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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

/x/
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2000

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

For the transition period from                to                

Commission file number 0-011275

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

WASHINGTON (State or other jurisdiction of incorporation or organization)	91-0839067 (I.R.S. Employer Identification No.)
22121-20th Avenue SE, Bothell, Washington (Address of principal executive offices)	98021 (Zip Code)

(425) 487-1515
(Registrant's telephone number, including area code)

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

    Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

    Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [  ] No [  ]

APPLICABLE ONLY TO CORPORATE ISSUERS

    State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.

6,515,503 shares of common stock outstanding as of December 31, 2000.

Transitional Small Business Disclosure Format (Check One): Yes [  ] No [X ]

Index		(Page Number)
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Balance Sheets at December 31, 2000 and June 30, 2000		4
	Statements of Operations for the three months and six months ended December 31, 2000 and 1999	5
	Statements of Cash Flows for the six months ended December 31, 2000 and 1999	6
	Notes to Unaudited Financial Statements	7
Item 2. Management's Discussions and Analysis of Financial Conditions and Results of Operations		10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		13
Item 2. Changes in Securities		13
Item 3. Defaults Upon Senior Securities		13
Item 4. Submission of Matters to a Vote of Security Holders		13
Item 5. Other Information		13
Item 6. Exhibits and Reports on Form 8-K		13
Signature		14

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PART 1—FINANCIAL INFORMATION

Item 1. Financial Information (Unaudited)

Balance Sheets at December 31, 2000 and June 30, 2000

Statements of Operations for the three months and six months ended December 31, 2000 and 1999

Statements of Cash Flows for the six months ended December 31, 2000 and 1999

Notes to Unaudited Financial Statements

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TELTONE CORPORATION
BALANCE SHEETS
December 31, 2000 and June 30, 2000
(Unaudited)

				December 31 2000			June 30 2000
ASSETS
Current assets
	Cash and cash equivalents			$	1,614,236		$	503,592
	Trade accounts receivable (net of allowance for doubtful accounts of $38,354 and $35,260)				1,390,219			1,966,907
	Inventories
		Raw materials			704,905			523,227
		Work in process			181,477			157,525
		Finished goods			353,144			445,826
			Total inventories		1,239,526			1,126,479
	Other current assets				155,294			55,629
			Total current assets		4,399,275			3,652,606
Property, plant and equipment — net					569,069			534,376
TOTAL				$	4,968,344		$	4,186,982
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Accounts payable — trade			$	383,161		$	536,393
	Accrued compensation and benefits				711,042			703,029
	Accrued warranty expense				54,627			57,911
	Deferred revenue				186,645			76,263
	Other accrued expenses				55,006			54,618
	Note payable — current portion				21,730			31,779
			Total current liabilities		1,412,211			1,459,993
Note payable — long-term portion								5,529
Stockholders' equity
	Convertible preferred stock — no par value; authorized 6,000,000 shares; 876,684 and 905,364 shares issued and outstanding ($1,753,368 and $1,810,728 liquidation preference)				1,665,236			1,722,596
		Common stock — no par value; authorized 20,000,000 shares; 6,515,503 and 6,294,323 shares issued and outstanding			3,737,695			3,583,885
		Accumulated deficit			(1,846,798	)		(2,585,021	)
		Stockholders' equity			3,556,134			2,721,460
TOTAL				$	4,968,344		$	4,186,982

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

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TELTONE CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended December 31, 2000 and 1999
(Unaudited)

			Three Months Ended December 31					Six Months Ended December 31
			2000			1999		2000			1999
Net sales			$	2,429,999		$	2,986,891	$	5,133,643		$	5,658,328
Cost of goods sold				1,032,925			1,373,216		2,151,231			2,633,368
Gross margin				1,397,074			1,613,675		2,982,412			3,024,960
Operating expenses
	Selling, general and administrative			1,492,475			1,285,782		3,033,078			2,383,205
	Engineering and development			454,720			319,948		866,556			628,554
		Total operating expenses		1,947,195			1,605,730		3,899,634			3,011,759
(Loss) income from operations				(550,121	)		7,945		(917,222	)		13,201
Other income				28,956			2,518		35,446			4,948
Gain on sale of product line									1,620,000
(Loss) income before tax				(521,165	)		10,463		738,223			18,149
Income tax provision
Net (loss) income			$	(521,165	)	$	10,463	$	738,223		$	18,149
Basic net (loss) income per common share			$	(.08	)	$	.00	$	.11		$	.00
Average common shares outstanding				6,504,836			6,102,296		6,429,102			6,071,089
Diluted net (loss) income per common and potential common share			$	(.08	)	$	.00	$	.10		$	.00
Average common and potential common shares outstanding				6,504,836			7,613,310		7,648,612			7,603,323

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

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TELTONE CORPORATION
STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 2000 and 1999
(Unaudited)

			Six Months Ended December 31
			2000			1999
Cash flows from operating activities:
Net income			$	738,223		$	18,149
Adjustments to reconcile net income to net cash used for operating activities:
	Depreciation			90,204			57,038
	Gain on sale of product line			(1,620,000	)
Changes in:
	Accounts receivable			576,688			(26,168	)
	Inventories			(388,231	)		(240,525	)
	Accounts payable and accrued liabilities			(37,733	)		(227,912	)
	Other current assets			(99,665	)		(40,384	)
		Cash used for operating activities		(740,514	)		(459,802	)
Cash flows from investing activities:
	Net proceeds from sale of product line			1,895,184
	Investment in property, plant and equipment			(124,898	)		(128,375	)
		Cash provided by (used for) investing activities		1,770,286			(128,375	)
Cash flows from financing activities:
	Net repayment of note payable			(15,578	)		(14,407	)
	Employee stock sales, net			96,450			28,545
		Cash provided by financing activities		80,872			14,138
Increase (decrease) in cash				1,110,644			(574,039	)
Beginning of period				503,592			780,590
End of period			$	1,614,236		$	206,551

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

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TELTONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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

2. SEGMENT INFORMATION

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

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and information used by management. Operating results and other financial data for each segment are as follows (in thousands):

	Remote Voice		Telecom Equipment	ASICs	Total
Three Months Ended December 31, 2000 and 1999
Net Sales
2000	398		2,032	—	2,430
1999	613		1,667	707	2,987
Net (Loss) Income
2000	(1,071	)	550	—	(521	)
1999	(634	)	553	91	10
Depreciation
2000	22		8		30

	Remote Voice		Telecom Equipment	ASICs	Total
Six Months Ended December 31, 2000 and 1999
Net Sales
2000	866		3,859	409	5,134
1999	1,231		3,144	1,283	5,658
Net Income (Loss)
2000	(2,031	)	984	1,785	738
1999	(1,163	)	1,022	159	18
Depreciation
2000	46		17		63
Identifiable Assets
2000	873		1,997		2,870

    There were no intersegment sales. Segment operating results are measured based on net income or loss. Assets and related depreciation were not separated by reportable segment prior to June 30, 2000. Facilities expense and other indirect expenses were allocated to reportable segments using various methods such as percentage of square footage used to total square footage and estimated allocation of time spent by various personnel. Total identifiable assets and related depreciation of the segments do not equal the financial statement totals at December 31, 2000, because certain assets are not allocated to the segments, primarily cash and cash equivalents and common use property and equipment.

3. STOCKHOLDERS' EQUITY

    The Company has two active stock option plans. The 1992 Employees Stock Option Plan provides for the grant of options to purchase up to 1,900,000 common shares to key employees of the Company. Of this total, options to purchase 1,310,500 shares of common stock are outstanding and 175,500 shares remain available for grant. The Nonemployee Directors Stock Option Plan provides for the grant of options to purchase up to 320,000 common shares to outside directors of the Company. Of this total,

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options to purchase 200,000 shares of common stock are outstanding and 120,000 shares remain available for grant at December 31, 2000. All options are granted at the fair market value of the stock on the date of grant and vest over a four-year period. The maximum term of an option may not exceed six years.

4. FEDERAL INCOME TAX

    At December 31, 2000, approximately $11,470,000 in net operating loss carryforwards were available to offset future taxable income and expire from 2001 through 2020. If substantial changes in the Company's ownership should occur, there may be annual limitations on the utilization of such carryforwards at December 31, 2000. Although the Company has adopted the Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes, there is no tax asset recognized for the net operating loss carryforwards and tax credits due to the Company's loss history and therefore uncertainty regarding future taxable income.

5. NET INCOME PER SHARE

    Basic net income (loss) per common share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and potential common shares outstanding. Potential common shares result from the assumed exercise of outstanding stock options and convertible preferred stock. Diluted earnings per share excludes the effect of antidilutive stock options, and for the quarter ended December 31, 2000, the convertible preferred stock. There were no antidilutive stock options for the quarter ended December 31, 1999.

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

	Three Months Ended December 31,		Six Months Ended December 31,
	2000	1999	2000	1999
Average common shares outstanding	6,504,836	6,102,296	6,429,102	6,071,089
Dilutive effect of potential common shares	—	1,511,014	1,219,510	1,532,234
Average common and potential common shares outstanding	6,504,836	7,613,310	7,648,612	7,603,323

6. SALE OF ASIC SEGMENT

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

7. RECENT PRONOUNCEMENTS

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

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TELTONE CORPORATION

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

Statement of Forward-Looking Information

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

Overview

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

Results of Operations

    In the second quarter of fiscal 2001 net sales increased 7% over the second quarter of the prior year after adjustment for the sale of the ASIC segment in August 2000, and gross margin decreased from 59% to 57% due to a shift in product mix. Operating expenses increased 21% due to the increased investment in the Remote Voice business. This investment exceeded the growth in gross margin dollars and as a result, income from operations of $8,000 in the second quarter of the prior year decreased to a loss from operations of $(550,000).

    In the six months ended December 31, 2000, net sales increased 8% after adjustment for the ASIC sale with gross margins unchanged at 57%. Operating expenses increased 29% due to the investment in Remote Voice. There was a gain of $1,620,000 on the sale of the ASIC segment which resulted in net income of $738,000.

    The Company has $11,470,000 in net operating loss carryforwards available to offset future taxable income which expire from 2001 through 2020. If substantial changes in the Company's ownership occur, there may be annual limitations on the utilization of such carryforwards. The Company has not recognized a tax asset for the net operating loss carryforwards due to the uncertainty regarding the amount of future taxable income.

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

Net Sales by Segment
For Six Months Ended December 31,
(in thousands)

	Remote Voice	Telecom Equipment	ASICs	Total
2000	866	3,859	409	5,134
1999	1,231	3,144	1,283	5,658

Net Income (Loss) by Segment
For Six Months Ended December 31,
(in thousands)

	Remote Voice		Telecom Equipment	ASIC	Total
2000	(2,031	)	984	1,785	738
1999	(1,163	)	1,022	159	18

Remote Voice Segment

    During the six months ended December 31, 2000, net sales decreased in the Company's remote voice products by 30%. This decrease was due to a downturn in sales through Avaya (formerly Lucent) who has historically been a reseller of OfficeLink2000. Sales through Avaya are not expected to rebound to previous levels as the relationship is expected to shift to a marketing partnership where Avaya will refer their customers directly to the Company for OfficeLink2000 applications. Although direct sales and sales through other channels are increasing, management plans to reduce the level of investment in this segment in anticipation of slower sales growth.

Telecom Equipment Segment

    The Telecom Equipment segment grew 23% over the same period of the prior year due to increasing sales of line sharing products as well as the introduction in the fourth quarter of fiscal 2000 of the Telecom Simulation Platform (TSP). The TSP provides T-1 and analog simulation by using software modules running on a standard hardware platform.

ASIC Segment

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

Liquidity and Capital Resources

    The Company had cash on hand at December 31, 2000, of $1,614,000 in addition to a line of credit agreement for $1,500,000, renewable in July 2001. The agreement is collateralized by eligible accounts receivable, inventory, and other tangible and intangible assets and contains financial covenants including working capital and debt ratios, as well as maximum loss provisions. As of December 31, 2000, there were no borrowings outstanding under this line.

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

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    Options to purchase 192,500 shares of common stock were exercised during the first six months of the fiscal year at prices ranging from $.30 to $.60, which provided the Company with $96,450 in cash.

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings
	None
Item 2. Changes in Securities
	None
Item 3. Defaults Upon Senior Securities
	None
Item 4. Submission of Matters to a Vote of Security Holders
	None
Item 5. Other Information
	None
Item 6. Exhibits and Reports on Form 8-K
	(a) Exhibits
	None.

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SIGNATURES

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

	TELTONE CORPORATION (Registrant)
Date February 14, 2001	By	/s/ DEBRA L. GRIFFITH Debra L. Griffith President & Chief Executive Officer
Date February 14, 2001	By	/s/ DEBRA L. GRIFFITH Debra L. Griffith Acting Chief Financial Officer

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QuickLinks

TELTONE CORPORATION BALANCE SHEETS December 31, 2000 and June 30, 2000 (Unaudited)
TELTONE CORPORATION STATEMENTS OF OPERATIONS For the Three Months and Six Months Ended December 31, 2000 and 1999 (Unaudited)
TELTONE CORPORATION STATEMENTS OF CASH FLOWS For the Six Months Ended December 31, 2000 and 1999 (Unaudited)
TELTONE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS
Net Sales by Segment For Six Months Ended December 31, (in thousands)
Net Income (Loss) by Segment For Six Months Ended December 31, (in thousands)
Remote Voice Segment
Telecom Equipment Segment
ASIC Segment
SIGNATURES