |                             |                          
|method had been applied       |                             |                          
|                             
|Net loss  pro forma          |                             |                          
|                             
|Net loss per share:           |                             |                          
|Basic  as reported           |                             |                          
|Basic  pro forma             |                             |                          
|Diluted  as reported         |                             |                          
|Diluted  pro forma           |                             |                          

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.

-11-

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# NOTE 4 - COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) is as follows:

|                             | Three Months Ended June 30, | Six Months Ended June 30,
|---------------------------- | --------------------------- | -------------------------
|
|Net loss                     | $                           | (302,632                 
|Foreign currency translation |                             |                          
|                            
|Total comprehensive loss     |                             |                          
|                            

# NOTE 5 - NET LOSS PER SHARE

Basic net loss per share is computed by dividing net
 loss, adjusted for preferred stock dividends, by the weighted average number of issued common shares
 outstanding during the applicable period. Diluted net loss per share is computed by dividing net 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.

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

|                                    | Three Months Ended June 30, | Six Months Ended June 30,
|----------------------------------- | --------------------------- | -------------------------
|
|Basic                               |                             |                          
|Net Loss                            | $                           | (302,632                 
|Preferred dividends                 |                             | (156,813                 
|                                   
|                                    |                             |                          
|                                   
|Weighted average shares outstanding |                             | 7,838,686                
|                                   
|Net loss per share                  | $                           | (0.06                    
|                                   
|Diluted                            
|Net loss                            |                             |                          
|Preferred dividends                 |                             | (156,813                 
|                                   
|                                    |                             |                          
|                                   
|Weighted average shares outstanding |                             |                          
|Effect of dilutive securities      
|Employee stock options              |                             | ---                      
|Convertible preferred stock         |                             | ---                      
|Convertible note                    |                             | ---                      
|                                   
|Dilutive potential common shares    |                             | 7,838,686                
|                                   
|Net loss per share                  | $                           | (0.06                    
|                                   

For the three months and six months ended June 30, 2004
 and 2003, options to purchase 1,664,000 and 1,747,000 shares of common stock, respectively, were not
 included in the computation of diluted net loss per share because the effect would be anti-dilutive.

For the three months and six months ended June 30, 2004
 and 2003, warrants to purchase 1,190,000 shares of common stock were not included in the computation
 of diluted net loss per share because the effect would be anti-dilutive.

-12-

---

# NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

|                                                      | June 30, 2004 | December 31, 2003
|----------------------------------------------------- | ------------- | -----------------
|
|Costs incurred on uncompleted contracts               | $             | 702,711          
|Estimated earnings                                    |               |                  
|                                                     
|                                                      |               |                  
|Less: Billings to date                                |               |                  
|                                                     
|                                                      |               |                  
|                                                     
|Included in accompanying condensed consolidated      
|balance sheets under the following captions:         
|Costs and estimated earnings in excess of billings on |               |                  
|uncompleted contracts                                 | $             | 160,417          
|Billings in excess of costs and estimated earnings on
|uncompleted contracts                                 |               | (149,475         
|                                                     
|                                                      | $             | 10,942           
|                                                     

Costs and estimated earnings on uncompleted contracts
 includes unbilled revenue of approximately $64,000 and $254,000 as of June 30, 2004 and December 31,
 2003, respectively.

# NOTE 7 - INVENTORIES

The major classes of inventories are as follows:

|                | June 30, 2004 | December 31, 2003
|--------------- | ------------- | -----------------
|
|Raw materials   | $             | 2,127,588        
|Work-in-process |               | 929,270          
|Finished goods  |               | 1,396,626        
|               
|                | $             | 4,453,484        
|               

The valuation allowance for slow moving inventories
 was $948,000 and $1,222,000 as of June 30, 2004 and December 31, 2003, respectively.

-13-

---

# NOTE 8 - OTHER INTANGIBLE ASSETS

The Companys other intangible assets are as follows:

|June 30, 2004 (Unaudited)              
|---------------------------------------
|
|                                       
|Customer List                          
|Patent                                 
|Customer contracts    and relationships
|                                       
|Total                                  
|                                       

|December 31, 2003
|-----------------
|
|                 
|Customer List    
|Patent           
|                 
|Total            
|                 

As a result of the SMARTCALL acquisition, $432,000 of
 the purchase price was allocated to Customer contracts and relationships as of June 30, 2004.

Amortization is provided over the estimated useful lives
 of the respective assets using the straight-line method. Amortization expense related to intangible
 assets was $36,404 and $15,185 for the three months ended June 30, 2004 and 2003, respectively. Amortization
 expense related to intangible assets was $48,725 and $30,370 for the six months ended June 30, 2004
 and 2003, respectively. Estimated amortization expense related to other intangible assets for each of
 the five years in the period ending December 31, 2009 and thereafter is: 2004 - $52,238; 2005 - $87,787;
 2006 - $76,218; 2007 - $76,218; 2008 - $76,218; 2009 - $76,218; thereafter - $131,166.

-14-

---

# NOTE 9  DEBT

Debt consists of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | June 30, 2004(Unaudited) |  | December 31, 2003
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ |  | -----------------
|Secured promissory note - payable to Harris in monthly installments of $96,805 with interest at 8.0%
 commencing May 1, 2002 with a balloon payment of $7,196,801 due May 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | $  8,599,624             |  | $  8,599,624     
|Bank line of credit - On December 22, 1998, the Company's principal lender, 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 year ended December 31, 2003. At June 30, 2004, the Company's
 interest rate was 7.00%. 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 June 30, 2004, the Company had $954,000 available, pursuant to this facility. The availability
 of this unused line of credit is restricted based on availability formulas. See Note 2 for further descriptions. | 1,625,160                |  | 1,395,793        
|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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 219,530                  |  | 251,163          
|Note payable to Tri-Link in quarterly principal installments of $180,000 plus interest at 6.5% commencing
 August 1, 2003, with final payment due May 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 1,980,000                |  | 1,980,000        
|Notes payable to finance companies, payable in monthly installments of $8,000 with interest at approximately
 5%. The notes mature through 2008 and are collateralized by vehicles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 240,053                  |  | 289,973          
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 12,664,367               |  | 12,516,553       
|Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 3,581,089                |  | 11,225,868       
|Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | $        9,083,278       |  | $   1,290,685    

-15-

---

The Company maintains a Secured 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 and all accrued and unpaid interest will be due. The interest rate was 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 Secured Note
 is secured by a first lien on certain of the acquired assets and a lien on the Companys other assets.

As a result of the event of default described in Note
 2 with respect to the Secured Note prior to the Patent Transfer Agreement, the interest rate was increased
 from 8.0% to 12.5%. As of December 31, 2003, the entire outstanding balance on the Secured Note had
 been classified in the current portion of long-term debt.

On February 25, 1998, the Company entered into Senior
 Secured Loans for $1,000,000 and $280,000 with Finova. 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 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 (Senior Note). Under the terms of the Senior Note, monthly
 principal and interest payments of $55,000 were required commencing September 1, 2003 until February
 1, 2004 (maturity date). The interest rate remained at 14%.

On April 30, 2004, the Company and Finova entered into
 a Forbearance Agreement (Agreement) through June 30, 2004. In connection with the Agreement, the Company
 paid $50,000 to Finova on April 30, 2004. The payment represented $8,582 of accrued interest through
 April 27, 2004, a fee of $7,000, and a reduction in the outstanding principal balance of $34,418.

The entire outstanding balance on the Senior Note has
 been classified in the current portion of long-term debt as of June 30, 2004 and December 31, 2003,
 since the Senior Note matures on June 30, 2004.

Finova 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 2002. This fee
 was expensed as a financing cost in our condensed consolidated statement of operations in 2002.

As described above, the Company and Finova entered into
 an Agreement on April 30, 2004. In accordance with the Agreement, the exercise period of the 890,000
 warrants was extended from February 26, 2004 to February 21, 2005. As a result of extending the exercise
 period, the Company recorded a financing fee of approximately $53,000 in April 2004. This fee was expensed
 as a financing cost in our condensed consolidated statement of operations during the three months ended
 June 30, 2004.

-16-

---

The covenants in the Secured Note, Loan and Security
 Agreement and the Senior 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.

As described in Note 1 to the condensed consolidated
 financial statements, the Company closed on its acquisition of the Vortex technology from Tri-Link with
 an effective date of May 30, 2003. 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 scheduled to be paid
 in quarterly principal installments of $187,500 plus interest at 6.5%. The Note Payable (Note) is
 collateralized primarily by the Vortex technology and technology assets. Tri-Link was granted the right,
 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 (maximum of 1,125,000 shares of common stock).

On October 24, 2003, the Company issued 375,000 shares
 of Common stock to Tri-Link as consideration for the conversion of $82,500 of the Companys obligation
 to Tri-Link. As a result of the conversion, the Companys quarterly principal installment was reduced
 to $180,000.

The Company was unable to make its scheduled quarterly
 installments in November 2003, February 2004, May 2004, and August 2004 on the Note to Tri-Link (see
 Note 10). The Note does not provide for an acceleration of all outstanding amounts if a payment is claimed
 to be past due and therefore, $720,000 of this Note is classified as long-term debt as of June 30, 2004.
 At December 31, 2003, $1,080,000 of this Note was classified as long-term debt.

# NOTE 10  CONTINGENCIES

Legal Proceedings

The Company from time to time is involved in legal actions
 arising in the ordinary course of business. With respect to these matters, management believes that
 it has adequate legal defenses or has provided adequate accruals for related costs such that the ultimate
 outcome will not have a material adverse effect on the Companys future financial position or results
 of operations.

The Company was formally notified by Tri-Link on March
 9, 2004 that Teltronics, Inc. was in default of its obligations under the Tri-Link Agreement of Purchase
 and Sale (Agreement). In the default notice, Tri-Link demands immediate payment of the past due principal
 and interest payments totaling $426,098 (November 2003 and February 2004 quarterly installments). The
 notice also stated that Tri-Link would immediately compel final and binding arbitration as allowed in
 the Agreement and would enforce all such other remedies, provisional and otherwise, as it may have with
 respect to such claims under the Agreement.

On March 10, 2004, the Company received a Demand for
 Arbitration notice from the American Arbitration Association notifying Teltronics of Tri-Links demand
 for arbitration. Teltronics was further notified on March 12, 2004 by the International Centre for Dispute
 Resolution of their receipt of Tri-Links demand for arbitration.

In its Demand for Arbitration, Tri-Link seeks payment
 by Teltronics of the total sum of $426,098 USD and the immediate issuance to Tri-Link of 900,000 shares
 of Teltronics common voting stock.

In its Answering Statement and Counterclaims, Teltronics
 seeks a declaration that issuance of 900,000 shares of its common voting stock satisfies the requirements
 of the contract for payment where the appropriate cash payments have not been made. In addition, as
 and for its counterclaims, Teltronics seeks findings that Tri-Link is in breach of the purchase agreement
 and its obligation of good faith and fair dealing inherent in that contract; that Tri-Link breached
 its express and implied warranties and fitness for a particular purpose; that Tri-Link engaged in fraudulent
 concealment and inducement; and that Tri-Link is

-17-

---

guilty of negligent misrepresentation. Teltronics seeks
 an amount, as stated in its Answering Statement, in excess of $1 million.

The Company has been notified by Tri-Link that it intends
 to seek possession of the Vortex technology which Tri-Link claims secures its right to payment.

The Company was named as a party to a lawsuit filed
 in the State of New York. The lawsuit alleges that various parties who entered into contracts with the
 New York Department of Education, did not insure that a subcontractor paid its employees in accordance
 with the prevailing wage rate required by the State of New York. The Company intends to vigorously defend
 itself and believes it has meritorious defenses.

# NOTE 11 - 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 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 in June
 2003. This charge was allocated to cost of goods sold and the operating expense categories.

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 statement 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.

Effective June 1, 2004, the Company and Eagle-Midway
 Place, L.P. (Lessor) entered into an Amendment to Industrial Real Estate Lease (Amendment) for the
 Dallas facility. The Amendment was caused by a 35% reduction in office space leased by the Company and
 the corresponding lease payments. As a result of the Amendment, the Company recorded a reduction in
 the present value of the lease obligation of approximately $103,000. In addition, the Company incurred
 a charge of $49,000 for tenant improvements caused by the reduction in office space, however; the Company
 will receive a credit from the Lessor of $24,500 that will be applied to past due rent payments as of
 May 31, 2004. The Company is in default under the lease for non-payment of rent.

In connection with the Amendment, the Company recorded
 a benefit of approximately $79,000 during the three months and six months ended June 30, 2004. This
 benefit was reported as a reduction in general and administrative expense in our condensed consolidated
 statements of operations.

-18-

---

The changes in the Companys unaudited lease obligation
 for the six months ended June 30, 2004 and 2003 are as follows:

|                                                                 | 2004      | 2003     
|---------------------------------------------------------------- | --------- | ---------
|Balance, beginning of the period                                 | $ 430,000 | $ 437,000
|Accretion in present value of lease obligation during the period | 13,200    | 20,000   
|Payments made during the period                                  | (41,200)  | (24,500) 
|Net reduction in obligation due to Amendment                     | (79,000)  | ---      
|                                                                
|Balance, end of the period                                       | $ 323,000 | $ 432,500
|                                                                

# NOTE 12  WARRANTY

The Company provides currently for the estimated cost
 that may be incurred under product warranties. Factors that affect the Companys product 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 unaudited product liability
 during the six months ended June 30, 2004 and 2003 are as follows:

|                                                 | 2004      | 2003     
|------------------------------------------------ | --------- | ---------
|Balance, beginning of the period                 | $ 302,000 | $ 315,000
|Warranties issued during the period              | 17,000    | 107,000  
|Payments made during the period                  | (40,000)  | (96,000) 
|Changes in liability for pre-existing warranties
|during the period                                | (23,000)  | 11,000   
|                                                
|Balance, end of the period                       | $ 256,000 | $ 337,000
|                                                

# NOTE 13 - 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 increased to $18 per share on February 27, 2004 and will increase 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.

-19-

---

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  In March 2003, the Company recorded the issuance of 1.0 million shares of
 Common stock with a fair value of $200,000 as additional compensation for 2003 services by its Board
 of Directors. The compensation was expensed as a general and administrative expense in our condensed
 consolidated statements of operations commencing January 1, 2003 through December 31, 2003.

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).

In April 2004, the Company issued 11,803 shares with
 a fair value of $3,520 in connection with the Employee Stock Purchase 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.

On April 30, 2004, the Company and Finova entered into
 a Forbearance Agreement (Agreement) through June 30, 2004. In accordance with the Agreement, the exercise
 period was extended from February 26, 2004 to February 21, 2005. As a result of extending the exercise
 period, the Company recorded a financing expense of approximately $53,000 during the three months ended
 June 30, 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.

-20-

---

# NOTE 14 - SEGMENT INFORMATION

The Company's operations are classified into three reportable
 segments, Teltronics, Mexico and Teltronics Limited. As described in Note 1, the Company acquired the
 assets of the 20-20 maintenance business of SMARTCALL Limited located in the UK. As a result, the Company
 has classified the operations of our subsidiary, Teltronics Limited, referred to as the UK segment,
 as a reportable segment commencing February 1, 2004.

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 unaudited information about
 reportable segment operations and assets.

|                                      | Three Months EndedJune 30, | Six Months EndedJune 30,
|------------------------------------- | -------------------------- | ------------------------
|
|Net Sales                             |                            |                         
|Teltronics                            |                            |                         
|Mexico                                |                            |                         
|UK                                    |                            |                         
|                                     
|Total net sales                       |                            |                         
|                                     
|Depreciation and Amortization         |                            |                         
|Teltronics                            |                            |                         
|Mexico                                |                            |                         
|UK                                    |                            |                         
|                                     
|Total depreciation and amortization   |                            |                         
|                                     
|Interest and Financing Costs          |                            |                         
|Teltronics                            |                            |                         
|Mexico                                |                            |                         
|UK                                    |                            |                         
|                                     
|Total interest and financing costs    |                            |                         
|                                     
|Segment Profit (Loss)                 |                            |                         
|Teltronics                            |                            |                         
|Mexico                                |                            |                         
|UK                                    |                            |                         
|                                     
|Loss before income taxes              |                            |                         
|                                     
|Segment Assets                        |                            |                         
|Teltronics                            |                            |                         
|Mexico                                |                            |                         
|UK                                    |                            |                         
|                                     
|Total segment assets                  |                            |                         
|                                     
|Acquisition of Property and Equipment |                            |                         
|Teltronics                            |                            |                         
|Mexico                                |                            |                         
|UK                                    |                            |                         
|                                     
|Total acquisition of property         |                            |                         
|and equipment                         |                            |                         
|                                     

-21-

---

# 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 condensed consolidated financial statements. The condensed 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. Teltronics generates
 revenues through different sources.

- Manufacturing. Revenues from sales of product,
 including our electronic manufacturing services business are recognized when title and risk of loss
 passes, which is generally when the product is shipped. Based on the Company's history of providing
 manufacturing services, we believe that collectibility 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.
 The circumstance that the Company considers the most significant when determining the appropriate method
 of accounting is the right to require

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---

- 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.
- Revenue Arrangements with Multiple Deliverables.
 Certain of the Companys arrangements include multiple deliverables, which consist of product, installation,
 and training. In the absence of higher-level specific authoritative guidance, the Company determines
 the units of accounting for multiple element arrangements in accordance with Emerging Issues Task Force
 Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Specifically, the Company will consider
 a delivered item as a separate unit of accounting if it has value to the customer on a standalone basis,
 if there is objective and reliable evidence of the fair value of the undelivered elements, and, if the
 arrangement includes a general right of return relative to the delivered element, delivery or performance
 of the undelivered element is considered probable and is substantially within the Companys control.

Accounts receivable. A considerable amount
 of judgment is required when we assess the ultimate realization of receivables, including assessing
 the following factors: probability of collection, the current credit-worthiness of each customer and
 the economy. We recognize an allowance for doubtful accounts based on these factors, including the length
 of time the receivables are past due and an analysis of the specific facts relative to the customer.
 We may record an additional provision for doubtful accounts to our allowance for doubtful accounts if
 factors relative to the customer change. We charge off outstanding balances after all collection efforts
 have been exhausted.

Slow moving inventories. We write down
 our slow moving inventories equal to the difference between the carrying value of the inventories 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, an additional inventory write-down may be required.

Impairment of Intangible and Long-Lived Assets.
 Long-lived assets consist of fixed assets and intangible 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.

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The Company periodically performs reviews of the recoverability
 of capitalized software costs. At the time a determination is made that capitalized amounts are not
 recoverable based on the estimated cash flows to be generated from the applicable software, any remaining
 capitalized amounts are written off.

Warranty and Service. The Company provides
 currently for the estimated cost that may be incurred under product warranties. Factors that affect
 the Companys product 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. The product liability may change in the future
 based on changes in the factors noted above.

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. A determination of the amount of loss accrual required, if any, for these
 contingencies are made after careful review of each individual issue. 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.

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.

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# 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 months and six months ended June 30, 2004 and 2003.

|                              | Three Months EndedJune 30, |         | Six Months EndedJune 30,
|----------------------------- | -------------------------- | ------- | ------------------------
|                              | 2004                       | 2003    |                         
|Net sales                     | 100.0%                     | 100.0%  |                         
|Cost of sales                 | 62.9%                      | 62.0%   |                         
|                             
|Gross profit                  | 37.1%                      | 38.0%   |                         
|                             
|Operating expenses:          
|General and administrative    | 9.8%                       | 11.9%   |                         
|Sales and marketing           | 16.8%                      | 19.4%   |                         
|Research and development      | 6.4%                       | 12.1%   |                         
|Depreciation and amortization | 2.4%                       | 2.5%    |                         
|                             
|                              | 35.4%                      | 45.9%   |                         
|                             
|Income (loss) from operations | 1.7%                       | (7.9%)  |                         
|                             
|Other income (expense):      
|Interest                      | (3.5%)                     | (2.3%)  |                         
|Financing                     | (0.8%)                     | (0.7%)  |                         
|Other                         | ---                        | ---     |                         
|                             
|                              | (4.3%)                     | (3.0%)  |                         
|                             
|Loss before income taxes      | (2.6%)                     | (10.9%) |                         
|Provision for income taxes    | ---                        | (0.1%)  |                         
|                             
|Net loss                      | (2.6%)                     | (11.0%) |                         
|                             

Net Sales and Gross Profit Margin

Net sales decreased $825,000 or 6.4% for the three months
 ended June 30, 2004 as compared to the same period in 2003. Net sales decreased $1.1 million or 4.5%
 for the six months ended June 30, 2004 as compared to the same period in 2003. The decreases in net
 sales were primarily attributable to a slow down in net sales to our three largest customers.

Gross profit margin for the three months ended June
 30, 2004 and 2003 was 37.1% and 38.0%, respectively. Gross profit margin for the six months ended June
 30, 2004 and 2003 was 40.8% and 39.3%, respectively.

Excluding affects of the provision for slow moving inventories,
 the gross profit margin for the three months and six months ended June 30, 2004 would have been 38.1%
 and 41.3%, respectively. Gross profit margin, excluding affects of the provision for slow moving inventories
 for the year ended December 31, 2003 would have been 41.3%. The gross profit margin is impacted by changes
 in product mix, manufacturing variances and project management.

Operating Expenses

Operating expenses were $4.3 million and $6.0 million
 for the three months ended June 30, 2004 and 2003, respectively.

General and administrative expenses decreased $354,000
 for the three months ended June 30, 2004 as compared to the same period in 2003. The net decrease for
 the three months ended June 30, 2004 was primarily a result of the following items: (a) a $20,000 decrease
 in the provision for doubtful accounts, (b)

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a $70,000 decrease related to the cost of being a public
 company, (c) a $74,000 decrease in rental expense related to the net reduction in the Dallas lease obligation
 due to the lease amendment, (d) a $137,000 decrease in wages, benefits and severance related to the
 June 2003 reduction in force, and (e) a $34,000 decrease in 401(k) expense. These decreases were offset
 by a $17,000 increase in professional fees.

Sales and marketing expenses decreased $480,000 for
 the three months ended June 30, 2004 as compared to the same period in 2003. The net decrease for the
 three months ended June 30, 2004 was primarily a result of the following items: (a) a $365,000 decrease
 in wages, benefits and severance related to the June 2003 reduction in force, (b) a $132,000 decrease
 in commissions, (c) a $53,000 decrease in advertising and trade shows, (d) a $57,000 decrease in travel,
 meals, and entertainment, and (e) an $18,000 decrease in telephone and cell phone charges. 
 These decreases were partially offset by an increase in UK expenses of $153,000, as a result of the
 SMARTCALL acquisition effective February 1, 2004.

Research and development expenses decreased $792,000
 for the three months ended June 30, 2004 as compared to the same period in 2003. The net decrease for
 the three months ended June 30, 2004 was primarily a result of the following items: (a) at our research
 facilities located in Sarasota and Salt Lake City, wages, benefits and severance decreased $407,000
 related to the June 2003 reduction in force and operating supplies decreased $96,000, and (b) development
 costs of our Cypreon product decreased $274,000 from 2003 due to the release of Cypreon in the fourth
 quarter of 2003.

Operating expenses were $9.0 million and $11.1 million
 for the six months ended June 30, 2004 and 2003, respectively.

General and administrative expenses decreased $349,000
 for the six months ended June 30, 2004 as compared to the same period in 2003. The net decrease for
 the six months ended June 30, 2004 was primarily a result of the following items: (a) a $118,000 decrease
 related to the cost of being a public company, (b) a $75,000 decrease in rental expense related to the
 net reduction in the Dallas lease obligation due to the lease amendment, (c) a $215,000 decrease in
 wages, benefits and severance related to the June 2003 reduction in force, and (d) a $34,000 decrease
 in 401(k) expense. These decreases were partially offset by a $105,000 increase in professional fees.

Sales and marketing expenses decreased $561,000 for
 the six months ended June 30, 2004 as compared to the same period in 2003. The net decrease for the
 six months ended June 30, 2004 was primarily a result of the following items: (a) a $404,000 decrease
 in wages and benefits related to the June 2003 reduction in force, (b) a $139,000 decrease in commissions,
 (c) a $132,000 decrease in travel, meals, and entertainment, (d) a $53,000 decrease in advertising and
 trade shows, and (e) a $25,000 decrease in telephone and cell phone charges. These decreases were
 partially offset by an increase in UK expenses of $239,000, as a result of the SMARTCALL acquisition
 effective February 1, 2004.

Research and development expenses decreased $1,104,000
 for the six months ended June 30, 2004 as compared to the same period in 2003. The net decrease for
 the six months ended June 30, 2004 was primarily a result of the following items: (a) at our research
 facilities located in Sarasota and Salt Lake City, wages, benefits and severance decreased $688,000
 related to the June 2003 reduction in force, operating supplies decreased $94,000 and professional fees
 decreased $26,000, and (b) development costs of our Cypreon product decreased $245,000 from 2003 due
 to the release of Cypreon in the fourth quarter of 2003.

Other Expenses

Other expenses were $512,000 and $382,000 for the three
 months ended June 30, 2004 and 2003, respectively.

For the three months ended June 30, 2004, interest expense
 increased $121,000, financing costs increased $11,000, and other expenses decreased $1,000 as compared
 to the same period in 2003. The

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increase in interest expense was a result of the increase in interest
 rate on the Harris debt and the interest on the Tri-Link debt in connection with the Tri-Link acquisition
 in May 2003. The increase in financing costs was primarily related to the extension of the exercise
 period of the Finova warrants, and the financing fees from an investment services firm offset by the
 services of Atlantic American in 2003 that were terminated by December 31, 2003.

Other expenses were $949,000 and $754,000 for the six
 months ended June 30, 2004 and 2003, respectively.

For the six months ended June 30, 2004, interest expense
 increased $235,000, financing costs decreased $46,000, and other expenses increased $6,000 as compared
 to the same period in 2003. The increase in interest expense was a result of the increase in interest
 rate on the Harris debt and the interest on the Tri-Link debt in connection with the Tri-Link acquisition
 in May 2003. The decrease in financing costs was primarily related to the services of Atlantic American
 in 2003 that were terminated by December 31, 2003, offset by the extension of the exercise period of
 the Finova warrants and the financing fees from an investment services firm.

# LIQUIDITY AND CAPITAL RESOURCES

Net cash flows provided by Operating Activities

Net cash flows provided by operating activities were
 $469,000 for the six months ended June 30, 2004. The $469,000 was comprised of the following items:
 (1) net loss of $369,000, (2) non-cash expenses of $1,392,000, (3) a net increase in operating assets,
 net of acquisition, of $3,248,000, and (4) a net increase in operating liabilities, net of acquisition,
 of $2,694,000. The net increase in operating assets was primarily a result of an increase in accounts
 receivable of $4,411,000. The majority of the increase in accounts receivable from December 31, 2003
 to June 30, 2004 was a result of an increase in net sales for the three months and six months ended
 June 30, 2004 as compared to the three months and six months ended December 31, 2003. The net increase
 in operating liabilities was a result of an increase in accounts payable of $2,490,000 and an increase
 in accrued expenses and deferred revenue of $469,000, which were offset by a decrease in billings in
 excess of costs and estimated earnings on uncompleted contracts of $320,000.

Net cash flows used in Investing Activities

Net cash flows used in investing activities were $317,000
 for the six months ended June 30, 2004 as the Company acquired $57,000 of property and equipment to
 support its operations and made payments of $260,000 for inventories and customer contracts and relationships
 in connection with its acquisition of SMARTCALL Limited.

Net cash flows provided by Financing Activities

Net cash flows provided by financing activities were
 $88,000 for the six months ended June 30, 2004. The Company had net borrowings on its line of credit
 of $229,000 and net principal repayments of $94,000 related to its debt to Finova and finance companies.
 Additionally, the Company paid dividends on the Preferred Series B Convertible stock of $50,500. These
 uses of cash were partially offset by proceeds from the issuance of Common stock under the Companys
 Employee Stock Purchase Plan of $3,500.

Liquidity

Our liquidity needs arise from our debt service obligations,
 working capital needs and capital expenditures. We have historically funded our liquidity needs with
 proceeds from our line of credit with CIT and cash flows from operations. We have incurred a net loss
 of $3.3 million, $4.6 million and $6.7 million in 2003, 2002 and 2001, respectively. These losses have
 significantly weakened our financial position and ability to make the required debt service and dividend
 payments. Future liquidity and cash

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---

requirements will depend on a wide range of factors including the
 level of business in existing operations and credit lines extended by trade suppliers. Our ability to
 maintain sufficient liquidity in the future is impacted by several factors including continued management
 of our costs and balance sheet, successfully achieving our product release schedules and the attainment
 of our forecasted sales objectives. We are currently exploring raising additional debt or equity financing;
 however, we do not have any commitments for such funding at this time. Such capital may not be available
 on acceptable terms, if at all. We may also require additional capital to acquire or invest in complementary
 businesses or products or obtain the right to use complementary technologies. If we issue additional
 equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced.
 New investors may demand rights, preferences or privileges senior to those of existing holders of our
 common stock. Debt incurred by us would be senior to equity in the ability of debt holders to make claims
 on our assets. If adequate funds are not available to satisfy either short or long-term capital requirements,
 we may be required to curtail our operations significantly or to seek funds through arrangements with
 strategic partners or other parties that may require us to relinquish material rights to certain of
 our products, technologies or potential markets, or we may be forced to seek protection under bankruptcy
 laws.

The Company has engaged an investment services firm
 as financial advisor to assist the Company in developing and exploring strategic opportunities, which
 may include raising capital, mergers, acquisitions, strategic partnerships or joint ventures, and various
 other services, all ultimately designed to maximize shareholder value. There can be no assurances that
 any strategic alternative will be consummated.

As described above, the Company is working to raise
 additional capital; however, there is no assurance that these efforts will be successful and that we
 will achieve profitability or, if we achieve profitability, that it will be sustainable, or that we
 will continue as a going concern. As a result, our predecessor independent certified public accountants
 included an explanatory paragraph for a going concern matter in their report for the year ended December
 31, 2003. The year ended December 31, 2003 and six months ended June 30, 2004 financial statements do
 not include any adjustments relating to the recoverability of recorded asset amounts that might be necessary
 as a result of the above uncertainty.

As of June 30, 2004, the Company had cash and cash equivalents
 of $393,275 as compared to $146,277 as of December 31, 2003. Working capital deficiency as of June 30,
 2004 and December 31, 2003 was $3,109,102 and $10,888,995, respectively. The working capital deficiency
 at December 31, 2003 was primarily a result of the classification of the long-term portion of the secured
 promissory note payable to Harris of approximately $7.7 million being classified as current portion
 of long- term debt due to our inability to make principal and interest payments.

Our principal obligations as of June 30, 2004, consisted
 primarily of the following items: (1) a Secured Note payable to Harris of $8.6 million, (2) a Senior
 Note in the amount of $220,000 payable to Finova that matures on June 30, 2004, (3) dividends on our
 Series B and Series C Preferred Stock, of which $1,323,000 will be due and payable within the next twelve
 months, (4) a bank line of credit payable to CIT of $1,625,000, and (5) a Note for $1,980,000 aggregate
 principal amount payable to Tri-Link.

On August 16, 2004, the Company entered into a Patent
 Transfer Agreement with Harris Corporation (Harris) under which the Company conveyed and transferred all of its rights, title and interest in certain
patents initially acquired from Harris in exchange for consideration consisting of the following items: (i) a credit in the amount of
 $578,022 of accrued and unpaid interest as of June 1, 2004 owed to Harris under the terms of the Secured
 Promissory Note (Secured Note), (ii) a credit in the amount of $406,792 of unpaid and past due scheduled
 principal payments as of June 1, 2004 owed to Harris under the terms of the Secured Note, and (iii)
 a credit of $290,414 representing interest and regularly scheduled principal payments that will be due
 under the terms of the Secured Note for the period from July 1, 2004 through September 1, 2004. The
 interest rate will revert from the default rate of 12.5% to the original rate of 8.0%, effective June
 1, 2004. Consequently, the Company has classified $8.2 million of the Secured
 Note in long-term debt as of June 30, 2004.

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On September 9, 2003, the Company and Finova entered
 into a Fifth Amended and Restated Senior Secured Promissory Note (Senior Note). Under the terms of
 the Senior Note, monthly principal and interest payments of $55,000 were required commencing September
 1, 2003 until February 1, 2004 (maturity date). The interest rate remained at 14%. On April 30, 2004,
 the Company and Finova entered into a Forbearance Agreement (Agreement) through June 30, 004. In connection
 with the Agreement, the Company paid $50,000 to Finova on April 30, 2004. The payment represented $8,582
 of accrued interest through April 27, 2004, a fee of $7,000, and principal of $34,418.

We have 12,625 shares of Series B and 40,000 shares
 of Series C Preferred Stock outstanding as of December 31, 2003. Holders of shares of our Series B Preferred
 Stock were entitled to receive annual dividends of $16 per share, payable quarterly. The annual dividends
 increased to $18 per share on February 27, 2004 and will increase 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. 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. As of June 30, 2004, we were in arrears four dividend payments on our Series
 C Preferred Stock and three payments on our Series B Preferred Stock.

We have a credit facility with CIT, as described in
 the notes to our 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
 ended December 31, 2003. At June 30, 2004 and December 31, 2003, the Companys interest rate was 7.0%.
 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 June 30, 2004 was $954,000. 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 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 $2.5 million. We also agreed to pay to Tri-Link, royalties on the net sales 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 Note
 for $2,250,000 aggregate principal amount. Our 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
 to Tri-Link is secured by a lien on the Vortex technology and related technology assets. The Company
 was unable to make the November 2003 and the February 2004 quarterly installments. According to the
 terms of the Agreement, if we fail to make any quarterly payment on the 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 by which
 the applicable payment default exceeds ten days. In addition, failure to make payments on the Note when
 due may result in Tri-Link seeking to obtain a judgment and attempting to seize our Vortex technology
 securing the Note in satisfying such past-due payments. Tri-Link may have the right 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 into shares of the Company's voting common stock at prices ranging from $0.22 per share to
 $1.00 per share (maximum of 1,125,000 shares of common stock).

On October 24, 2003, the Company issued 375,000 shares
 of Common stock to Tri-Link as consideration for the conversion of $82,500 of the Company's obligation
 to Tri-Link. As a result of the conversion, the Company's quarterly principal installment was reduced
 to $180,000.

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# 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, 2003, and incorporated herein by reference.

# ITEM 4.   CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation
 of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated
 the effectiveness of the design and operation of the Companys disclosure controls and procedures
 (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of
 the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer
 and the Chief Financial Officer concluded that the Companys disclosure controls and procedures are
 effective in timely making known to them material information relating to the Company and the Companys
 consolidated subsidiaries required to be disclosed in the Companys reports filed or submitted under
 the Exchange Act. There has been no change in the Companys internal control over financial reporting
 during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially
 affect, the Companys internal control over financial reporting.

-30-

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# PART II  OTHER INFORMATION

# ITEM 1.      LEGAL PROCEEDINGS

The Company from time to time is involved in legal actions
 arising in the ordinary course of business. With respect to these matters, management believes that
 it has adequate legal defenses or has provided adequate accruals for related costs such that the ultimate
 outcome will not have a material adverse effect on the Companys future financial position or results
 of operations.

The Company was formally notified by Tri-Link on March
 9, 2004 that Teltronics, Inc. was in default of its obligations under the Tri-Link Agreement of Purchase
 and Sale (Agreement). In the default notice, Tri-Link demands immediate payment of the past due principal
 and interest payments totaling $426,098 (November 2003 and February 2004 quarterly installments). The
 notice also stated that Tri-Link would immediately compel final and binding arbitration as allowed in
 the Agreement and would enforce all such other remedies, provisional and otherwise, as it may have with
 respect to such claims under the Agreement.

On March 10, 2004, the Company received a Demand for
 Arbitration notice from the American Arbitration Association notifying Teltronics of Tri-Links demand
 for arbitration. Teltronics was further notified on March 12, 2004 by the International Centre for Dispute
 Resolution of their receipt of Tri-Links demand for arbitration.

In its Demand for Arbitration, Tri-Link seeks payment
 by Teltronics of the total sum of $426,098 USD and the immediate issuance to Tri-Link of 900,000 shares
 of Teltronics common voting stock.

In its Answering Statement and Counterclaims, Teltronics
 seeks a declaration that issuance of 900,000 shares of its common voting stock satisfies the requirements
 of the contract for payment where the appropriate cash payments have not been made. In addition, as
 and for its counterclaims, Teltronics seeks findings that Tri-Link is in breach of the purchase agreement
 and its obligation of good faith and fair dealing inherent in that contract; that Tri-Link breached
 its express and implied warranties and fitness for a particular purpose; that Tri-Link engaged in fraudulent
 concealment and inducement; and that Tri-Link is guilty of negligent misrepresentation. Teltronics seeks
 an amount, as stated in its Answering Statement, in excess of $1 million.

The Company has been notified by Tri-Link that it intends
 to seek possession of the collateral which Tri-Link claims secures its right to payment.

The Company was named as a party to a lawsuit filed
 in the State of New York. The lawsuit alleges that various parties who entered into contracts with the
 New York Department of Education, did not insure that a subcontractor paid its employees in accordance
 with the prevailing wage rate required by the State of New York. The Company intends to vigorously defend
 itself and believes it has meritorious defenses.

# ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS  None

# ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

As of June 30, 2004, we were in arrears on dividend
 payments on our Series B and Series C Preferred Stock in the amounts of $159,786 and $529,972, respectively,
 which amounts include interest thereon. We were also in arrears on debt payments on our Senior Secured
 Promissory Note with Finova, our Secured Promissory Note with Harris Corporation and the Note Payable
 to Tri-Link in the amounts of $219,530, $1,130,578 and $540,000, respectively.  As more fully described in Note 2
of the notes to the condensed consolidated financial statements, the Company has been credited for all past due
debt payments through September 1, 2004 owed to Harris Corporation.
As a result, the Company is not in default as of August 16, 2004.

-31-

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

# ITEM 5.     OTHER INFORMATION  None

# ITEM 6(a).      EXHIBITS

|10   |  | Patent Transfer Agreement dated August 16, 2004 by and between Harris Corporation and Teltronics, Inc.                                                          
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|31.2 |  | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32   |  | Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

The Company filed two reports on Form 8-K and one Form
 8-K/A during the quarter ended June 30, 2004. Information regarding the item reported on is as follows:

|Date          | Item Reported On                                                   
|------------- | -------------------------------------------------------------------
|May 17, 2004  | Item 12 and 7:   First Quarter 2004 Earnings Press Release.        
|June 4, 2004  | Item 4 and 7:   Change in Registrants Certifying Accounts          
|June 30, 2004 | Item 4 and 7:   Change in Registrants Certifying Accounts (Amended)

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# 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.

|Dated: August 16, 2004 |  | TELTRONICS, INC.BY: /S/ EWEN R. CAMERONEwen R. CameronPresident and Chief Executive Officer
|---------------------- |  | ---------------------------------------------------------------------------------------------------------

|Dated: August 16, 2004 |  | BY: /S/ ANTHONY FOCARACCIAnthony FocaracciChief Accounting Officer
|---------------------- |  | --------------------------------------------------------------------------------

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# EXHIBIT INDEX

|ExhibitNumber |  | Description                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|10*           |  | Patent Transfer Agreement dated August 16, 2004 by and between Harris Corporation and Teltronics, Inc.                                                          
|31.1*         |  | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|31.2*         |  | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32*           |  | Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|_________(*)  |  | Filed as an Exhibit to this Report on Form 10-Q for the period ended June 30, 2004.                                                                             

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