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


FORM 10-Q
|-------------------------------------------------------------------------

|[X]  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. 
|---- | -----------------------------------------------------------------------------------------
|     | For the Quarterly Period Ended September 30, 2003.                                       
|[  ] | 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
(I.R.S. Employer Identification Number)2150 WHITFIELD INDUSTRIAL WAY
SARASOTA, FLORIDA 34243
(Address of principal executive offices, including zip code)941-753-5000(Registrant's telephone number, including area code)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


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


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


1


INDEX
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|              |                                                                                                                        | PAGE
|------------- | ---------------------------------------------------------------------------------------------------------------------- | ----
|PART I.       | FINANCIAL INFORMATION                                                                                                  |     
|ITEM 1.       | FINANCIAL STATEMENTS (Unaudited)                                                                                       |     
|              | Condensed Consolidated Balance Sheets at September 30, 2003 andDecember 31, 2002                                       | 3-4 
|              | Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2003 and 2002 | 5   
|              | Condensed Consolidated Statements of Cash Flows for the nine monthsended September 30, 2003 and 2002                   | 6-7 
|              | Notes to Condensed Consolidated Financial Statements                                                                   | 8   
|ITEM 2.       | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS                                   | 18  
|ITEM 3.       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                             | 24  
|ITEM 4.       | CONTROLS AND PROCEDURES                                                                                                | 24  
|PART II.      | OTHER INFORMATION                                                                                                      |     
|ITEM 1.       | LEGAL PROCEEDINGS                                                                                                      | 25  
|ITEM 2.       | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                              | 25  
|ITEM 3.       | DEFAULTS UPON SENIOR SECURITIES                                                                                        | 25  
|ITEM 4.       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                    | 25  
|ITEM 5.       | OTHER INFORMATION                                                                                                      | 25  
|ITEM 6.       | EXHIBITS AND REPORTS ON FORM 8-K                                                                                       | 25  
|SIGNATURE     | 26                                                                                                                    
|EXHIBIT INDEX | 27                                                                                                                    

|2
|-

|PART I  FINANCIAL
INFORMATION



ITEM 1.   FINANCIAL
STATEMENTS (Unaudited)



TELTRONICS, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS


ASSETS
|---------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                            | September 30,2003(Unaudited) | December 31,2002
|----------------------------------------------------------- | ---------------------------- | ----------------
|Current assets:                                             |                              |                 
|Cash and cash equivalents                                   |                              |                 
|Accounts receivable, net of allowance for doubtful accounts |                              |                 
|of $158,105 at September 30, 2003 and $399,610 at           |                              |                 
|December 31, 2002                                           |                              |                 
|Costs and estimated earnings in excess of billings on       |                              |                 
|uncompleted contracts                                       |                              |                 
|Inventories, net                                            |                              |                 
|Prepaid expenses and other current assets                   |                              |                 
|                                                            |                             
|Total current assets                                        |                              |                 
|Property and equipment, net                                 |                              |                 
|Goodwill                                                    |                              |                 
|Other intangible assets, net                                |                              |                 
|Other assets                                                |                              |                 
|                                                            |                             
|Total assets                                                |                              |                 
|                                                            |                             

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


3




TELTRONICS, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS  Continued


LIABILITIES AND
SHAREHOLDERS DEFICIENCY
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                              | September 30,2003(Unaudited) | December 31,2002
|------------------------------------------------------------- | ---------------------------- | ----------------
|Current liabilities:                                          |                              |                 
|Current portion of long-term debt                             |                              |                 
|Current portion of capital lease obligations                  |                              |                 
|Accounts payable                                              |                              |                 
|Billings in excess of costs and estimated earnings            |                              |                 
|on uncompleted contracts                                      |                              |                 
|Accrued expenses and other current liabilities                |                              |                 
|Deferred revenue                                              |                              |                 
|                                                              |                             
|Total current liabilities                                     |                              |                 
|                                                              |                             
|Long-term liabilities:                                        |                              |                 
|Long-term debt, net of current portion                        |                              |                 
|Capital lease obligations, net of current portion             |                              |                 
|                                                              |                             
|Total long-term liabilities                                   |                              |                 
|                                                              |                             
|Shareholders' deficiency:                                     |                              |                 
|Common stock, $.001 par value, 40,000,000 shares              |                              |                 
|authorized, 7,354,736 and 5,930,241 issued and                |                              |                 
|outstanding at September 30, 2003 and December 31, 2002,      |                              |                 
|respectively                                                  |                              |                 
|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             |                              |                 
|Preferred Series B Convertible stock, $.001 par value, 25,000 |                              |                 
|shares authorized, 12,625 shares issued and outstanding       |                              |                 
|Preferred Series C Convertible stock, $.001 par value, 50,000 |                              |                 
|shares authorized, 40,000 shares issued and outstanding       |                              |                 
|Additional paid-in capital                                    |                              |                 
|Deferred compensation                                         |                              |                 
|Accumulated other comprehensive loss                          |                              |                 
|Accumulated deficit                                           |                              |                 
|                                                              |                             
|Total shareholders' deficiency                                |                              |                 
|                                                              |                             
|Total liabilities and shareholders' deficiency                |                              |                 
|                                                              |                             

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



4




TELTRONICS, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
|------------------------------------ | ------------------------------- | ------------------------------
|
|Net sales                            |                                 |                               
|Product sales and installation       |                                 |                               
|Maintenance and service              |                                 |                               
|                                    
|                                     |                                 |                               
|Cost of sales                        |                                 |                               
|                                    
|Gross profit                         |                                 |                               
|                                    
|Operating expenses:                  |                                 |                               
|General and administrative           |                                 |                               
|Sales and marketing                  |                                 |                               
|Research and development             |                                 |                               
|Depreciation and amortization        |                                 |                               
|                                    
|                                     |                                 |                               
|                                    
|Income (loss) from operations        |                                 |                               
|                                    
|Other income (expense):              |                                 |                               
|Interest                             |                                 |                               
|Financing                            |                                 |                               
|Litigation costs                     |                                 |                               
|Other                                |                                 |                               
|                                    
|                                     |                                 |                               
|                                    
|Income (loss) before income taxes    |                                 |                               
|Provision for income taxes (benefit) |                                 |                               
|                                    
|Net income (loss)                    |                                 |                               
|Dividends on Preferred Series        |                                 |                               
|B and C Convertible stock            |                                 |                               
|                                    
|Net income (loss) available to       |                                 |                               
|common shareholders                  |                                 |                               
|                                    
|Net income (loss) per share:         |                                 |                               
|Basic                                |                                 |                               
|                                    
|Diluted                              |                                 |                               
|                                    

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



5




TELTRONICS, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                             | Nine Months Ended September 30,
|------------------------------------------------------------ | -------------------------------
|
|OPERATING ACTIVITIES:                                        |                                
|Net loss                                                     |                                
|Adjustments to reconcile net loss to net cash                |                                
|provided by (used in) operating activities:                  |                                
|Provision for (recovery of) doubtful accounts                |                                
|Provision for slow moving inventories                        |                                
|Depreciation and amortization                                |                                
|Amortization of other intangible assets                      |                                
|Amortization of deferred financing costs                     |                                
|Fair value of Common stock issued for 401(k) match           |                                
|Gain on sale of property and equipment                       |                                
|Amortization of deferred compensation costs                  |                                
|Changes in operating assets and liabilities:                 |                                
|Accounts receivable                                          |                                
|Costs and estimated earnings in excess of billings on        |                                
|uncompleted contracts                                        |                                
|Inventories                                                  |                                
|Prepaid expenses and other current assets                    |                                
|Other assets                                                 |                                
|Accounts payable                                             |                                
|Billings in excess of costs and estimated earnings on        |                                
|uncompleted contracts                                        |                                
|Accrued expenses and other current liabilities               |                                
|Deferred revenue                                             |                                
|                                                            
|Net cash flows provided by (used in) operating activities    |                                
|                                                            
|INVESTING ACTIVITIES:                                        |                                
|Acquisition of property and equipment                        |                                
|Proceeds from sale of property and equipment                 |                                
|                                                            
|Net cash flows used in investing activities                  |                                
|                                                            
|FINANCING ACTIVITIES:                                        |                                
|Net borrowings (repayments) on line of credit                |                                
|Net principal repayments on loans, notes and capital leases  |                                
|Proceeds from issuance of Common stock                       |                                
|Dividends paid on Preferred Series B and C Convertible stock |                                
|                                                            
|Net cash flows provided by (used in) financing activities    |                                
|                                                            
|Effect of exchange rate changes on cash                      |                                
|                                                            
|Net decrease in cash and cash equivalents                    |                                
|Cash and cash equivalents - beginning of period              |                                
|                                                            
|Cash and cash equivalents - end of period                    |                                
|                                                            

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



6




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


(Unaudited)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                               | Nine Months Ended September 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 $150,000,                |                                
|included in deferred compensation                              |                                
|Purchase of Vortex technology for debt                         |                                
|Unpaid dividends on Preferred Series B and C Convertible       |                                
|stock included in accounts payable                             |                                
|Conversion of other long-term liability to Preferred           |                                
|Series C Convertible stock                                     |                                
|Conversion of certain accrued expenses to Preferred            |                                
|Series C Convertible stock                                     |                                
|Unpaid dividends on Preferred Series B and C Convertible stock |                                
|included in accrued expenses                                   |                                
|Deferred financing fee of $21,000 less amortization            |                                
|expense of $5,250, included in prepaid expenses                |                                
|and other current assets                                       |                                

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



7




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


NOTE 1  NATURE OF
BUSINESS AND BASIS OF PRESENTATION



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


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


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


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


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


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


Other Matters Affecting
OperationsThe Company has incurred net losses
for the past two years and the nine month period ended September 30, 2003. The Company
has also experienced negative cash flows for the nine month period ended September 30,
2003. In addition, the Company has limited additional borrowing capacity under its
existing debt agreements.
During the past year, the Company has reduced its operating expenses and has engaged the investment banking firm of
Atlantic American Capital Advisors, LLC as its financial advisor to assist the Company in developing and exploring
strategic alternatives that include raising capital, mergers, acquisitions, strategic partnerships or joint ventures.
Management is continuing its focus on these items.  The Company is also focusing on increasing its sales levels and is
introducing new products in the fourth quarter of 2003.  There is no assurance that we will raise any additional capital,
consummate any strategic alternatives or that the introduction of the new products will result in increased sales.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8




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


NOTE 2  ACCOUNTING
FOR STOCK-BASED COMPENSATION



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


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


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

|                                          | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
|----------------------------------------- | ------------------------------- | ------------------------------
|                                          | 2003                            | 2002                          
|Net income (loss) - as reported           |                                 |                               
|Stock-based employee compensation cost if |                                 |                               
|the fair value method had been applied    |                                 |                               
|                                          |                                
|Net income (loss) - pro forma             |                                 |                               
|                                          |                                
|Net income (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.


9




NOTE 3 COMPREHENSIVE
INCOME (LOSS)



Total comprehensive income (loss) is
as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
|--------------------------------- | ------------------------------- | ------------------------------
|                                  | 2003                            | 2002                          
|                                 
|Net income (loss)                 |                                 |                               
|Foreign currency translation      |                                 |                               
|                                 
|Total comprehensive income (loss) |                                 |                               
|                                 

|NOTE 4  NET
INCOME (LOSS) PER SHARE



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


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

|                                    | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
|----------------------------------- | ------------------------------- | ------------------------------
|                                    | 2003                            | 2002                          
|Basic                               |                                 |                               
|Net income (loss)                   |                                 |                               
|Preferred dividends                 |                                 |                               
|                                    |                                
|                                    |                                 |                               
|                                    |                                
|                                    |                                 |                               
|Weighted average shares outstanding |                                 |                               
|                                    |                                
|Net income (loss) per share         |                                 |                               
|                                    |                                
|Diluted                             |                                 |                               
|Net income (loss)                   |                                 |                               
|Preferred dividends                 |                                 |                               
|Interest on convertible note        |                                 |                               
|                                    |                                
|                                    |                                 |                               
|                                    |                                
|Weighted average shares outstanding |                                 |                               
|Effect of dilutive securities:      |                                 |                               
|Employee stock options              |                                 |                               
|Convertible preferred stock         |                                 |                               
|Convertible note                    |                                 |                               
|                                    |                                
|Dilutive potential common shares    |                                 |                               
|                                    |                                
|Net income (loss) per share         |                                 |                               
|                                    |                                

|10



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


NOTE 5  COSTS AND
ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                        | September 30, 2003(Unaudited) | December 31, 2002
|------------------------------------------------------- | ----------------------------- | -----------------
|Costs incurred on uncompleted contracts                 |                               |                  
|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                                   |                               |                  
|Billings in excess of costs and estimated earnings on   |                               |                  
|uncompleted contracts                                   |                               |                  
|                                                        |                              
|                                                        |                               |                  
|                                                        |                              

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


NOTE 6  INVENTORIES



The major classes of inventories are
as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                | September 30, 2003(Unaudited) | December 31, 2002
|--------------- | ----------------------------- | -----------------
|                |                               |                  
|Raw materials   |                               |                  
|Work-in-process |                               |                  
|Finished goods  |                               |                  
|                |                              
|                |                               |                  
|                |                              

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


11




NOTE 7  OTHER
INTANGIBLE ASSETS



The Companys other intangible
assets are as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|              | September 30, 2003 (Unaudited)
|------------- | ------------------------------
|              | Life                          
|Customer list |                               
|Patent        |                               
|              |                               
|Total         |                               
|              |                               

|              | September 30, 2003 (Unaudited)
|------------- | ------------------------------
|              | Life                          
|Customer list |                               
|Patent        |                               
|              |                               
|Total         |                               
|              |                               

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


12




NOTE 8  DEBT



Debt consists of the following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | September 30,2003(Unaudited) |  | December 3,2002
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | ---------------
|Secured promissory note - payable to Harris Corporation in monthly installments
of $96,805 with interest at 8% commencing May 1, 2002 with a balloon payment
of $7,196,801 due May 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | $ 8,599,624                  |  | $ 8,868,717    
|Bank line of credit - On December 22, 1998, the Company's principal lender,
The CIT Group/Business Credit, Inc. ("CIT") amended the Company's existing
Line of Credit Facility and Term Loan whereby, the interest rate was 2.0% above
prime rate, maximum credit was $5,500,000 and an early termination fee was
assessed at 1.5%.  On October 28, 2000, the Line of Credit Facility was
extended to October 28, 2002.  A director of the Company had personally
guaranteed a portion of the facility.  On October 16, 2002, the Company entered
into the Thirteenth Amendment to Loan and Security Agreement (the
"Amendment") with CIT.  This Amendment extended the term from October 28,
2002 to October 28, 2004 and modified the interest rate from prime plus 2.0%
to prime plus 2.5%.  The applicable margin (2.5%) may vary from 2.0% to 3.0%
depending on the Company's financial results for the year ended December 31,
2002 and the year ending December 31, 2003.  At September 30, 2003, the
Company's interest rate was 7.0%.  The maximum credit remained at
$5,500,000 while the early termination fee was modified from 1.5% to 1.0% of
the maximum credit.  In connection with this Amendment, CIT has released a
director of the Company from any and all obligations under any guaranty
agreement or arrangement in favor of CIT.
Substantially all of the Company's present and future assets, except for fixed
assets, are pledged as collateral with borrowings limited to certain gross
availability formulas based on accounts receivable and inventory as defined in
the agreement.  The facility provides for minimum loan fees, unused line fees
and renewal term fees.  The outstanding borrowings are classified as a current
liability.  At September 30, 2003, the Company had $607,000 available,
pursuant to this facility.  The availability of this unused line of credit is restricted
based on availability formulas. |  | 3,051,626                    |  | 1,013,416      
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 302,652                      |  | 693,477        
|Note payable to Tri-Link in quarterly principal installments of $187,500 plus
interest at 6.5% commencing August 1, 2003, with final payment due May 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 2,062,500                    |  | --             
|Notes payable to finance companies, payable in monthly installments of $7,000
with interest at approximately 5%.  The notes mature through March 2008 and
are collateralized by vehicles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 308,627                      |  | 259,576        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                              | 
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | 14,325,029                   |  | 10,835,186     
|Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 4,716,957                    |  | 2,193,401      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                              | 
|Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | $ 9,608,072                  |  | $ 8,641,785    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                              | 

|13




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


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


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


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


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


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


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


NOTE 9  EXIT
ACTIVITY



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


14




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


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


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

| | Balance, beginning of the period           |  |  | $ | 250,000  |  
| | ------------------------------------------ |  |  | - | -------- | -
| | Termination benefit accruals during period |  |  |   | --       |  
| | Payments made during the period            |  |  |   | (217,000 | )
| |                                           
| | Balance, end of the period                 |  |  | $ | 33,000   |  
| |                                           

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


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


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

| | Balance, beginning of the period                                 |  |  | $ | 437,000 |  
| | ---------------------------------------------------------------- |  |  | - | ------- | -
| | Accretion in present value of lease obligation during the period |  |  |   | 29,500  |  
| | Payments made during the period                                  |  |  |   | (39,500 | )
| |                                                                 
| | Balance, end of the period                                       |  |  | $ | 427,000 |  
| |                                                                 

|NOTE 10  WARRANTY



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


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

| | Balance, beginning of the period                                   |  |  | $ | 315,000  |  
| | ------------------------------------------------------------------ |  |  | - | -------- | -
| | Warranties issued during the period                                |  |  |   | 144,000  |  
| | Payments made during the period                                    |  |  |   | (133,000 | )
| | Changes in liability for pre-existing warranties during the period |  |  |   | 11,000   |  
| |                                                                   
| | Balance, end of the period                                         |  |  | $ | 337,000  |  
| |                                                                   

|15




NOTE 11  SHAREHOLDERS EQUITY



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


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


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


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


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


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


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


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


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


16




NOTE 12  SEGMENT
INFORMATION



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


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


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

|                                       | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
|-------------------------------------- | ------------------------------- | ------------------------------
|                                       | 2003                            | 2002                          
|Net Sales                              |                                 |                               
|Teltronics                             |                                 |                               
|Mexico                                 |                                 |                               
|ISI                                    |                                 |                               
|                                      
|Total net sales                        |                                 |                               
|                                      
|Depreciation and Amortization          |                                 |                               
|Teltronics                             |                                 |                               
|Mexico                                 |                                 |                               
|ISI                                    |                                 |                               
|                                      
|Total depreciation and amortization    |                                 |                               
|                                      
|Interest and Financing Costs           |                                 |                               
|Teltronics                             |                                 |                               
|Mexico                                 |                                 |                               
|ISI                                    |                                 |                               
|                                      
|Total interest and financing costs     |                                 |                               
|                                      
|Segment Profit (Loss)                  |                                 |                               
|Teltronics                             |                                 |                               
|Mexico                                 |                                 |                               
|ISI                                    |                                 |                               
|                                      
|Income (loss) before income taxes      |                                 |                               
|                                      
|Segment Assets                         |                                 |                               
|Teltronics                             |                                 |                               
|Mexico                                 |                                 |                               
|ISI                                    |                                 |                               
|                                      
|Total segment assets                   |                                 |                               
|                                      
|                                       |                                 |                               
|Acquisition of Property and  Equipment |                                 |                               
|Teltronics                             |                                 |                               
|Mexico                                 |                                 |                               
|ISI                                    |                                 |                               
|                                      
|Total acquisition of property and      |                                 |                               
|equipment                              |                                 |                               
|                                      

|17




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


FORWARD-LOOKING STATEMENTS



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


Critical Accounting Policies



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


Our critical accounting policies and
estimates are as follows:


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

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

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

|18
|--

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

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

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

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

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


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


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


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


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


19




Seasonality



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


RESULTS OF OPERATIONS



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

|                                     | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
|------------------------------------ | ------------------------------- | ------------------------------
|                                     | 2003                            | 2002                          
|Net sales                            | 100.0%                          | 100.0%                        
|Cost of sales                        | 59.2%                           | 61.3%                         
|                                    
|Gross profit                         | 40.8%                           | 38.7%                         
|                                    
|Operating expenses:                 
|General and administrative           | 10.4%                           | 8.1%                          
|Sales and marketing                  | 14.6%                           | 17.3%                         
|Research and development             | 4.9%                            | 8.3%                          
|Depreciation and amortization        | 2.3%                            | 2.5%                          
|                                    
|                                     | 32.2%                           | 36.2%                         
|                                    
|Income (loss) from operations        | 8.6%                            | 2.5%                          
|                                    
|Other income (expense):             
|Interest                             | (2.6%)                          | (1.9%)                        
|Financing                            | (0.6%)                          | (0.6%)                        
|Litigation costs                     | --                              | --                            
|Other                                | (0.1%)                          | 0.3%                          
|                                    
|                                     | (3.3%)                          | (2.2%)                        
|                                    
|Income (loss) before income taxes    | 5.3%                            | 0.3%                          
|Provision for income taxes (benefit) | --                              | --                            
|                                    
|Net income (loss)                    | 5.3%                            | 0.3%                          
|                                    

|Net Sales



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


20




Gross Profit Margin



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


Operating Expenses



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


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


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


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


Other Expenses



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


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


21




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


LIQUIDITY AND CAPITAL RESOURCES



Cash flows for the nine months ended September 30, 2003



Operating Activities


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


Investing Activities


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


Financing Activities


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


Liquidity



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


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


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


22




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


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


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


The Company has incurred net losses
for the past two years and the nine month period ended September 30, 003. The Company has
also experienced negative cash flows for the nine month period ended September 30, 2003.
In addition, the Company has limited additional borrowing capacity under its existing
debt agreements; however, we estimate that our cash on hand as of September 30, 2003,
totaling $148,514, future cash flows that we expect to generate from operations, and
availability under our bank line with CIT will be sufficient to fund our operations and
our debt obligations through December 31, 2003.
During the past year, the Company has reduced its operating expenses and has engaged the investment banking firm
of Atlantic American Capital Advisors, LLC as its financial advisor to assist the Company in developing and
exploring strategic alternatives that include raising capital, mergers, acquisitions, strategic partnerships or
joint ventures.  Management is continuing its focus on these items.  Atlantic American engaged Early Bird
Capital, LLC in May of 2003 to assist them in their efforts.  The Company is also focusing on increasing its
sales levels and is introducing new products in the fourth quarter of 2003.  There is no assurance that we will
raise any additional capital, consummate any strategic alternatives or that the introduction of the new products
will result in increased sales.  On the other hand, if we are able to raise such additional funds through public or
private equity financings or from other sources, any financing we obtain may dilute your ownership interests.  If
we raise additional funds through equity financings, we must repay all or a portion of our promissory notes in
favor of Harris and Finova based on the amount of our gross proceeds from any such equity financing.



23




ITEM 3.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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


ITEM 4.  CONTROLS AND
PROCEDURES



Evaluation of Disclosure Controls and Procedures



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


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


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


24




PART II  OTHER
INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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


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

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





ITEM 3. DEFAULTS UPON
SENIOR SECURITIES



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

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


ITEM 5. OTHER INFORMATION - None



ITEM 6(a). EXHIBITS
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10   |  | Second Amendment to Loan and Security Agreement and Fifth Amended and
Restated Senior Secured Promissory Note dated September 9, 2003 between Teltronics, Inc. and Finova Mezzanine Capital Inc.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|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 one report on Form
8-K during the quarter ended September 30, 2003. Information regarding the item reported
on is as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|DateAugust 19, 2003 | Item Reported OnOn August 19, 2003, the Company issued a press release reporting its financial results
                         for its fiscal quarter ended June 30, 2003.
|------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | TELTRONICS, INC.                                                                
|----------------- | --------------------------------------------------------------------------------
|November 14, 2003 | /s/ PATRICK G. MINPatrick G. MinVice President Finance & Chief Financial Officer

|26


EXHIBIT INDEX
|------------------

|ExhibitNumber | Description
|------------- | -----------
|             
|10            |            
|             
|31.1          |            
|             
|31.2          |            
|             
|32            |            

|27
|--