form10k-2007.htm

10-K 1 form10k-2007.htm FORM 10-K FOR FISCAL YEAR 2007 form10k-2007.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

S	ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

£	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

For the transition period from _______________________ to ___________________________________

Commission File Number: 0-17893

TELTRONICS, INC.
(Name of small business issuer in its charter)
Delaware	59-2937938
(State or other jurisdiction of Incorporation or organization)	(IRS Employer Identification Number)

2150 Whitfield Industrial Way, Sarasota, Florida 34243
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common stock, $.001 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No T

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No T

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 T No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. N/A T

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer £

Accelerated filer £

Non-accelerated filer T

Small reporting company £

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T

The aggregate market value on the OTC Bulletin Board of the Registrant's common stock held by non-affiliates, computed by reference to the average bid and asked price of the common stock on the OTC Bulletin Board as of the last business day of Teltronics' most recently completed second fiscal quarter (June 30, 2007), was approximately $3,955,761. For purposes of computing such market value, the Registrant has assumed that affiliates include only its executive officers, directors and 5% stockholders. This determination of affiliate status has been made solely for the purpose of this Report, and the Registrant reserves the right to disclaim that any such individual is an affiliate of the Registrant for any other purposes.

As of March 28, 2008, 8,647,539 shares of the Registrant's common stock, par value $.001, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Exhibit index appears on pages 57.

TABLE OF CONTENTS

			PAGE NUMBER

PART I
	ITEM 1.	BUSINESS	1
	ITEM 2.	PROPERTIES	8
	ITEM 3.	LEGAL PROCEEDINGS	8
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	8
PART II
	ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	9
	ITEM 6.	SELECTED FINANCIAL DATA	12
	ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	20
	ITEM 8.	FINANCIAL STATEMENTS	21
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE	43
	ITEM 9A.	CONTROLS AND PROCEDURES	43
PART III
	ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	44
	ITEM 11.	EXECUTIVE COMPENSATION	46
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	51
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	53
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	53
PART IV
	ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	54
SIGNATURES			56
CERTIFICATIONS

iii

PART 1

ITEM 1. BUSINESS

References in this report to the "Company," "Teltronics," "we," "our," or "us" mean Teltronics, Inc. together with its subsidiaries, except where the context otherwise requires. A number of statements contained in this Annual Report on Form 10-K 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-K and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. All dollar amounts are in thousands.

General

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

Management utilizes criteria provided in Statement of Financial Accounting Standards No. 131 to define its operating segments. This standard defines an operating segment as a component of an enterprise (1) which engages in business activities from which it earns sales and incurs expenses, (2) whose operating results are regularly reviewed by the enterprises chief operating decision maker and (3) for which discrete financial information is available.

The Company's operations are classified into three reportable segments, Teltronics, Inc., Teltronics Limited (“UK”) and Mexico. Operating segment data for 2007, 2006 and 2005 are summarized in Note 13 in the notes to the Consolidated Financial Statements in Part II and are incorporated herein by reference.

Our Strategy

We are committed to the design, development and support of innovative communications solutions that enable our customers to increase revenues, decrease costs and improve productivity. This includes: pure IP and hybrid based Switching Systems supporting converged voice and data communications for businesses of all sizes including government and education verticals; Contact Center solutions to effectively and efficiently manage voice, e-mail and web based customer interactions with support staff; and a comprehensive Alarm Management and Service Level Management solution through our Intelligent Systems Management product line.

Our products are manufactured in our ISO 9001:2000 certified factory. This enables us to be more responsive to our customers, as well as providing an additional source of revenue through our ability to provide contract manufacturing services. We have invested in facilities that will allow us to expand our manufacturing for our existing product lines and accommodate an increase in our contract manufacturing services business.

TELTRONICS, INC. SEGMENT

Intelligent Systems Management

As companies adopt technologies to improve communication and collaboration, preventing network and system downtime is essential to the success of a business. The Teltronics Intelligent Systems Management (“ISM”) product line is designed to help service providers and enterprises reduce downtime for converged voice and data networks in today’s multi-vendor, multi-technology environments.

With an increased focus on service level agreements in support of reduced downtime and improved end user productivity, Service Level Management has significantly grown in importance. Service providers and enterprises must be able to predict and prevent problems in order to ensure service quality and delivery. With this objective in mind, Teltronics has expanded its ISM product line to include monitoring and management for critical resources such as VoIP, servers, databases and applications. The expanded suite of ISM products is named Intelligent Service Level Management (“iSLM”). iSLM enables service providers and enterprises to proactively manage a wider variety of environments than ever before, including traditional PBXs, IP telephony, IT infrastructure and application performance. The iSLM product line consists of a centralized management system, IRISnGEN®, and three intelligent remote agents offering unique monitoring capabilities, NET-PATH®, VQProbe and NimBUS to provide a comprehensive Alarm Management and Service Level Management solution.

iSLM IRISnGEN®. IRISnGEN is a best-in-class Windows based alarms management system which provides centralized visibility and control of all monitored systems. Critical data received by IRISnGEN from its Remote Agents (NET-PATH, VQProbe and NimBUS Agents) is displayed instantly through the Alarm Viewer which identifies problem severity, specific trouble areas and faulty equipment. IRISnGEN facilitates remote access to a customer site for correction of service affecting problems, thereby avoiding costly site visits and reducing downtime.

Usability, customized reporting, geographical alarm display, alarm escalation, alarm correlation, and alarm forwarding are just a few of the key features of IRISnGEN. In addition a comprehensive Application Program Interface (API) is available to assist customers in integrating IRISnGEN with legacy management systems and databases.

iSLM NET-PATH®. The NET-PATH suite of intelligent remote agents are host-independent devices designed to monitor and report alarms for nearly any electronic device equipped with a serial interface, alarm contact or network connection. NET-PATH utilizes an architecture specifically engineered for unattended operation. It incorporates a built-in UPS to provide the highest possible reliability for monitoring mission-critical devices.

Tremendous extensibility in data screening allows NET-PATH to detect and react to changing host conditions with customized responses. NET-PATH monitors legacy PBX equipment or IP Telephony communications systems and provides all of the data needed to effectively report and correct service-affecting problems.

iSLM VQProbe. VQProbe is a high performance, standards-based, non-intrusive call quality monitoring and diagnostic agent that integrates directly into the ISM/iSLM suite of products. It provides real-time visibility of network performance, detection of transient problems and comprehensive diagnostic data. VQProbe collects voice quality data transmitted in an RTCP-XR stream or measures key characteristics of the packet voice stream (RTP packets) and calculate real-time performance data use to detect, characterize and report transient problems. It provides detailed information on the severity and distribution of packet loss and discards due to jitter and other essential diagnostic data. Most importantly, VQProbe is able to detect the transient IP problems and assess their effects on call quality.

iSLM NimBUS. For data collection, service automation and service level management, NimBUS offers a comprehensive suite of infrastructure monitoring agents. NimBUS agents enable full coverage of heterogeneous IT infrastructures. Monitoring probes include support for networks, databases, servers, middleware, email, applications, web-based services, directory services, and much more. NimBUS open

APIs, flexible architecture, and out-of-the-box third-party integrations and gateways, ensure that adapting to other management tools and monitoring processes is easily achieved.

NimBUS is a Service Level Management platform that provides scalable, resilient, and reliable monitoring capabilities for Service Providers that wish to proactively manage their clients IT infrastructures and critical business services.

Customer Contact Management Systems

OmniWorks®. OmniWorks is a Windows client-server based, sophisticated multi-media customer contact and management system for use by enterprise operations whose mission includes receiving or launching large numbers of telephone calls. The product also has the capability of receiving or launching large quantities of emails, or accommodating real time web-based responses to product/services queries through "chat" sessions. The system detects information about callers, organizes the calls according to predetermined priorities, places the calls in "queues" to be serviced by employees, and may even route the calls based on the "skills" of the call handlers ("skills-based routing").

OmniWorks may be deployed in small call centers with only a few agents or call handlers, or it may be used in large, complex applications with hundreds of agents. OmniWorks integrates with the CERATO product line and is available to any of the Company's distribution partners with support from its professional services group; however, the target market is larger users with sophisticated IT requirements and infrastructures.

Switching Systems

Building on decades of enterprise telephony leadership and experience, Teltronics switching systems offer 99.999% quality of service, mission critical reliability and scalability. With more than 15,000 systems in operation world wide, Teltronics is the solution of choice for a wide variety of industries including, service providers, utilities, manufacturing, retail, government, education, healthcare and financial institutions. Scaling from 8 to 9,216 ports, the Cerato® family of products provides hybrid and pure IP solutions supporting small, medium and large enterprises with one or multiple locations.

CERATO SE, ME and LE. The Cerato SE is a new edition to Teltronics. It is a hybrid key system that integrates all the communications needs of a small business into a single platform including voice over internet protocol “VoIP”, voicemail, automated attendant, unified messaging and computer telephony. The SE supports up to 48 analog or digital subscribers and up to 8 VoIP Subscribers.

Expanding on the success of the 20-20™, Teltronics launched a whole new range of products under the Cerato name. The Cerato ME and LE offers the same unsurpassed reliability and feature rich services customers have previously enjoyed but with a reduced footprint so less space is required for implementation. The Cerato ME and LE are full-featured, redundant, high-density communication systems with a complete set of calling features and multi-media applications supporting, analog, digital, VoIP and softphone subscribers.

The ME consists of one high density common control shelf and any combination of high density expansion shelf, mid density expansion shelf and low density expansion shelf that can extend up to 2,048 ports.

The LE consists of a common control shelf that is housed in one cabinet with redundant common equipment. As with the ME, the interface units are located in the high density expansion shelf, mid density expansion shelf and low density expansion shelves. Any combination of expansion shelves can extend up to 9,216 ports.

As with the 20-20, these switching products may be configured for fully redundant common control when system availability is critical, such as in large call centers or critical government applications. As an example, a variant of the 20-20 is used in FAA ground-to-air and ground-to-ground applications where down time must be in the order of less than 5 seconds in a year. Known for its robust computer-

telephony interface, the Teltronics Switching Systems have been used by systems integrators throughout the world for large custom applications as well as "local dial tone" in small central office applications.

CERATO Vision® IP (“VIP”). The Cerato VIP is a highly reliable, cost effective option for businesses requiring basic calling features but want the cost savings associated with a converged voice and data network. It operates as a stand alone phone system as well as a remote phone system which integrates with the Cerato ME or LE. The Cerato VIP family of products supports terminations to traditional Digital and Analog Public Switched Telephone Network (“PSTN”) as well as VoIP networks. It is available in a number of platforms that support 128 Direct VoIP terminations, T1/E1 Digital trunks, 8. 24 or 32 Analog Subscribers, 4 or 8 Analog LS trunks and includes an embedded SIP server.

CERATO IP. Previously named Cypreon, the Cerato IP is a pure IP and Session Initiation Protocol (“SIP”) switching system specifically designed to meet the needs of small to medium sized enterprises (both single-site and multi-location). The system combines the high speed access of broadband, the reliability of modern telecommunications, and the power of full-featured network servers to provide high quality voice and data communications to employees whether they work at the office, at home, or around the globe.

The system can sit behind an existing legacy private branch exchange (“PBX”) to provide VoIP functionality, or connect directly to the PSTN and IP networks. It supports standard analog and digital trunk connections to the PSTN plus WAN gateway connections to corporate WANs and even the internet for VoIP call transmission. The system supports portal-to-portal VoIP and cost-saving "jump off" capability that enables users to transmit voice calls over the IP network to achieve long distance cost savings then "jump off" and complete the final miles over the PSTN. Simplicity of installation, programming, and administration/use are some of Cerato IP’s most appealing benefits. Intuitive, easy to use graphical administration tools take the complexity out of system installation and administration, and Cerato IP's Fingertip Toolset™ enables employees to manage their own workstation settings and launch powerful integrated application suites at the touch of a button.

Linux-based Cerato IP supports up to a total of 350 ports, including up to 200 IP phones, WAN Gateways to provide portal-to-portal VoIP, plus PSTN Gateways to support up to 128 Analog trunks and/or phones and up to 96 T1 PRI/120 E1 PRI trunks. The target Cerato IP market is customers with single or multi-site campus environments and less than 200 phones.

The Company continues to invest in engineering development to maintain and expand capabilities to include IP Telephony convergence.

Emergency Response Systems

Telident Enterprise Systems. In the business sector, the Telident Enterprise Systems product line provides life saving information about 911 calls made by users of PBXs and other telephone systems. Few people realize that emergency response personnel may find it impossible to locate a 911 caller in a multi-building business or on a college campus. This life-threatening problem is the result of a public E911 system that never contemplated modern telecommunications technology such as PBX's and wireless extensions. The Telident Enterprise Systems products are designed to ensure that emergency personnel receive the information needed to quickly and accurately locate a 911 caller. Our Station Translation System™, and Database Maintenance software are installed in over 1,000 businesses of all sizes.

The Company decided that the 911 Emergency business sector was not strategic to the overall future of the Company. The Company had already exited the PSAP business. The Telident product line was sold to Amcom Software, Inc. in January of 2008.

Electronic Manufacturing Services

Teltronics provides electronic manufacturing services for companies in the telecommunications, industrial control, test and measurement and other computer-related industries. Services include design and test ability reviews, turnkey material procurement and management, automated through-hole or surface mount circuit board assembly, in-circuit and functional test, and final mechanical integration. Teltronics' manufacturing operations are certified to ISO Q9001 - 2000, BABT 340. The manufacturing facility is also UL registered. Through our quality certifications, Teltronics has established and demonstrated effective procedures and processes that ensure that all products are manufactured, installed and serviced under a quality system, which carries an internationally recognized and certified level of excellence.

Teltronics' current manufacturing capacity should allow for increased growth of the Company's existing product lines and accommodate an increase in electronic manufacturing services business.

Trademarks, Patents and Copyrights

We rely on patent, trademark, trade secret and copyright laws both to protect our intellectual property, including our proprietary technology, and to protect us against claims from others. We believe that we have direct intellectual property rights covering substantially all our material technologies. We currently hold a world-wide, non-exclusive, fully paid-up license to make, use and sell the inventions under approximately 30 U.S patents and numerous international patents and patent applications relating to the 20-20 digital switching product line. We consider the patents relating to our digital switching products to be the most important to our business. The patents relating to the 20-20 digital switching systems expire on various dates between 2007 and 2019. We also currently own a patent relating to a personal translator device for assisting communications. We have approximately 25 registered trademarks in the United States, of which we consider the 20-20 and the SEBea to be our most valuable. We license some technology from third parties that we use in providing manufacturing services to our customers. We believe that such licenses are generally available on commercial terms from a number of licensors. Generally, the agreements governing such technology grant us non-exclusive licenses regarding the subject technology and terminate upon a material breach by us.

The Company also seeks to protect its confidential and proprietary information through the enforcement of confidentiality and non-compete agreements presently executed by key employees.

Component Procurement

The Company assembles a majority of its products at its manufacturing facility in Sarasota, Florida. All components used in the assembly of the Company's products are purchased from distributors and manufacturers.

Purchase orders for components are placed from one month to six months in advance, depending on the supply sensitivity of a particular component. Most components are available from several sources, based upon current price quotations. If these suppliers should stop carrying or manufacturing components for the Company, the Company's operations could be adversely affected until alternative sources are located and increased operating costs could result from product re-engineering required to use such substitute components. Certain electronic components used in the Company's products are purchased through American distributors from sources outside of the United States. The costs of such components increase as the value of the United States dollar decreases in relation to foreign currencies. In addition, the availability of such components may be affected by factors external to the United States, including war, civil strife, embargo and export or import restrictions. Although there can be no assurance for the future, the Company has not experienced and does not anticipate experiencing any significant difficulty in purchasing components.

Backlog

The Company's backlog at December 31, 2007 was approximately $12,374, as compared to $11,513 at December 31, 2006. The Company's backlog is for orders that have scheduled deliveries or maintenance over the next twelve months, and is not an indication that the Company is unable to fulfill these requirements. Given the nature of our relationships with our customers, we allow our customers to reschedule deliveries, and therefore, backlog is not necessarily indicative of our future financial results.

Seasonality

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

Customers

Our core strategy is to establish and maintain long-term relationships with leading telecommunications customers. A small number of customers have historically represented a major portion of our net sales. The table below sets forth the respective portion of net sales for the applicable period attributable to our customers who individually accounted for more than 10% of our net sales in any respective period:

	Years Ended December 31,
	2007	2006	2005

New York City Department of Education	24%	22%	19%
Nielsen Media Research	11%	8%	7%
IBM	1%	7%	10%

We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net revenue. The historic percentages in the table above are not necessarily indicative of the percentage of net sales that we may receive from any customer in the future.

Competition

The telecommunications network industry is highly competitive. For the Switching Systems and Contact Center product lines the dominate competitors are Cisco, Avaya and NORTEL. For the ISM product line our primary competitors are HP, IBM, BMC and NET IQ. We compete very favorably with all of our competitors based on price/total cost of ownership, reliability, scalability, technology, ease of administration, installation and use, customer service and technical support.

Research and Product Development

The Company maintains continuing research and development efforts directed toward enhancement of its existing product lines and development of new products. The Company's research and development expenditures during the fiscal years ended December 31, 2007, 2006 and 2005 were $4,127, $4,108 and $3,978, respectively.

Regulatory

Federal Communications Commission. The Company must comply with certain regulatory guidelines. Part 68 of the Federal Communications Commission ("FCC") Rules ("Part 68") contains the majority of the technical requirements with which telephone systems must comply to qualify for FCC registration for interconnection to the public telephone network. Part 68 registration represents a determination by the FCC that telecommunication equipment interfacing with the public telephone network complies with certain interference parameters and other technical specifications. FCC registration for the Company's products has been granted and the Company intends to apply for FCC registration for all of its new products.

Certain of the Company's products are also subject to and comply with regulation under Part 15 of the FCC Rules ("Part 15") which requires equipment classified as containing a Class A computing device to meet certain radio and television signal interference requirements. Notwithstanding this minimum compliance; however, Part 15 provides that operators of equipment containing Class A computing devices may be required to take whatever steps are necessary to correct radio and television interference caused by operation of such equipment in a residential area.

Environmental. We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process. Although we believe that we are currently in substantial compliance with all material environmental regulations, any failure to comply with present and future regulations could subject us to future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expense to comply with environmental regulations.

Employees

As of December 31, 2007, the Company had 252 employees.

Available Information

Copies of Teltronics' Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through Teltronics' website (www.teltronics.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the Securities and Exchange Commission.

ITEM 2. PROPERTIES

We lease our corporate headquarters and manufacturing facility in Sarasota, Florida. The leased facility consists of approximately 72,000 square feet, approximately 36,000 square feet of which are used for laboratories and offices.

Our lease expires in February 2011. Our lease also includes an additional single story building located in the same vicinity. This building consists of approximately 7,500 square feet.

We lease a facility in Whitestone, New York that is the base of our technical support group. This lease expires in August 2010.

The Company also leases offices in several locations under leases expiring at various dates. We believe that our existing facilities are suitable and adequate for our current needs.

ITEM 3. LEGAL PROCEEDINGS

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

In February of 2007 the Company agreed to make monthly payments of $15.7 commencing in March 2007 in settlement of litigation over attorney fees associated with previous litigation with FCG Holdings Ltd. (“FGC”). The last payment was made in December 2007. One of the Company’s directors is affiliated with FGC.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED

STOCKHOLDER MATTERS

Our common stock currently trades on the OTC Bulletin Board under the symbol "TELT." The following table sets forth, for the fiscal quarters indicated the high and low bid quotations for the Company's common stock as reported on the OTC Bulletin Board. OTC Bulletin Board quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not necessarily represent actual transactions.

	COMMON STOCK
	2007				2006
	High		Low		High		Low
PERIOD

1st Quarter	$	0.57	$	0.35	$	0.80	$	0.40
2nd Quarter		0.77		0.42		0.86		0.40
3rd Quarter		0.72		0.35		0.64		0.31
4th Quarter		0.50		0.30		0.45		0.29

On March 28, 2008, the last reported sales price for the Company's common stock as reported on the OTC Bulletin Board was $0.31 per share. As of March 28, 2008, there were approximately 490 shareholders of record of the Company's common stock.

The Company historically has not paid cash dividends on its common stock. The Company intends to retain all of its earnings for the future operation and growth of its business and does not intend to pay cash dividends in the foreseeable future. Additionally, certain covenants in our financing agreements restrict the payment of cash dividends.

The Preferred Series A stock are restricted securities owned by the Company's Director and Senior Vice President of Business Development and are 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 Company has 12,625 shares of Preferred Series B Convertible stock outstanding at December 31, 2007 and 2006. The Preferred Series B Convertible stock provides for a $20 per share annual dividend, payable quarterly. The holder of the Preferred Series B Convertible stock has the right, at its option, to convert the 12,625 preferred shares to 721,429 common shares. The Company has the right, but not the obligation, 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, including the right to appoint a director which has been exercised by the holder.

The Company has 40,000 shares of Preferred Series C Convertible stock outstanding at December 31, 2007 and 2006. The Preferred Series C Convertible stock, which is owned by an entity controlled by the Company’s Director and Senior Vice President of Business Development, provides for a $20 per share annual dividend, payable quarterly. The holder of the Preferred Series C Convertible stock has the right, but not the obligation, at its option, to convert the 40,000 preferred shares to 1,454,545 common shares, 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 for 100% of the face value plus accrued and unpaid dividends.

In July 2005, the Company issued a warrant to purchase 236,236 common shares in connection with the July 2005 loan agreement. As part of the refinancing the Company completed during 2007, the Company paid $42 to the lender for the appreciated value of the warrants, and the warrants were cancelled.

In connection with a settlement agreement entered into in October 2005, the Company issued 750,000 restricted shares of common stock.

The above described issuances and modifications of warrants and preferred stock terms were consummated in privately negotiated transactions in reliance on exemptions pursuant to Section 4(2) under the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

The information relating to our equity compensation plans required by this item is included in Item 12 under the heading "Equity Compensation Plans" and incorporated by reference herein.

STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total return on the Company’s Common Stock as compared to the cumulative total return for the Nasdaq Stock Market Total Return Index – US Companies, and the Nasdaq Stock Market – Telecommunications Stock Index. The Stock Performance Graph assumes $100 was invested in the stock or the index on December 31, 2002 and assumes that no dividends were paid.

Five Year Cumulative Total Return Chart

(Per $100 Invested)

	2002	2003	2004	2005	2006	2007
Teltronics, Inc.	100	510	540	440	340	300
NASDAQ Stock Market – US Companies	100	150	163	165	181	199
NASDAQ Stock Market – Telecommunications Stock	100	169	182	169	216	236

Five Year Cumulative Total Return Graph

(Per $100 Invested at Fiscal Year Ending December 31,)

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical consolidated financial data was derived from the Company's audited financial statements and should be read in conjunction with the consolidated financial statements and the related notes thereto in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7.

	2007			2006			2005			2004			2003
Statement of Operations Data:

Net sales	$	40,631		$	46,891		$	46,111		$	46,046		$	46,884
Gross profit		15,448			19,311			18,178			17,543			18,287
Recurring operating expense		15,441			16,198			16,182			16,707			19,883
Impairment of fixed assets		---			---			1,583			---			---
Total operating expenses		15,441			16,198			17,765			16,707			19,883
Income (loss) from operations		7			3,113			413			836			(1,596	)
Other income (expense):
Interest		(1,948	)		(1,449	)		(1,283	)		(1,631	)		(1,675	)
Non-operating gain (loss)		(136	)		(19	)		4,728			1,341			(25	)
Total other income (expense)		(2,084	)		(1,468	)		3,445			(290	)		(1,700	)

Net income (loss)	$	(2,070	)	$	1,607		$	3,816		$	539		$	(3,303	)
Net income (loss) available to common shareholders	$	(3,022	)	$	954		$	3,168		$	(85	)	$	(3,905	)

Net income (loss) per share:
Basic	$	(0.35	)	$	0.11		$	0.39		$	(0.01	)	$	(0.54	)
Diluted	$	(0.35	)	$	0.10		$	0.36		$	(0.01	)	$	(0.54	)

Shares used to compute amount:
Basic		8,646,706			8,637,246			8,041,323			7,831,051			7,297,512
Diluted		8,646,706			9,280,289			10,540,391			7,831,051			7,297,512
Balance Sheet Data:
Working capital (deficiency)	$	116		$	798		$	(326	)	$	(2,922	)	$	(10,889	)
Total assets		18,033			16,692			16,980			16,424			16,320
Line of credit, current portion of long-term debt and capital lease obligations		5,788			6,228			5,967			4,831			11,250		(1)
Long-term debt and capital lease obligations, less current portion		4,125			2,366			3,081			7,885			1,383
Total shareholders' deficiency	$	(4,487	)	$	(1,452	)	$	(2,586	)	$	(6,044	)	$	(6,124	)

(1) Reflects notes payable in default as of December 31, 2003.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This management’s discussion and analysis should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report on Form 10-K.

A number of statements contained in this Annual Report on Form 10-K 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-K and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

General Overview

The Company focuses on three major telecommunications markets. The first is the monitoring of alarms from PBXs, voice mail systems and data networks. This market is referred to as the Intelligent Systems Management market for which the product is sold directly to service companies to enable them to be pro-active in maintaining their systems. Typical service companies are companies such as Verizon, Black Box, Southwestern Bell (new AT&T), Telus and Bell Canada. The Company maintains a sales force nationwide to service these major customers. The Company has been successful in not only increasing the number of products sold to these customers, but also finding new service company customers. Typically the sales cycle would be six months to eighteen months while the customer tests the product before installation. A new customer would then purchase an IRISnGEN, which is a centralized piece of software that monitors the alarms at the remote sites. At the remote sites, the Company provides one of its SEB-II's or an SEBea, which is an alarms management, monitoring, pro-active computerized device. The Company expects to continue to invest in research and development to develop, not only next generation versions of the centralized Windows® NT based software (IRISnGEN), but also the SEB hardware including NET-PATH®.

The second telecommunications market is in the Digital Switching Systems arena which involves providing telephone switches to Small and Medium Business Markets (“SMB”) as well as advanced Automatic Call Distribution. The Company's premier product in this market is the 20-20™ switching system.

The 20-20 switching system offers a price competitive solution from 300 ports to just under 10,000. The 20-20 products are being sold both directly and through distributors, particularly outside the USA.

The 20-20 switching system is technically approved by, and has been installed in, over 60 countries. Teltronics continues to support the international channels and the distributors of the 20-20 switching system sell to and provide installation and support for their customers.

Teltronics also has some significant direct customers, in particular the New York City Department of Education, the City of New York Department of Corrections and the Federal Bureau of Prisons. These installations are supported by our organization in Whitestone, New York.

The Company also offers a Contact Center product, OmniWorks. The product continues to be enhanced and the product now provides, web chat, e-mail, and multimedia to the Contact Center.

The third telecommunications market is VoIP. The Company entered this market in the fourth quarter of 2003 with the introduction of Cypreon. Cerato IP (formerly Cypreon) combines the power of voice, data and video into a single, robust and feature rich solution. The market focus of this product is the SMB. Cerato IP allows these businesses to embrace cost and time saving advances previously reserved for only the largest of corporations.

The system supports all the telephony features expected from a business communication private computer exchange (“PCX”) platform designed to address the requirements of small to medium enterprises, plus a variety of applications to enhance, streamline, and personalize business communications. Feature support includes most standard telephony functions, such as multi-party conference at the desktop, rules based call forwarding, message indication, hot desking, night service, attendant console support, and call park/page/pickup. A few of Cerato IP’s initial applications include unified messaging, voicemail, speech enabled automated attendant, contact center and contact management applications.

Cerato IP’s ability to provide fully featured telephony functions, complimented and enhanced by intelligent call control applications, make it an attractive overall solution for improving, streamlining, and personalizing both internal and external business communications. One of the key features of the system is the simplified administration. Its browser based administrative interface makes programming and maintaining the system very user friendly.

Cerato IP is designed to operate as both a single site and enterprise solution. The ability to interconnect multiple systems over an IP WAN allows hundreds of users independent of physical location to be seamlessly interconnected.

The Company continues to invest in engineering development to maintain and expand its 20-20 switching systems capabilities to include IP Telephony convergence. With the introduction of IP Telephony gateways, the more than 15,000 20-20 end users can upgrade their systems, allowing them to retain the existing 20-20 system investments.

Additionally, the Company has been successful in manufacturing its own products. To supplement its own business, the Company also sells electronic manufacturing services to companies that require high quality, but have low volume manufacturing demand. This enables the Company to maximize its production facility and more effectively absorb overhead costs.

The Company has experienced seasonality due in part to purchasing tendencies of our customers during the fourth and first quarters of each year. Consequently, results for the fourth and first quarters of each year are not typically as strong as results during the other quarters.

Critical Accounting Policies and Estimates

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. Critical accounting policies have the potential to have the most significant impact on the consolidated financial statements. We have disclosed all significant accounting policies including our critical accounting policies in Note 2 to the consolidated financial statements included in this Form 10-K.

Our most critical accounting policies revolve around the manner in which the Company recognizes revenues and are summarized as follows:

Revenue recognition

Manufacturing. Revenues from sales of product, including our electronic manufacturing services business are recognized when title and risk of loss passes, which is generally when the product is shipped. Based on the Company's history of providing manufacturing services, we believe that collectibility is reasonably assured.

Turnkey Contracts. Certain of the Company’s customers purchase equipment on a turnkey basis under which the Company agrees to provide the equipment, install the equipment and train the customers personnel. On those contracts in which the customer accepts ownership of the individual deliverables, a general right of return exists on the deliverable and it is both probable and substantially within the Company’s control to deliver the remaining elements, revenues will be recognized as the customer accepts the deliverables.

For those customers that only accept multiple deliverable projects at the conclusion of the project, revenue is recognized under either the completed contract method or the percentage-of-completion method depending on the right to require the customer to make progress payments to support their ownership investment and to approve the services performed to date if they meet the contract requirements. If the percentage-of-completion method is used, revenues and related costs are recognized 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 specific contract. Provision is made for any anticipated contract losses in the period that the loss becomes evident.

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

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

Impairments

If the carrying value of an asset exceeds the sum of estimated undiscounted future cash flows, an impairment loss is recognized for the difference between the estimated fair value and carrying value.

The Company assesses the recoverability of goodwill and intangible asset not subject to amortization under FAB No. 142, “Goodwill and Other Intangible Assets.”

Inventory obsolescence

Inventories are stated at the lower of cost or market. In the electronics and telecommunications industry technology changes rapidly and, accordingly, a considerable amount of judgment is used when evaluating inventories for the level of obsolescence.

Results of Operations

The following tables set forth certain data, expressed as a percentage of revenue, from consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005.

	2007			2006			2005

Net sales		100.0	%		100.0	%		100.0	%
Gross profit		38.0			41.2			39.4
Recurring operating expense		38.0			34.6			35.1
Impairment of fixed assets		---			---			3.4
Total operating expenses		38.0			34.6			38.5
Income from operations		0.0			6.6			0.9

Other income (expense):
Interest		(4.9	)		(3.1	)		(2.8	)
Non-operating gain (loss)		(0.3	)		0.0			10.2

Total other income (expense)		(5.1	)		(3.1	)		7.4

Income before income taxes		(5.1	)		3.5			8.3

Provision for income taxes		0.0			0.1			0.1
Net income (loss)		(5.1	)%		3.4	%		8.2	%

The following is a discussion of results of operations for each of the three years ended December 31, 2007, 2006 and 2005. The discussion should be read in conjunction with our Consolidated Financial Statements and notes thereto included elsewhere herein. The statements regarding the telecommunications industry, our expectations regarding our future performance and other non-historical statements in this discussion are forward-looking statements.

Net Sales and Gross Profit Margin (in thousands)

Net Sales decreased $6,260 or 13.3 % for the year ended December 31, 2007 as compared to the same period in 2006. Net sales increased $780 or 1.7% for the year ended December 31, 2006 as compared to the same period in 2005.

The decrease in net sales for the year ended December 31, 2007 was primarily the result of a decrease of $5,628 in net sales from the US, a decrease of $423 in net sales from the UK subsidiary, and a $209 decrease in net sales from the Mexico subsidiary. The overall decrease in net sales for the year ended December 31, 2007 was primarily the result of reduced sales in the 20-20 market based on competitive pressure from the VoIP switch providers, deceases in the Intelligent Systems Management market which was as a result of the change in focus from the telephony market to the server based systems, and decreases in the Contract Services market. The increase in net sales for the year ended December 31, 2006 was primarily the result of an increase of $542 in net sales from the US, an increase of $214 in net sales from the Mexico subsidiary, and an increase of $24 in net sales from the UK subsidiary. The overall increase in net sales for the year ended December 31, 2006 was primarily the result of improved sales in the Intelligent Systems Management market and an increase in the 20-20 market, offset with decreases in the non-Teltronics equipment market and E911 markets.

Gross profit margin for the years ended December 31, 2007, 2006 and 2005 was 38.0%, 41.2% and 39.4%, respectively. Gross profit margin fluctuates based on the volume and mix of sales.

Operating Expenses

Recurring operating expenses were $15,441, $16,198 and $16,182 for the years ended December 31, 2007, 2006 and 2005, respectively. In October 2005 the Company recorded an additional $1,583 charge for the impairment of assets associated with capitalized software.

2007

General and administrative expenses increased $265 for the year ended December 31, 2007 as compared to the same period in 2006. The net increase for the year ended December 31, 2007 was primarily the result of the following items: (a) a $250 increase in compensation and fringe benefit expenses, (b) a $110 increase in legal fees, (c) a $52 increase in rent expense and (d) a $41 increase in real estate tax expense. These increases were partially offset with the following items: (a) a $98 decrease in bad debt expense, (b) a $98 decrease in telephone expense, and (c) other miscellaneous expenses.

Sales and marketing expenses decreased $933 for the year ended December 31, 2007 as compared to the same period 2006. The net decrease for the year December 31, 2007 was primarily the result of the following items: (a) a $542 decrease in commission and fringe benefit expenses, a $182 decrease in consulting and professional services, (c) a $108 decrease in rent expense, (d) a $70 decrease in bad debt expense from the UK operation, and (e) a $54 decrease in telephone expense. These decreases were partially offset with a $52 increase in compensation expense, and other miscellaneous expense changes.

Research and development expenses increased $19 for the year ended December 31, 2007 as compared to the same period in 2006. The net increase for the year December 31, 2007 was primarily the result of a $369 increase in R&D material and equipment offset with a $322 decrease in compensation and other miscellaneous expense changes.

Depreciation and amortization expense decreased $108 for the year ended December 31, 2007 as compared to the same period in 2006. The decrease for the year ended December 31, 2007 was primarily the result of lower asset purchases and older assets becoming fully depreciated.

2006

General and administrative expenses decreased $537 for the year ended December 31, 2006 as compared to the same period in 2005. The net decrease for the year ended December 31, 2006 was primarily the result of the following items: (a) a $353 decrease in legal fees, (b) a $180 decrease in telephone expense, (c) an $84 decrease in rent expense, (d) a $64 decrease in recruiting costs, (e) a $60 decrease in business insurance, (f) a $42 decrease in shipping charges, and (g) a $33 decrease in public entity expenses. These decreases were partially offset with the following items: (a) a $107 increase in compensation and benefits expenses primarily associated with the replacement of personnel, (b) a $157 increase in the provision for doubtful accounts and (c) other miscellaneous expense changes.

Sales and marketing expenses increased $578 for the year ended December 31, 2006 as compared to the same period 2005. The net increase for the year December 31, 2006 was primarily the result of the following items: (a) a $251 increase in compensation expense (b) a $227 increase in commission expense, (c) a $137 increase in travel, entertainment, and tradeshow, (d) a $108 increase in UK bad debt expense and (e) a $66 write-off of a Mexican tax receivable. These increases were partially offset with the following items: (a) a $82 decrease in temporary labor, (b) a $77 decrease in small equipment and software expense, and (c) other miscellaneous expense changes,

Research and development expenses increased $130 for the year ended December 31, 2006 as compared to the same period in 2005. The net increase for the year ended December 31, 2006 was primarily the result of a $361 increase in compensation and fringe expense, offset with a $210 decrease in temporary labor, and other miscellaneous expense changes.

Depreciation and amortization expense decreased $155 for the year ended December 31, 2006 as compared to the same period in 2005. The decrease for the year ended December 31, 2006 was primarily the result of lower asset purchases and older assets becoming fully depreciated.

Other Income (Expense)

For the year ended December 31, 2007, interest expense increased $499 and non-operating gain (loss) increased $117 as compared to the same period in 2006. The increase in interest costs was primarily the result of an additional charge of approximately $489 from the debt restructuring in 2007. The increase in non-operating loss of $117 was primarily related to a charge of $114 associated with the settlement of sales tax audits.

For the year ended December 31, 2006, interest expense increased $166 and non-operating gain (loss) decreased $4,747 as compared to the same period in 2005. The increase in interest costs was primarily the result of the debt restructured during 2005. The decrease in non-operating gain (loss) of $4,747 was primarily related to $3,897 gain associated with the satisfaction of a secured promissory note, $450 associated with the sale of patents, and $211 associated with the settlement of the Tri-Link debt, which were recorded in 2005.

Liquidity and Capital Resources

Net cash flows provided by (used in) operating activities

Net cash used in operating activities was $176 for the year ended December 31, 2007. The $176 was comprised of the following items: (a) net loss of $2,070, (b) net non-cash income of $770, (c) an increase in operating assets of $1,233, and (d) an increase in operating liabilities of $2,357. The net increase in operating assets was primarily the result of an increase in accounts receivables of $593, a $281 increase in inventory and a $259 increase in other assets. The net increase in operating liabilities was primarily the result of increased accounts payable of $2,239, an increase in accrued liabilities of $473, offset with a $355 decrease in deferred revenue. The net non-cash income in 2007 of $770 was primarily comprised of depreciation and amortization of $440, the amortization of deferred finance costs of $247, and an $85 provision for slow moving inventory.

Net cash provided by operating activities was $635 for the year ended December 31, 2006. The $635 was comprised of the following items: (a) net income of $1,607, (b) net non-cash income of $1,418, (c) an increase in operating assets of $1,058, and (d) a decrease in operating liabilities of $1,332. The net increase in operating assets was primarily the result of an increase in accounts receivables of $2,166, offset with a $709 decrease in inventory and a $410 decrease in prepaid expenses. The increase in accounts receivables is the result of increased sales in the fourth quarter. The net decrease in operating liabilities was primarily the result of decreased accounts payable of $1,590, offset with an increase in accrued liabilities of $446. The net non-cash income in 2006 of $1,418 was primarily comprised of depreciation and amortization of $574, provision for slow moving inventory of $222, and provision for doubtful accounts of $454.

Net cash used in operating activities was $1,110 for the year ended December 31, 2005. The $1,110 was comprised of the following items: (a) net income of $3,816, (b) net non-cash income of $1,384, (c) an increase in operating assets of $4,253 and (d) an increase in operating liabilities of $711. The net increase in operating assets was primarily the result of an increase in inventory of $2,621 and a $1,026 increase in accounts receivable. The increased inventory, of which $1,618 is raw materials, resulted from the increased purchasing to meet forecasted demand which the Company was not able to fulfill in 2005 due to capacity constraints in the fourth quarter. The increase in accounts receivable is the result of increased sales in the fourth quarter. The net increase in operating liabilities was primarily the result of an increase in accounts payable of $672, attributable in part to the inventory increase sited above. The net non-cash income in 2005 of $1,384 was primarily comprised of the following items: (a) other non-operating gains of $4,603, which included the gain on the extinguishment of debt, offset with, (b) impairment of fixed assets of $1,583, (c) depreciation and amortization of $1,558, and (d) provision for slow moving inventories of $214.

Net cash flows provided by (used in) investing activities

Net cash flows used in investing activities were $534 for the year ended December 31, 2007 as the Company acquired property and equipment to support its operations.

Net cash flows used in investing activities were $379 for the year ended December 31, 2006 as the Company acquired property and equipment to support its operations.

Net cash flows provided by investing activities were $176 for the year ended December 31, 2005 primarily driven by the $495 proceeds from the sale of the iCommunicator patent offset with acquisitions of property and equipment.

Net cash flows provided by (used in) financing activities

Net cash flows provided by financing activities for the year ended December 31, 2007 were $1,067. The Company had net repayments on its line of credit of $1,366 and net borrowings on the term loan of $2,865 associated with the refinancing. Additionally, the Company paid dividends on the Preferred Series B convertible stock of $252.

Net cash flows used in financing activities for the year ended December 31, 2006 were $743. The Company had net borrowings on its line of credit of $282 and principal repayments of $777. Additionally, the Company paid dividends on the Preferred Series B convertible stock of $248.

Net cash flows provided by financing activities for the year ended December 31, 2005 were $572. The Company had net borrowings on its line of credit of $2,558 and net principal repayments of $2,011. Additionally, the Company paid dividends on the Preferred Series B convertible stock of $227. The Company also entered into a $250 long term loan with an entity controlled by a Director of the Company.

Liquidity

As of December 31, 2007 the Company had cash and cash equivalents of $1,123 as compared to $794 as of December 31, 2006. Working capital as of December 31, 2007 was $116 as compared to $798 as of December 31, 2006.

As of December 31, 2006 the Company had cash and cash equivalents of $794 as compared to $1,150 as of December 31, 2005. Working capital as of December 31, 2006 was $798 and a $326 deficiency as of December 31, 2005.

Our principal obligations as of December 31, 2007 consisted primarily of the following items: (a) a revolving line of credit facility with an outstanding balance of $4,029, (b) a senior term loan of $5,258, (c) a note payable to Tri-Link of $208, (d) a note payable to a related party of $348, and (e) dividends on our Series B and C Preferred stock, of which $252 is due and payable within the next twelve months.

The Company has 12,625 shares of Series B and 40,000 shares of Series C Preferred Stock outstanding as of December 31, 2007. Holders of shares of our Series B Preferred Stock are entitled to receive annual dividends of $20 per share. Holders of shares of our Series C Preferred Stock are entitled to receive annual dividends of $20 per share. 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. The Series C Preferred holder has agreed to defer the demand for payment of nineteen dividend payments until April 30, 2009 and the Series B Preferred Stock dividend was in arrears three payments.

Our contractual obligations consist of operating leases for facilities, debt financing and dividend requirements on our Preferred Series B and C Convertible stock. The following table summarizes our fixed cash obligations as of December 31, 2007 for the fiscal years ending December:

	2008		2009		2010		2011		2012		2013 and thereafter

Operating leases	$	1,270	$	1,036	$	898	$	125	$	0	$	0
Debt financing		1,759		1,204		1,168		1,168		4,613		0
Preferred Series B and C convertible stock dividends		1,052		1,052		1,052		1,052		1,052		1,052
Total contractual cash obligations	$	4,081	$	3,292	$	3,118	$	2,345	$	5,665	$	1,052

Dividends payable on our Series C Preferred stock will continue at the rate of $800 per year as long as such shares are outstanding. Dividends on Series B Preferred stock will continue at the rate of $252 per year as long as such shares are outstanding.

Teltronics does not engage in any off-balance sheet financing arrangements. In particular, we do not have any interest in limited purpose entities, which include special purpose entities and structured finance entities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company had no holdings of derivative financial or commodity instruments at December 31, 2007. The Company is exposed to financial market risks, including changes in interest rates. All borrowings under the Company's bank line of credit agreement bear interest at a variable rate based on the prime rate. An increase in interest rates of 100 basis points would not significantly impact the Company's net income. All of the Company's business is recorded in U.S. dollars. Accordingly, foreign exchange rate fluctuations should not have a significant impact on the Company. The sum of EPS for the four quarters may differ from the annual EPS due to the required method of computing weighted average number of shares in respective periods.

Quarterly Results of Operations (Unaudited)

2007	1st Quarter			2nd Quarter			3rd Quarter		4th Quarter

Net sales	$	9,582		$	8,094		$	11,706	$	11,249
Cost of goods sold		6,072			5,117			7,194		6,800
Net income (loss)		(1,034	)		(1,537	)		310		191
Net income (loss) per share:
Basic	$	(0.14	)	$	(0.21	)	$	0.01	$	(0.01	)
Diluted	$	(0.14	)	$	(0.21	)	$	0.01	$	(0.01	)

2006	1st Quarter			2nd Quarter			3rd Quarter		4th Quarter

Net sales	$	10,297		$	11,502		$	12,224	$	12,868
Cost of goods sold		6,310			6,535			7,333		7,402
Net income (loss)		(560	)		755			495		917
Net income (loss) per share:
Basic	$	(0.08	)	$	0.07		$	0.04	$	0.09
Diluted	$	(0.08	)	$	0.05		$	0.04	$	0.08

ITEM 8. FINANCIAL STATEMENTS

Certain information required by this item is included in Item 7A of Part II of this report under the heading "Quarterly Results of Operations (Unaudited)" and is incorporated into this item by reference.

Index to Financial Statements

		Page
Financial Statements:
	Report of Independent Registered Certified Public Accounting Firm	22
	Consolidated Balance Sheets – December 31, 2007 and 2006	23
	Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005	24
	Consolidated Statements of Shareholders' Deficiency for the Years Ended December 31, 2007, 2006 and 2005	25
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	26
	Notes to Consolidated Financial Statements	28
Financial Statement Schedule:
	Item 15(a)(2):
	Schedule II – Valuation and Qualifying Accounts	55
	All other consolidated financial statement schedules have been omitted because the required information is shown in the consolidated financial statements or notes thereto or they are not applicable.

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Teltronics, Inc.:

We have audited the accompanying consolidated balance sheets of Teltronics, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ deficiency and cash flows for each of the years in the three-year period then ended. Our audit also included the consolidated financial statement schedule listed in Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teltronics, Inc. and subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and cash flows for each of the years in the three-year period then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated financial statement schedule, which is presented for additional analysis and is not a required part of the basic consolidated financial statements, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/Kirkland, Russ, Murphy & Tapp, P.A.

Clearwater, Florida

March 28, 2008

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

ASSETS

	December 31,
	2007			2006
Current assets:
Cash and cash equivalents	$	1,123		$	794
Accounts receivable, net		9,122			8,512
Inventories, net		5,423			5,227
Prepaid expenses and other current assets		643			543
Total current assets		16,311			15,076
Property and equipment, net		949			809
Goodwill		241			241
Other assets, net		532			566
Total assets	$	18,033		$	16,692

LIABILITIES AND SHAREHOLDERS’ DEFICIENCY

Current liabilities:
Line of credit	$	4,029		$	5,394
Current portion of long-term debt		1,759			834
Accounts payable		6,279			4,040
Accrued expenses and other current liabilities		3,221			2,748
Deferred revenue		907			1,262
Total current liabilities		16,195			14,278
Long-term liabilities:
Deferred dividends		2,200			1,500
Long-term debt, net of current portion		4,125			2,366
Total long-term liabilities		6,325			3,866
Commitments and contingencies Shareholders' deficiency:
Common stock, $.001 par value, 40,000,000 shares authorized, 8,647,539 and 8,639,539 issued and outstanding at December 31, 2007 and 2006, respectively		9			9
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		24,722			24,707
Other comprehensive income		27			55
Accumulated deficit		(29,245	)		(26,223	)
Total shareholders' deficiency		(4,487	)		(1,452	)
Total liabilities and shareholders' deficiency	$	18,033		$	16,692

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

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

	Years Ended December 31,
	2007			2006			2005

Net sales
Product sales and installation	$	29,035		$	33,390		$	33,314
Maintenance and service		11,596			13,501			12,797
		40,631			46,891			46,111
Cost of goods sold		25,183			27,580			27,933
Gross profit		15,448			19,311			18,178
Operating expenses:
General and administrative		4,959			4,694			5,231
Sales and marketing		6,084			7,017			6,439
Research and development		4,127			4,108			3,978
Depreciation and amortization		271			379			534
Impairment of fixed assets		---			---			1,583
		15,441			16,198			17,765
Income from operations		7			3,113			413

Other income (expense):
Interest		(1,948	)		(1,449	)		(1,283	)
Non-operating gain (loss)		(136	)		(19	)		4,728
		(2,084	)		(1,468	)		3,445
Income (loss) before income taxes		(2,077	)		1,645			3,858
Income taxes		(7	)		38			42

Net income (loss)		(2,070	)		1,607			3,816

Dividends on Preferred Series B and C Convertible stock		952			653			648
Net income (loss) available to common Shareholders	$	(3,022	)	$	954		$	3,168

Net income (loss) per share:
Basic	$	(0.35	)	$	0.11		$	0.39
Diluted	$	(0.35	)	$	0.10		$	0.36

Weighted average shares outstanding:
Basic		8,646,706			8,637,246			8,041,323
Diluted		8,646,706			9,280,289			10,540,391

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

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY

(In thousands, except share data)

	COMMON STOCK				PREFERRED STOCK
	SHARES		AMOUNT		SHARES		AMOUNT		ADDITIONAL PAID-IN CAPITAL		ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)			ACCUMULATED DEFICIT			TOTAL

BALANCE, DECEMBER 31, 2004		7,861,539	$	8		152,625		---	$	24,301	$	(8	)	$	(30,345	)	$	(6,044	)
Shares issued for Tri-Link settlement		750,000		1		---		---		298		---			---			299
Shares issued for exercise of stock options		25,000		---		---		---		2		---			---			2
Issuance of warrants		---		---		---		---		57		---			---			57
Comprehensive loss:
Net income		---		---		---		---		---		---			3,816			3,816
Foreign currency		---		---		---		---		---		(68	)		---			(68	)
Comprehensive loss																		3,748
Dividends on Preferred Series B and C Convertible stock		---		---		---		---		---		---			(648	)		(648	)
BALANCE, DECEMBER 31, 2005		8,636,539	$	9		152,625		---	$	24,658	$	(76	)	$	(27,177	)	$	(2,586	)
Shares issued for exercise of stock options		3,000		---		---		---		---		---			---			---
Stock based compensation expense		---		---		---		---		49		---			---			49
Comprehensive income:
Net income		---		---		---		---		---		---			1,607			1,607
Foreign currency		---		---		---		---		---		131			---			131
Comprehensive income																		1,738
Dividends on Preferred Series B and C Convertible stock		---		---		---		---		---		---			(653	)		(653	)
BALANCE, DECEMBER 31, 2006		8,639,539	$	9		152,625		---	$	24,707	$	55		$	(26,223	)	$	(1,452	)
Shares issued for exercise of stock options		8,000		---		---		---		---		---			---			---
Stock based compensation expense		---		---		---		---		15		---			---			15
Comprehensive income:
Net loss		---		---		---		---		---		---			(2,070	)		(2,070	)
Foreign currency		---		---		---		---		---		(28	)		---			(28	)
Comprehensive loss																		(2,098	)
Dividends on Preferred Series B and C Convertible stock		---		---		---		---		---		---			(952	)		(952	)

BALANCE, DECEMBER 31, 2007		8,647,539	$	9		152,625		---	$	24,722		27		$	(29,245	)	$	(4,487	)

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

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except share data)

	Years Ended December 31,
	2007			2006			2005

OPERATING ACTIVITIES:
Net income (loss)	$	(2,070	)	$	1,607		$	3,816
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		394			537			1,446
Provision for slow moving inventories		85			454			214
Provision (recovery) for doubtful accounts		(17	)		222			(43	)
Amortization of deferred financing costs		247			119			---
Amortization of other intangible assets		46			37			112
Stock based compensation expense		15			49			---
Impairment of fixed assets		---			---			1,583
Other non-operating gains		---			---			(4,603	)
Forfeiture of deferred compensation		---			---			(93	)
Changes in operating assets and liabilities net of acquisition:
Accounts receivable		(593	)		(2,166	)		(1,026	)
Inventories		(281	)		709			(2,621	)
Prepaid expenses and other current assets		(100	)		410			(573	)
Other assets		(259	)		(11	)		(33	)
Accounts payable		2,239			(1,590	)		672
Accrued expenses and other current liabilities		473			446			(23	)
Deferred revenue		(355	)		(188	)		62
Net cash flows provided by (used in) operating activities		(176	)		635			(1,110	)
INVESTING ACTIVITIES:
Acquisition of property and equipment		(534	)		(379	)		(266	)
Proceeds from sale of property and equipment		---			---			495
Payments for inventories and customer contracts and relationships of SMARTCALL		---			---			(53	)
Net cash flows provided by (used in) investing activities		(534	)		(379	)		176
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit		(1,366	)		282			2,558
Proceeds from issuance of common stock		---			---			2
Net principal borrowings (repayments) on loans, notes and capital leases		2,685			(777	)		(2,011	)
Dividends paid on Preferred Series B Convertible stock		(252	)		(248	)		(227	)
Borrowing from related party		---			---			1,000
Repayment of loan from related party		---			---			(750	)
Net cash flows provided by (used in) financing activities		1,067			(743	)		572
Effect of exchange rate changes on cash		(28	)		131			(68	)
Net increase (decrease) in cash and cash equivalents		329			(356	)		(430	)
Cash and cash equivalents - beginning of year		794			1,150			1,580
Cash and cash equivalents – end of year	$	1,123		$	794		$	1,150

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

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands, except share data)

	Years Ended December 31,
	2007		2006		2005

SUPPLEMENTAL NONCASH FINANCING AND
INVESTING ACTIVITIES:

Equipment acquired under capital lease	$	---	$	88	$	---
Fair value of Common stock issued for Tri-Link settlement		---		---		299
Fair value of Warrants issued with debt		---		---		57


SUPPLEMENTAL DISCLOSURES:
Interest paid	$	1,702	$	1,365	$	1,086
Income taxes paid	$	28	$	---	$	---

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

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(All amounts in thousands, except share amounts)

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 consolidated financial statements include the accounts of the Company which is comprised of its wholly owned subsidiaries, Teltronics Direct, Inc., TTG Acquisition Corp., Teltronics, S.A. de C.V., 36371 Yukon Inc. and Teltronics Limited.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents - The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.

Concentration of Credit Risk - The Company's largest customer was 24%, 22% and 19% of sales in 2007, 2006 and 2005, respectively. The second largest customer was 11%, 8% and 7% of sales in 2007, 2006 and 2005, respectively. The third largest customer in 2007 was 7% and the third largest customer in 2006 and 2005 was 7% and 10%, respectively. The Company has accounts receivable from federal, state and city governmental agencies, independent telephone companies, alternative service companies and telecommunication companies primarily located in the United States. The Company does not believe that there are substantial credit risks associated with those receivables. Cash balances are maintained in financial institutions. Occasionally, deposits may exceed amounts insured by the Federal Deposit Insurance Corporation.

Fair Value of Financial Instruments - Cash, accounts receivable and accounts payable are reflected in the consolidated financial statements at their carrying amount which approximates fair value because of the short-term maturity of those instruments. The line of credit, note payable and long-term debt reflect interest rates that are currently available to the Company based on the financing arrangement and the collateral provided. As a result, the carrying amount of the note payable and long-term debt approximates fair value.

Accounts Receivable - Accounts receivable are recorded at their net realizable value. 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 recognize an allowance for doubtful accounts based on the length of time the receivables are past due and an analysis of the specific facts relative to the customer. We have evaluated our allowance for doubtful accounts based on the economy and have adjusted it as necessary. We charge off outstanding balances only after all collection efforts have been exhausted.

Accounting for Stock-based Compensation – Prior to January 1, 2006, the Company accounted for the stock-based compensation granted under the Company’s stock incentive plans under the recognition and measurement provisions of APB 25. In accordance with APB 25 the Company used the intrinsic-value method of accounting for stock option awards to employees and accordingly did not recognize compensation expense for the stock option awards to employees in the Consolidated Statement of Operations. Effective January 1, 2006, the Company implemented Statement 123R for all stock-based compensation that was not vested as of December 31, 2005. In accordance with Statement 123R the

Company measures compensation cost for employee stock options at fair value and recognizes cost over the vesting period.

Had compensation cost for the Company’s stock options been recognized in 2005 based upon estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123R, the Company’s net income and net income per share would have been as follows:

	2005
Net income	$	3,816
Stock-based employee compensation cost if fair method value had been applied		(125	)
Net income – pro forma	$	3,691
Net income per share:
Basic - as reported	$	0.39
Basic - pro forma	$	0.36

Diluted - as reported	$	0.36
Diluted - pro forma	$	0.35

Inventories - Inventories are stated at the lower of cost or market. Costs are determined principally on the weighted average method. Shipping and handling costs are included in cost of goods sold in the accompanying consolidated statements of operations. We recognize a reserve for slow moving inventory based primarily on our estimated forecast of product demand and production requirements.

Property and Equipment - Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided over the estimated useful lives (three to ten years) of the respective assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes.

Capitalized Software - Capitalization of computer software development costs begins upon the establishment of technological feasibility. Technological feasibility for the Company's computer software products is generally based upon achievement of a detail program design free of high-risk development issues. The Company capitalizes only those costs directly attributable to the development of the software. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized computer software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technology. Prior to reaching technological feasibility, these costs are expensed as incurred and included in research and development. Activities undertaken after the products are available for general release to customers to correct errors or keep the product updated are expensed as incurred and included in research and development. Amortization of capitalized computer software development costs commences when the related products become available for general release to customers. Amortization is provided on a product-by-product basis over three to five years. Capitalized costs are reviewed annually for impairment.

The Company periodically performs reviews of the recoverability of such capitalized software costs. At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized amounts are impaired. During 2005, the Company recognized $1,583 as impairment charges related to capitalized software costs.

Impairments - If the carrying value of an asset exceeds the sum of estimated undiscounted future cash flows, an impairment loss is recognized for the difference between the estimated fair value and carrying value.

The Company assesses the recoverability of goodwill and intangible assets not subject to amortization under FAS No. 142 “Goodwill and Other Intangible Assets.”

Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by use of a valuation allowance.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years that began after December 15, 2006. Adoption of FIN 48 did not have a material impact on the Company’s financial reporting.

Revenue Recognition

Turnkey Contracts. Certain of the Company’s customers purchase equipment on a turnkey basis under which the Company agrees to provide the equipment, install the equipment and train the customer’s personnel. On those contracts in which the customer accepts ownership of the individual deliverables, and it is both probable and substantially within the Company’s control to deliver the remaining elements, revenues will be recognized as the customer accepts the deliverables.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Research and Development - Research and development costs are expensed as incurred.

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

Changes in the Company's product liability during the years ended December 31, 2007, 2006 and 2005 are as follows:

	2007			2006			2005

Balance, beginning of the year	$	221		$	171		$	192
Warranties issued during the year		97			259			114
Payments made during the year		(111	)		(198	)		(124	)
Changes in liability for pre-existing warranties during the year		5			(11	)		(11	)
Balance, end of the year	$	212		$	221		$	171

Reclassifications – Certain amounts from prior years have been reclassified to conform to the current year’s presentation.

NOTE 3 - ACCOUNTS RECEIVABLE, NET

Accounts receivable, net at December 31, 2007 and 2006 are as follows:

	December 31,
	2007			2006

Accounts receivable	$	9,470		$	8,877
Allowance for doubtful accounts		(348	)		(365	)
	$	9,122		$	8,512

As of December 31, 2007, accounts receivable included $124 of retainage. There was no retainage at December 31, 2006.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 4 – INVENTORIES, NET

The major classes of inventories, net at December 31, 2007 and 2006 are as follows:

	December 31,
	2007		2006

Raw materials	$	2,670	$	2,883
Work-in-process		1,237		1,045
Finished goods		1,516		1,299
	$	5,423	$	5,227

At December 31, 2007, there were no contracts accounted for using percentage of completion accounting method.

At December 31, 2006, accumulated costs of approximately $150 on contracts, net of progress payments of $144 amounting to $6 and are included in work-in-process inventory.

Costs and estimated earnings in excess of billings on uncompleted contracts includes unbilled revenue of approximately $673 as of December 31, 2006.

The reserve for slow moving inventories was $1,069 and $1,185 as of December 31, 2007 and 2006, respectively.

NOTE 5 - PROPERTY AND EQUIPMENT, NET

The major classifications of property and equipment, net at December 31, 2007 and 2006 are as follows:

	December 31,
	2007			2006

Machinery and equipment	$	7,802		$	7,698
Furniture, fixtures and computers		4,994			4,541
Equipment under capital leases		646			646
Capitalized software		2,565			2,547
Leasehold improvements		580			599
		16,587			16,031
Accumulated depreciation and amortization		(15,638	)		(15,222	)
	$	949		$	809

Depreciation and amortization expense was $394, $537 and $1,466 for the years ended December 31, 2007, 2006 and 2005, respectively. For the years ended December 31, 2007, 2006 and 2005, depreciation and amortization expense of $123, $158 and $911, respectively, was included in cost of goods sold. Amortization of equipment under capital leases is included in depreciation and amortization of property and equipment.

The Company acquired certain assets from Tri-Link for $2,500. The Company received an independent valuation of the assets acquired and as a result of the valuation has included $108 of the acquisition price under furniture, fixtures and computers and $2,392 under capitalized software. During 2005 it was determined that the value of this capitalized software was impaired and, accordingly, the Company recognized impairment charges for the remainder of these costs, which amounted to approximately $1,583.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The unamortized cost of capitalized software to be sold, leased or otherwise marketed was $94, $143, and $201 as of December 31, 2007, 2006 and 2005, respectively. For the years ended December 31, 2007, 2006 and 2005, amortization and impairment expense related to capitalized software was $50, $60 and $2,139, respectively.

NOTE 6 – LINE OF CREDIT AND LONG-TERM DEBT

In May 2007, the Company entered into a new five year Revolving Credit, Term Loan and Security Agreement under which the Company established a revolving credit facility with a maximum principal amount up to $6,000 and received a term-loan with the maximum principal amount of $5,842. Advances under the revolving credit facility are subject to availability based upon percentages of eligible receivables and eligible inventory. Borrowings under the facility bear interest (9.25% at December 31, 2007) at an annual rate of Prime Rate plus 2% and are subject to mandatory prepayments in certain situations. The Loan Agreement is subject to certain financial covenants. The obligations of the agreement are secured by a first lien and security interest in substantially all of the company’s assets. The availability under this facility as of December 31, 2007 was $1,971.

In May 2007, the Company recognized an additional $489 of interest costs in connection with the termination of the previous financing arrangement.

In 2005, the Company recognized a gain of $3,897 or $0.48 per basic share on the extinguishment of a promissory note.

In 2005, the Company entered into a Settlement Agreement (“Settlement Agreement”) with Tri-Link Technologies Inc. (“Tri-Link”) under which all arbitration and legal proceedings were settled. Under the Settlement Agreement, the Company paid $1,000 and issued 750,000 restricted shares of the Company’s Common Stock and a $750 note, which bears interest at eight percent (8%), to Tri-Link in exchange for the Company’s original promissory note in the amount of $2,250. The Company recognized a gain of $211 on the transaction.

In 2005, the Company borrowed $250 from an entity controlled by one of the Company’s directors. Principal and cumulative interest, at an annual rate of fifteen percent (15%), are due November 2008. The note, which is unsecured, may be prepaid by the Company beginning in October 2006 and is convertible, at the option of the holder, into shares of the Company’s Common Stock, at a conversion rate of $1.00 per share and/or shares of any of the Company’s existing or future preferred stock, at a conversion rate to be determined by mutual agreement.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Long-term debt at December 31, 2007 and 2006 consists of the following:

	December 31,
	2007		2006
Term Loan, payable in monthly installments of $97 plus interest (9.25% at December 31, 2007) at prime plus 2.0%.	$	5,258	$	0
Term Loan, payable in monthly installments of $42		0		2,292
Note payable to Tri-Link in monthly principal installments of $21 plus interest with final maturity October 2008.		208		458
Note payable to related party, principal and interest due November 2008.		348		300
Notes payable to finance companies, payable in monthly installments of $3 with interest at approximately 20%. The notes mature through 2009 and are collateralized by vehicles.		67		116
Capital lease obligations, interest at 8%		3		34
Total		5,884		3,200
Less current portion		1,759		834
Long-term portion	$	4,125	$	2,366

Future principal maturities of long-term debt and capital lease obligations, as of December 31, 2007, are as follows:

2008	$	1,759
2009		1,204
2010		1,168
2011		1,168
2012		585
	$	5,884

NOTE 7 - 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 are 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.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Preferred Series B Convertible stock, which is owned by a company controlled by the Series B Director, provides for a $20 per share annual dividend, payable quarterly. The holder of the Preferred Series B Convertible stock has the right, at its option, to convert the 12,625 preferred shares to 721,429 common shares. The Company has the right, but not the obligation, 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, including the right to appoint a director which the holder has exercised.

The Company is in arrears on three quarterly dividend payments due on Preferred Series B Convertible stock at December 31, 2007 that total $189, which represents $15.00 per Preferred Series B share. If the Company is in arrears on four quarterly dividend payments on our Preferred Series B Convertible 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 Preferred Series B Convertible stock to elect a majority of our Board of Directors.

The Preferred Series C Convertible stock, which is owned by an entity controlled by the Company’s Director and Senior Vice President of Business Development, provides for a $20 per share annual dividend, payable quarterly. The holder of the Preferred Series C Convertible stock has the right, but not the obligation, at its option, to convert the 40,000 preferred shares to 1,454,545 common shares, 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 for 100% of the face value plus accrued and unpaid dividends.

(B) Warrants - In July 2005, the Company issued a warrant to purchase 236,236 common shares in connection with the July 2005 loan agreement. As part of the May 2007 refinancing, the Company paid $42 to the lender for the appreciated value of the warrants and the warrants have been cancelled.

In September 2002, the Company issued a warrant to a financial advisor to purchase 300,000 shares of common stock at $1.00 per share which expired in September 2007.

(C) Incentive Stock Option Plan – In 1995, the Company adopted an Incentive Stock Option Plan ("1995 Plan") to enhance the Company's ability to retain the services of outstanding personnel and encourage such employees to have a greater financial investment in the Company. The 1995 Plan, under which the Company may issue options for up to 2,500,000 shares of the Company’s common stock, terminated August 8, 2005. In September 2004, the Company’s shareholders approved the Company’s 2005 Incentive Stock Option Plan (“2005 Plan”) under which the Company may issue options for up to 1,000,000 shares of the Company’s common stock. The 2005 Plan will terminate September 28, 2014 unless terminated by the Board of Directors or extended by the Board and approved by the shareholders. Both plans authorize the Board to grant stock options intended to qualify as incentive stock options under the Internal Revenue Code of 1986, as amended, to key employees of the Company or its subsidiaries. The term of an option shall be fixed by the Board. The option price shall not be less than the fair market value of the Company's Common Stock on the date of grant, unless the grantee is the holder of more than 10% of the voting power of all classes of stock of the Company, in which case the option price shall not be less than 110% of the fair market value of the stock on the date of grant.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table summarizes certain weighted average data for options outstanding and currently exercisable as of December 31, 2007, 2006 and 2005:

December 31, 2007:				Outstanding				Exercisable
				Weighted Average
Exercise Price Range		Shares		Exercise Price		Remaining Contractual Life (yrs)		Shares		Weighted Average Exercise Price
	$0.07 - $0.49		703,000	$	0.18		6.1		530,400	$	0.17
	$0.50 - $1.00		583,000		0.99		3.1		579,000		1.00
	$1.63 - $3.03		167,000		2.27		2.5		167,000		2.27
			1,453,000	$	0.74		4.5		1,276,400	$	0.82

December 31, 2006:				Outstanding				Exercisable
				Weighted Average
Exercise Price Range		Shares		Exercise Price		Remaining Contractual Life (yrs)		Shares		Weighted Average Exercise Price
	$0.07 - $0.49		728,000	$	0.18		7.1		540,800	$	0.21
	$0.50 - $1.00		635,000		0.99		4.1		629,000		1.00
	$1.63 - $3.03		193,000		2.24		3.3		193,000		2.24
			1,556,000	$	0.77		5.4		1,362,800	$	0.86


December 31, 2005:				Outstanding				Exercisable
				Weighted Average
Exercise Price Range		Shares		Exercise Price		Remaining Contractual Life (yrs)		Shares		Weighted Average Exercise Price
	$0.07 - $0.49		798,000	$	0.19		8.2		189,200	$	0.08
	$0.50 - $1.00		635,000		0.99		5.1		506,000		1.00
	$1.63 - $3.03		194,000		2.24		4.2		194,000		2.24
			1,627,000	$	0.75		6.5		889,200	$	1.07

The per share weighted average fair value of options granted during the years ended December 31, 2007 and 2005 were $0.35 and $0.32, respectively. No options were granted for the year ended December 31, 2006. All options were granted at not less than the fair market value at date of grant. Generally, stock options become exercisable over a five-year graded vesting period and expire ten years from the date of grant. Options totaling 750,000 shares were available for grant under the 2005 Plan at December 31, 2007.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The fair value for options was estimated at the date of grant using the Black-Scholes option pricing model. Information regarding the Company's Stock Option Plan is summarized below:

Weighted Average Assumptions:

	2007	2006	2005
Risk-free interest rates	4.75%	---	6.8%
Weighted average expected life of the options	5 years	---	3.7 years
Volatility factor of the expected market price of the Company's Common Stock	116%	---	138%
Dividend yield	None	---	None

Weighted average exercise prices for option activity:

	Number of Shares			Weighted Average Exercise Price
Outstanding, December 31, 2004		1,600,000		$	0.87
Granted		375,000			0.32
Exercised		(25,000	)		0.07
Forfeited		(203,000	)		0.58
Expired		(120,000	)		1.67
Outstanding, December 31, 2005		1,627,000		$	0.75
Granted		---			---
Exercised		(3,000	)		0.07
Forfeited		(68,000	)		0.31
Expired		---			---
Outstanding, December 31, 2006		1,556,000		$	0.77
Granted		10,000			0.35
Exercised		(8,000	)		0.07
Forfeited		(91,000	)		1.50
Expired		(14,000	)		2.00
Outstanding, December 31, 2007		1,453,000			0.74
Exercisable, December 31, 2007		1,276,400		$	0.82

NOTE 8 - INCOME TAXES

The components of the income tax provision (benefit) are as follows:

	Years ended December 31,
	2007			2006		2005
Current:
Federal	$	(14	)	$	23	$	9
State		7			15		33
		(7	)	$	38	$	42
Deferred:
Federal		---			---		---
State		---			---		---
		---			---		---
	$	(7	)	$	38	$	42

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following is a reconciliation of income tax expense recognized to that computed by applying the federal statutory rate of 34% in 2007, 2006 and 2005 to income before income taxes:

	Years ended December 31,
	2007			2006			2005

Federal tax at the statutory rate	$	(624	)	$	556		$	1,311
Foreign income tax at statutory rate		(83	)		---			---
State income taxes, net of federal tax benefit		4			59			135
Change in valuation allowance for deferred tax assets		696			(612	)		(1,444	)
Other items		---			35			40
	$	(7	)	$	38		$	42

Significant components of the Company's deferred tax assets and liabilities are as follows:

	December 31,
	2007			2006
Deferred tax assets:
Net operating loss carryforward	$	6,275		$	5,135
Accrued vacation		239			239
Inventory		420			509
Fixed assets		230			646
Bad debt reserve		122			128
Accrued expenses		152			85
		7,438			6,742
Valuation allowance	$	(7,438	)	$	(6,742	)

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to the uncertain nature of the ultimate realization of deferred tax assets based upon the Company's financial performance and the potential expiration of the net operating loss carryforward, the Company has established a valuation allowance against its deferred tax assets. The Company will recognize the benefits associated with the deferred tax assets only as reassessment demonstrates they are realizable. Realization is entirely dependent upon future earnings in specific tax jurisdictions. While the need for this valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefits will be recorded in future operations as a reduction of the Company's income tax expense. The valuation allowance increased $696 in 2007, and decreased $612 in 2006 and $1,444 in 2005.

At December 31, 2007, for federal income tax purposes, the Company had a net operating loss carryforward of approximately $16.6 million, which will expire in the years 2016 through 2027. Such net operating losses are available to offset future taxable income.

NOTE 9 – 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, and warrants computed using the if converted method, and stock options (vested and unvested) using the treasury stock method.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

	2007			2006			2005
Basic
Net income (loss)	$	(2,070	)	$	1,607		$	3,816
Preferred dividends		(952	)		(653	)		(648	)
Net income (loss) available to common Shareholders	$	(3,022	)	$	954		$	3,168
Weighted average shares outstanding		8,646,706			8,637,246			8,041,323
Net income (loss) per share	$	(0.35	)	$	0.11		$	0.39
Diluted
Net income (loss)	$	(2,070	)	$	1,607		$	3,816
Preferred dividends		(952	)		(653	)		---
Net income (loss) available to commonshareholders	$	(3,022	)	$	954		$	3,816
Weighted average shares outstanding		8,646,706			8,637,246			8,041,323
Effect of dilutive securities:
Employee stock options		---			406,807			291,547
Convertible preferred stock		---			---			2,175,974
Warrants		---			236,236			31,547
Dilutive potential common shares		8,646,706			9,280,289			10,540,391
Net income (loss) per share	$	(0.35	)	$	0.10		$	0.36

For the years ended December 31, 2007, 2006 and 2005, options to purchase 1,453,000, 873,000 and 1,019,000 shares of common stock, respectively, were not included in the computation of diluted net income (loss) per share because the effect would be anti-dilutive.

For the years ended December 31, 2007 and 2006, the preferred series stock were not included in the computation of dilutive net income (loss) per share because the effect would be anti-dilutive.

For the years ended December 31, 2006 and 2005 warrants to purchase 300,000 shares of common stock were not included in the computation of diluted net income (loss) per share because the effect would be anti-dilutive.

NOTE 10 - EMPLOYEE BENEFIT PLANS

The Company sponsors a savings plan ("401(k) plan") which covers substantially all employees of the Company. The Company made discretionary matching contributions to the 401(k) plan totaling $217 and $218 in 2007 and 2006, respectively. The Company elected not to match in 2005.

The Company also sponsors an employee stock purchase plan ("Purchase Plan") under which employees of the Company and its subsidiaries are given an opportunity to purchase Company Common Stock at a price equal to approximately 85% of fair market value. The Purchase Plan is intended to qualify under the Internal Revenue Code of 1986, as amended, and the 765,000 shares of common stock funding the Plan have been registered on Form S-8. The Purchase Plan has been suspended and no shares were issued in 2007, 2006 or 2005.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

(A) Employment Agreements - The Company is party to employment agreements with several of its officers that provide for annual base salaries, target bonus levels, severance pay under certain conditions, and certain other benefits.

(B) Operating Leases - The Company leases its manufacturing facilities, including land and building, under an operating lease which was extended for sixty-six months until February 28, 2011.

The Company is responsible for paying all taxes, insurance and maintenance cost relating to the leased property. The amended lease provides for a 3% increase in the annual rent. The Company also leases offices in several locations under leases expiring at various dates.

The Company also leases various equipment under operating leases expiring over a period of four years.

Future minimum lease payments for all non-cancelable operating leases at December 31, 2007 are as follows:

	2008	$ 1,278
	2009	1,036
	2010	898
	2011	125
	Thereafter	---
		$ 3,337

Rental expense for operating leases totaled approximately $1,372, $1,361 and $1,577 for the years ended December 31, 2007, 2006 and 2005, respectively.

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

In February of 2007 the Company agreed to make monthly payments of $15.7 commencing in March 2007 to FGC in settlement of the litigation. The last payment was made in December 2007. One of the Company’s directors is affiliated with FGC.

NOTE 12 – OTHER RELATED PARTY TRANSACTIONS

An entity controlled by a Director of the Company occupies approximately 1,000 square feet of the office space in our Sarasota facility. The annual rent for this space was approximately $8 per year for 2007, 2006 and 2005.

During 2005 the Company borrowed $250 from an entity controlled by this same director. Principal and cumulative interest, at an annual rate of fifteen percent (15%), are due November 2008. The note, which is unsecured, may be prepaid by the Company beginning in October 2006 and is convertible, at the option of the holder, into shares of the Company’s Common Stock, at a conversion rate of $1.00 per share, and/or shares of any of the Company’s existing or future preferred stock, at a conversion rate to be determined by mutual agreement. As of December 31, 2007 the balance was $348.

The Company leases two vehicles from another entity controlled by this director. Monthly costs are $3 and are due through October 2010.

In addition, the spouse of the same director is employed by the Company in an administrative capacity at a salary of $35 per year.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 13 - SEGMENT INFORMATION

For the years ended December 31, 2007, 2006 and 2005, the Company’s operations were classified into the following reportable segments: Teltronics, Teltronics S.A. de C.V., (Mexico) and Teltronics Limited (UK).

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

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

	Years ended December 31,
	2007			2006			2005
Net Sales
Teltronics	$	38,790		$	44,418		$	43,876
Mexico		260			469			255
UK		1,581			2,004			1,980
Total net sales	$	40,631		$	46,891		$	46,111
Depreciation, Amortization and Impairment
Teltronics	$	386		$	526		$	3,060
Mexico		2			2			4
UK		52			46			77
Total depreciation and amortization	$	440		$	574		$	3,141
Interest and Financing Costs
Teltronics	$	1,943		$	1,449		$	1,269
Mexico		5			---			---
UK		---			---			(6	)
Total interest and financing costs	$	1,948		$	1,449		$	1,263
Segment Income (Loss)
Teltronics	$	(1,747	)	$	1,537		$	(943	)
Mexico		(19	)		(29	)		(124	)
UK		(311	)		137			236
Subtotal	$	(2,077	)	$	1,645			(831	)
Non-operating gain		---			---			4,689
Income before income taxes	$	(2,077	)	$	1,645		$	3,858
Segment Assets
Teltronics	$	16,670		$	15,150		$	15,426
Mexico		29			28			95
UK		1,334			1,514			1,459
Total segment assets	$	18,033		$	16,692		$	16,980
Acquisition of Property and Equipment
Teltronics	$	530		$	369		$	266
Mexico		---			---			---
UK		4			10			---
Total acquisition of property and equipment	$	534		$	379		$	266

Information on major customers is discussed in the Summary of Significant Accounting Policies. All material assets are located in the United States. It is impracticable for the Company to provide segment information by product.

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 14 – SUBSEQUENT EVENTS

On December 19, 2007, Teltronics Direct, Inc. (“TDI”) a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement to acquire substantially all of the assets of FMG Ventures, LLC and JC Ventures, LLC, (”collectively the “Sellers”). The Sellers are local interconnect resellers and provide support of small to medium size telephone switches in the Tampa to Naples, Florida area.

On January 18, 2008, TDI closed the acquisition of substantially all of the assets of the Seller in exchange for $200 cash and possible future payments based on the net earnings of TDI for a period of five years. TDI also issued seven and one-half shares to each of the Sellers two principals, representing a fifteen percent aggregate ownership in TDI.

TDI also agreed to employ the two principals on a salary and commission basis for a period of five years, subject to termination under certain conditions.

On January 18, 2008, the Company sold all of its assets related to the Telident 911 Solutions line of products to Amcom Software, Inc. (“Amcom”) for a purchase price of $1,750 and the assumption by Amcom of certain liabilities.

The assets sold to Amcom included in the accompanying balance sheet at December 31, 2007 were $117 of net receivables, $46 of net inventory, fully depreciated fixed assets with a cost of $391 and other assets with an amortized cost of $235. Amcom assumed $17 of accounts payable and $402 of other liabilities.

The product line generated $2,222 in sales which yielded $1,555 in gross margins in 2007. The sales and marketing costs associated with the product line was $711 in 2007. These are the only operating expenses that will assumed by Amcom in the future. The product line generated operating profits of $0.10 per share in 2007. The Company’s backlog at December 31, 2007 included $445 associated with this sale.

The purchase agreement provides for $175 of the purchase price to be deposited into an escrow account to provide Amcom with limited rights to obtain payment for claims made under the indemnity provisions of the agreement.

The Company’s Revolving Credit Term Loan and Security Agreement stipulates that a portion of the net proceeds on the sale of the Telident product line be used to reduce the term loan. Had this sale occurred at December 31, 2007, the outstanding term loan balance would have been $4,549 as a result of this prepayment and the availability under the revolver would have been $2,608.

On February 21, 2008, the Series C shareholder agreed to defer the demand for payment of the $2,200 of accrued but unpaid dividends until April 30, 2009.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURE - None.

ITEM 9A(T). CONTROLS AND PROCEDURES

The Company’s management, under the direction of its Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2007, in timely alerting them to material information required to be included in the Company’s periodic SEC filings.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Our Chief Executive Officer and our Chief Financial Officer have evaluated the changes to the Company's internal control over financial reporting that occurred during our fiscal quarter ended December 31, 2007, as required by paragraph (d) of Rules 13a and 15d-15 under the Securities Exchange Act of 1934, as amended, and have concluded that there were no such changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT’S ASSESSMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

·	Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

Provide reasonable assurance that transactions are recorded, as necessary, to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the Internal Control – Integrated Framework, management concluded that the internal control over financial reporting was effective as of December 31, 2007.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

The following table sets forth the names and positions of all directors and executive officers of the Company.

Name	Position

Ewen R. Cameron	Director, President, Chief Executive Officer and Assistant Secretary
Russell R. Lee III	Vice President Finance, Chief Financial Officer, Secretary and Treasurer
Norman R. Dobiesz	Director and Senior Vice President Business Development
Richard Begando	Executive Vice President, Sales and Marketing
Duncan Anderson	Managing Director, Teltronics Limited, UK
Gregory G. Barr	Director (1)
Richard L. Stevens	Director (1)(3)
Peter Friedmann	Director (2)

________________

(1) Audit Committee Members

(2) Appointed by holder of Series B Preferred stock in October 2005

(3) Financial Expert

The Company's Directors will serve until the annual meeting of stockholders or until their successors are elected and qualified.

Ewen R. Cameron has served as President and Chief Executive Officer since July 1993 and a Director since June 1994. Prior to that, Mr. Cameron served as Managing Director of SRH plc, a European telecommunications and computer maintenance company from 1989 to 1992. From January 1978 to December 1989, Mr. Cameron served as Managing Director of Systems Reliability Europe SA/NV, a wholly owned subsidiary of SRH plc based in Brussels, Belgium. Mr. Cameron has spent the last 33 years in the computer and telecommunications industry.

Russell R. Lee III has served as Vice President of Finance, Chief Financial Officer, Secretary and Treasurer since November of 2004. Prior to joining Teltronics, Mr. Lee had served as Chief Financial Officer and Secretary for SinoFresh HealthCare, Inc., a publicly traded developer and marketer of antiseptic solutions for respiratory problems, as Executive Vice President of Finance for Esprix Technologies, LLP, and as Treasurer/Chief Financial Officer of Gencor Industries, Inc., a publicly-held, international manufacturer of processing equipment. Prior to his private industry experience, Mr. Lee was a Senior Audit Manager in the Ernst & Young organization in both Ohio and Florida. Mr. Lee holds a Bachelor Degree of Business Administration in Accounting from the University of Toledo, and is a Certified Public Accountant.

Norman R. Dobiesz has served as a Director of the Company since October 25, 1991 and is the Company's Senior Vice President, Business Development. Mr. Dobiesz has developed substantial financial and general management experience as a principal stockholder and executive of a group of privately held companies controlled by Mr. Dobiesz. Mr. Dobiesz is a principal stockholder of the Company.

Richard Begando has served as Executive Vice President of Sales and Marketing since November 2006, promoted to this position from Vice President International Sales. He also serves as the Product Manager for the 20-20 Digital Switching Products. Prior to joining Teltronics in July of 2000, he worked for Harris Corporation’s Digital Telephone Switching Division in Novato, California as Director of International Sales and established sales offices in London, Moscow and Hong Kong. Prior to joining Harris, he served as Vice President Major Account Sales, Western Region for Executone South California Corp. Mr. Begando holds a B.A. in Business from California State University, Fullerton.

Duncan Anderson, Managing Director of Teltronics Limited, joined Teltronics in 2001 to handle the sale of Teltronics products in the UK and Western Europe. He has held senior positions in management and sales for a number of other computer and telecom companies for the last 21 years.

Gregory G. Barr is currently Area President of Orion Bank (formerly known as Gulf Coast National Bank), Fort Myers, Florida. Prior to that, Mr. Barr was employed as Senior Vice President, Senior Lender for SouthTrust Bank. From 1987 to 1997 Mr. Barr was employed by Barnett Bank, Inc. as Senior Vice President and Commercial Banking Manager for Manatee County. Mr. Barr has experience in Commercial Banking, Finance, Accounting and Capital Markets transactions. He is a graduate of Salem State College, Salem, Massachusetts holding a Bachelor of Science in accounting. Mr. Barr has served as a Director of the Company since June 4, 1999. Mr. Barr meets the definition of an independent director as defined by the NASD’s listing standard.

Richard L. Stevens, CPA, provides tax compliance and consulting services to clients in a variety of industries. Mr. Stevens also serves as Chief Financial Officer of Avalon Global Group, Inc., a holding company with operating subsidiaries in car rental, franchising and technology solutions for the travel industry located in St. Petersburg, Florida. From 1984 to 2000, Mr. Stevens held various management positions with the international accounting firms of Grant Thornton, LLP, Coopers & Lybrand and KPMG Peat Marwick. He has experience in taxation, accounting, capital transactions and mergers and acquisitions. Mr. Stevens holds a B.S. in Business Administration from the University of Louisville and is a Certified Public Accountant. Mr. Stevens meets the definition of an independent director as defined by the NASD’s listing standards, and qualifies as a “financial experts” in accordance with SEC regulations.

Peter Friedmann graduated in Chemical Engineering from the University of Western Ontario and built a successful career with Procter and Gamble. Following that, he developed and operated major businesses in North America and Europe. Through his involvement, he gained significant experience and knowledge in business and management covering retail, distribution, steel, rubber and tire businesses. In addition, Mr. Friedmann continues to be involved in the software business, real estate development and is a principal of a venture capital company which is investing in start up technology driven companies. Also he has been involved in amateur and professional sports as a player and team owner.

Code of Ethics

We have a Code of Ethics that applies to our chief executive officer and senior financial and accounting officers. On November 9, 2007, the Company also adopted a Code of Ethics that applies to our board of directors. Both codes are available without charge upon request by contacting our Corporate Secretary in writing at, Teltronics, Inc., 2150 Whitfield Industrial Way, Sarasota, Florida 34243.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership of such securities with the SEC. Directors, officers and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it and written representations from certain reporting persons that no Forms 5 were required for them, the Company believes that during its most recently completed fiscal year ended on December 31, 2007, all filing requirements applicable to our directors, officers and greater than 10% shareholders were satisfied.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The Company’s compensation arrangements with its named executive officers are designed to attract and retain the best available personnel for positions of substantial responsibility within the Company. In addition, these arrangements have been developed to provide additional incentive to the Company’s key employees and promote the success of the Company’s business.

The Compensation arrangements consist of three components. The first component, applicable to all of the named executives is base compensation (See Table 1). In addition to the base compensations those executives with an involvement in expanding the Company’s revenues receive a commission component (See Table 2). And finally, to align the named executives interest with the Company’s performance, there is a stock option plan (See Table 3 and 4).

Base Compensation

The table below sets forth the base compensation of our named executive officers in 2007.

Table 1 – Summary Compensation During 2007
Name and Principal Position	Year		Salary		Non-Equity Incentive Plan Compensation		Other Annual Compensation (Car/401(k) match//Life Ins)		Total

Ewen R. Cameron President & CEO		2007 2006	$	424,038 400,000		--- ---	$	9,550 22,789	$	433,588 422,789

Russell R. Lee III Vice President Finance, CFO, Secretary & Treasurer		2007 2006	$	211,538 204,092		--- ---	$	9,800 9,884	$	221,338 213,976

Norman R. Dobiesz Senior Vice President Business Development		2007 2006	$	424,038 400,000		--- ---	$	4,500 17,784	$	428,538 417,784

Richard Begando Executive Vice President Sales & Marketing		2007 2006	$	155,480 105,990	$	185,276 210,955	$	9,800 9,884	$	350,556 326,829

Duncan Anderson Managing Director Teltronics Limited, UK		2007 2006	$	299,595 267,188		--- ---	$	27,762 27,760	$	327,357 294,945

Mr. Cameron’s and Mr. Dobiesz’s base compensation is stipulated under ten-year employment contracts. These contracts, which are renewable for an additional five-year period at the employee’s option were offered to the employees by the Company’s Board of Directors in October 2005. Each employment agreement provides for a base salary of $400 subject to annual increases of $25. If the Company terminates the employment of either Mr. Cameron or Mr. Dobiesz, the terminated employee will be entitled to severance equal to the salary for the remaining term on this contract.

The base compensation for the other named executives is reviewed annually by the Chief Executive Officer and adjustments are made based on the objectives set forth above.

Mr. Anderson has an employment agreement that provides for his compensation and can be terminated by either party with twelve months notice.

Plan Based Compensation

The table below sets forth the grants of plan based compensation during 2007. The only plan based compensation resulted from sales commission plans.

Table 2 – Grants of Plan-Based Awards During 2007
Name and Principal Position	Grant Date	Estimated Future Payouts Under Non-equity Incentive Plans
		Threshold	Target	Maximum

Ewen R. Cameron President & CEO	---	---	---	---

Russell R. Lee III Vice President Finance, CFO, Secretary & Treasurer	---	---	---	---

Norman R. Dobiesz Senior Vice President Business Development	---	---	---	---

Richard Begando Executive Vice President Sales & Marketing	1/01/2007	$75,400	$130,498	$185,276 (1)

Duncan Anderson Managing Director Teltronics Limited, UK	---	---	---	---

(1) Based on 2007 actual payout.

Mr. Begando is the only named executive who has commission based compensation. Commission plans are designed annually by management to incentivize the executive to increase the sale of the products and services that he is responsible for.

Equity Based Compensation

The Company also periodically issues stock options to key personnel in an effort to keep the employee’s overall compensation tied to shareholder value. Mr. Cameron makes periodic recommendations to the Company’s Board of Directors, based on employee performance. The Company’s Board of Directors approves all equity based compensation.

The table below sets forth the number of the Company’s common shares and value thereof of options which vested during 2007.

Table 3 – Option Vesting During 2007
Name and Principal Position	Number of Shares Acquired on Vesting (#)	Value Realized on Vesting ($)

Ewen R. Cameron President & CEO	30,000	$9,000

Russell R. Lee III Vice President Finance, CFO, Secretary & Treasurer	20,000	$6,000

Norman R. Dobiesz Senior Vice President Business Development	30,000	$9,000

Richard Begando Executive Vice President Sales & Marketing	6,000	$1,800

Duncan Anderson Managing Director Teltronics Limited, UK	10,000	$3,000

The following table shows the outstanding equity awards to named executive officers at December 31, 2007.

Table 4 – Outstanding Equity Awards at December 31, 2007
Name and Principal Position	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Un-exercisable		Option Exercise Price ($)		Option Expiration Date	Number of Shares of Stock That Have Not Vested		Market Value of Shares of Stock That Have Not Vested

Ewen R. Cameron		500,000			$	1.00	1/2/2011
President & CEO		30,000			$	0.36	12/23/2015

Russell R. Lee III		20,000		80,000	$	0.36	12/23/2015		80,000		24,000
Vice President Finance,
CFO, Secretary &
Treasurer

Norman R. Dobiesz		30,000			$	0.40	12/23/2015
Senior Vice President
Business Development

Richard Begando		5,000			$	2.56	9/19/2010
Executive Vice President		24,000		6,000	$	0.07	1/3/2013		6,000		1,800
Sales & Marketing

Duncan Anderson		20,000			$	1.00	10/05/2011
Managing Director		40,000		10,000	$	0.07	1/3/2013		10,000		3,000
Teltronics Limited, UK

All of the compensation adjustments or recommendations, other than the contract commitments to Messrs. Cameron and Dobiesz, are made by the Chief Executive Officer based upon individual and Company performance, the product marketplace and the metrics of the Company’s stock price in the market.

Incentive Stock Option Plans

The Company adopted an Incentive Stock Option Plan, as amended ("1995 Plan") to enhance the Company's ability to retain the services of outstanding personnel and encourage such employees to have a greater financial investment in the Company. The 1995 Plan authorized the Board of Directors to grant incentive stock options under the Internal Revenue Code of 1986, as amended, to key employees of the Company or its subsidiaries. The 1995 Plan terminated August 8, 2005.

Under the 1995 Plan, the Company issued options to purchase 100,000 shares in 2005 to non-executive employees. The Company cancelled options previously granted to non-executive employees to purchase 203,000 shares of Common Stock in 2005.

In September 2004, the shareholders of the Company ratified the 2005 Incentive Stock Option Plan (“2005 Plan”) which became effective May 1, 2005 and expires September 28, 2014. The maximum number of shares of common stock authorized under the 2005 Plan is 1,000,000 shares.

As of December 31, 2007, an aggregate of 750,000 shares of the Company's Common Stock may be issued or transferred to grantees under the 2005 Plan. If there is a stock split, stock dividend or other relevant change affecting the Company's shares, appropriate adjustments will be made in the number of shares that may be issued or transferred in the future and in the number of shares and price of all outstanding grants made before such event. The option price shall not be less than the fair market value of the Company's Common Stock on the date of grant, unless the grantee is the holder of more than 10% of the voting power of all classes of stock of the Company, in which case the option price shall not be less than 110% of the fair market value of the stock on the date of grant. The Company has registered all of shares issuable under this plan on Form S-8.

During 2005, the Company granted options to purchase 75,000 shares to non-executive employees and 200,000 shares to executive employees under the 2005 Plan.

During 2006, no options to purchase shares of Common Stock were granted by the Company under the 2005 Plan and options to purchase 68,000 shares previously granted to employees were forfeited.

During 2007, the Company granted options to purchase 10,000 shares to non-executive employees under the 2005 Plan and options to purchase 105,000 shares previously granted to employees were forfeited.

Under both plans options may be exercised solely by the Participant or his or her legal representative during his or her employment with the Company or after his or her death by the person or persons entitled thereto under his or her will or the laws of descent and distribution. In the event of termination of employment for any reason other than death, permanent disability as determined by the Board, or retirement with the consent of the Company, Options may not be exercised by the Participant or his or her legal representative and shall lapse effective upon the earlier to occur of (i) notice of employment termination or (ii) last day of employment with the Company.

Director Compensation

The Company has a policy to compensate non-employee members of its Board of Directors elected by common shareholders and such members appointed to the Audit Committee in the amount of $2,500 plus expenses for each meeting attended in person and $1,500 for participating in each meeting via telephone.

The table below shows director’s compensation for the year ended December 31, 2007. As with our named executive officers, we did not grant any options to our directors in 2007.

Table 5 – Director’s Compensation During 2007
Name and Principal Position	Fees Earned or Paid in Cash

Gregory G. Barr	$15,000
Director

Richard L. Stevens	$19,000
Director

Peter G. Friedmann	--- (1)
Director

(1) Mr. Friedmann is appointed by the Preferred Series B shareholder and is not a member of theAudit Committee.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee currently consists of Messrs. Cameron, Dobiesz, Barr and Stevens. There were no transactions during the year ended December 31, 2007 between the Company and members of the Compensation committee or entities in which they own an interest, other than as disclosed in the sections “EXECUTIVE COMPENSATION” and “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.”

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.

Compensation Committee:

Ewen R. Cameron

Norman R. Dobiesz

Gregory G. Barr

Richard L. Stevens

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The following table sets forth information with respect to the beneficial ownership of all of the Company's outstanding voting securities by each person owning five percent (5%) or more of such shares, by each director, by each executive officer listed in Item 10 of this Report on Form 10-K, and by all directors and officers as a group as of March 31, 2008. Unless otherwise indicated, it is assumed that all shares are directly owned and that the holders thereof have sole voting and investment power with respect thereto.

Name of Beneficial Owner and Address		Title of Class	Amount and Nature of Beneficial Ownership (1)	Percentage of Class (1)

Directors and Officers

Norman R. Dobiesz 2150 Whitfield Industrial Way Sarasota, Florida 34243	(2)(4)	Common Stock Preferred Series A Stock Preferred Series C Convertible Stock	1,527,191 100,000 28,236	17.66% 100% 70.59%	(3) (10)(11)

Ewen R. Cameron 2150 Whitfield Industrial Way Sarasota, Florida 34243	(2)(4)	Common Stock Preferred Series C Convertible Stock	761,786 11,764	8.81% 29.41%	(5) (10)(11)

Gregory G. Barr P. O. Box 413040 Naples, Florida 34101	(2)	Common Stock	212,000	2.45%	(6)

Richard L. Stevens 19314 Wind Dancer Street Lutz, Florida 33558	(2)	Common Stock	200,000	2.31%

Richard Begando 2150 Whitfield Industrial Way Sarasota, Florida 34243	(4)	Common Stock	43,575	.50%	(7)

Russell R. Lee III 2150 Whitfield Industrial Way Sarasota, Florida 34243	(4)	Common Stock	100,000	1.16%	(8)

Duncan Anderson Regent Court, Laporte Way Luton, Bedfordshire LU48AE	(4)	Common Stock	70,000	.81%	(9)

Peter G. Friedmann 4850 Keele Street Toronto, Ontario M3J 3K1	(2)	Preferred Series B Convertible Stock	12,625	100%

All Directors and Officers as a Group (8 persons)		Common Stock Preferred Series A Stock	2,914,552 100,000	33.70% 100%
		Preferred Series B Convertible Stock	12,625	100%
		Preferred Series C Convertible Stock	40,000	100%

Greater than 5% Ownership	(10)

FGC Holdings Ltd. 4850 Keele Street Toronto, Ontario M3J 3K1		Preferred Series B Convertible Stock Common Stock	12,625 721,427	100% 8.34%

IHL Investments, LLC 2150 Whitfield Industrial Way Sarasota, Florida 34243	(11)	Preferred Series C Convertible Stock Common Stock	40,000 1,454,545	100% 16.82%

(1)	Does not include an aggregate of 750,000 shares of Common Stock which may be issued upon exercise of incentive stock options which could be granted under the Company's 2005 Incentive Stock Option Plan.
(2)	Director of the Company.
(3)	Includes 56,000 shares owned by virtue of 100% ownership of H & N Management Co., Inc. "H&N"), 1,140,100 shares owned by virtue of 100% ownership of W&D Consultants, Inc., 24,000 shares owned by virtue of 100% ownership of National Communications of Sarasota, Inc., 6,649 shares owned by virtue of 100% ownership of Whitfield Capital of Sarasota, Inc., and 30,000 issued stock options. Does not include 100,000 shares of Preferred Series A Stock owned by Mr. Dobiesz, each such share entitling the holders to cast 400 votes, in any matter submitted for vote of the holders of common stock.
(4)	Executive Officer of the Company named in Item 11 of this Report on Form 10-K.
(5)	Includes 530,000 shares of issued stock options.
(6)	Includes 2,000 shares owned jointly with Mr. Barr's wife. Includes 10,000 shares of issued stock options.
(7)	Includes 35,000 shares of issued stock options.
(8)	Includes 100,000 shares of issued stock options.
(9)	Includes 70,000 shares of issued stock options.
(10)	The information concerning the shares attributable to each beneficial owner is based solely on information contained in Section 13D filings each beneficial owner made with the SEC.
(11)	Owned by Harris Corporation prior to March 29, 2007. Owned by IHL Investments, LLC after March 29, 2007. Ownership of IHL Investments, LLC was acquired by Messrs. Dobiesz and Cameron on February 5, 2008.

Change of Control

The holders of the Preferred Convertible Series B Stock have the right to elect a majority of the Board of Directors of the Company if and whenever four quarterly dividends (whether or not consecutive) payable on the Preferred Convertible Series B Stock shall be in arrears. The Company is in arrears on three dividend payments as of the date of this filing.

Equity Compensation, Plan Information

The following table presents information as of December 31, 2007, relating to our equity compensation plans:

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options	Weighted Average Exercise Price Of Outstanding Options	Number of Securities Remaining Available for Future Issuance

Equity compensation plans approved by security holders:
1995 Incentive Stock Option Plan	1,203,000	$ 0.76	---
2005 Incentive Stock Option Plan	250,000	0.36	750,000

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Effective October 21, 2005 the Company amended its employment agreements with Ewen R. Cameron, President and CEO, and Norman R. Dobiesz, Senior Vice President Business Development. See Executive Compensation - Employment Agreements.

The Company leases two vehicles from another entity controlled by this director. Monthly costs are $3 and are due through October 2010.

In addition, the spouse of the same director is employed by the Company in an administrative capacity at a salary of $35 per year.

All of the outstanding shares of the Company’s Series C Preferred Stock are owned by IHL Investments, LLC. Ownership of IHL Investments, LLC was acquired by two management Directors of the Company on February 5, 2008. See Current Report on Form 8-K dated February 8, 2008 filed with the SEC on February 8, 2008.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Kirkland, Russ, Murphy & Tapp, P.A.:

Kirkland, Russ, Murphy & Tapp, P.A. were engaged in July 2004 and have served as our registered certified public accounting firm during the years ended December 31, 2005, 2006 and 2007. The following table summarizes the aggregate fees billed to the Company by Kirkland, Russ, Murphy & Tapp, P.A. for professional services performed in 2007, 2006 and 2005:

Fees	2007	2006	2005
Audit Fees (1)	$155	$ 147	$ 138

1. Audit Fees.

Fees for audit services billed in 2007, 2006 and 2005 consisted of:

-- Audit of the Company’s annual financial statements for 2007, 2006 and 2005.

-- Reviews of the Company’s quarterly financial statements for 2007, 2006 and 2005.

-- Reviews of Securities and Exchange Commission documents.

The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent accountants on a case-by-case basis. The Audit Committee approved 100% of the services performed by Kirkland, Russ, Murphy & Tapp, P.A. in 2007, 2006 and 2005 as identified above.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)	The following documents are filed as a part of this report:

	(1)	Financial Statements: The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements on Page 21.

	(2)	Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts is on page 55. All other consolidated financial statement schedules have been omitted because the required information is shown in the consolidated financial statements or notes thereto or they are not applicable.

	(3)	See Item 15(c) below.

(b)	Reports on Form 8-K: The Company filed two reports on Form 8-K during the fourth quarter of fiscal year ended December 31, 2007. Information regarding the item reported on is as follows:

	Date		Item Reported On

	November 14, 2007		2.02 Results of Operations and Financial Condition 9.01 Financial Statements and Exhibits
	December 21, 2007		1.01 Entry into a Material Definitive Agreement 9.01 Financial Statements and Exhibits

(c)	Exhibits: The exhibits listed on the Exhibit Index are filed as part of, or incorporated by reference into, this Report.

(d)	Financial Statement Schedules: See Item 15(a) above.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Description	Balance at Beginning Of Period		Additions Charged to Costs and Expenses			Additions Charged to Other Accounts			Writeoffs			Balance at end of Period

Allowance for doubtful accounts:

Year ended December 31, 2007	$	365	$	(17	)	$	---		$	---		$	348
Year ended December 31, 2006		217		222			---			(74	)		365
Year ended December 31, 2005		290		(43	)		---			(30	)		217

Reserve for slow-moving inventories:

Year ended December 31, 2007	$	1,185	$	85		$	---		$	(201	)	$	1,069
Year ended December 31, 2006		989		454			---			(258	)		1,185
Year ended December 31, 2005		880		214			---			(105	)		989

Valuation allowance for deferred tax assets:

Year ended December 31, 2007	$	6,742	$	---		$	696		$	---		$	7,438
Year ended December 31, 2006		7,354		---			(612	)		---			6,742
Year ended December 31, 2005		8,798		---			(1,444	)		---			7,354

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: March 31, 2008	By:	/s/ Russell R. Lee III
		Russell R. Lee III Vice President Finance and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities on the dates indicated.

SIGNATURES	TITLE	DATE

/s/ Ewen R. Cameron	Director, President and Chief Executive Officer	March 31, 2008
Ewen R. Cameron	Director, President and Chief Executive Officer

/s/ Russell R. Lee III	Vice President Finance, Chief Financial Officer, Secretary and Treasurer	March 31, 2008
Russell R. Lee III

/s/ Norman R. Dobiesz	Director	March 31, 2008
Norman R. Dobiesz

/s/ Gregory G. Barr	Director	March 31, 2008
Gregory G. Barr

/s/ Richard L. Stevens	Director	March 31, 2008
Richard L. Stevens

/s/ Peter G. Friedmann	Director	March 31, 2008
Peter G. Friedmann

EXHIBIT INDEX

(c)	Exhibits:
2.1	Tri-Link Technologies, Inc. and Teltronics, Inc. Agreement of Purchase and Sale of Vortex Technology, dated October 31, 2002, between Tri-Link Technologies, Inc. and Teltronics, Inc.
2.2	Amendment No. 1 to Agreement of Purchase and Sale of Vortex Technology, dated May 13, 2003, between Tri-Link Technologies, Inc. and Teltronics, Inc.
3.1	Restated Certificate of Incorporation of Registrant, as amended. Filed as Exhibit 3.1 to Teltronics' Definitive Proxy Statement filed June 24, 1996.
3.2	By-Laws of the Registrant, as amended. Filed as Exhibit 3.2 to Teltronics' Annual Report on Form 10-KSB filed April 2, 1997.
4.1	Certificate of Designations of Preference of Series A Preferred Stock of Teltronics, Inc. filed with the Delaware Secretary of State on August 19, 1996. Filed as Exhibit 5 to Teltronics' Form 8-K filed October 7, 1996.
4.2	Certificate of Designations Establishing Series of Shares and Articles of Amendment of Teltronics, Inc., filed with the Delaware Secretary of State on February 24, 1998. Filed as Exhibit 3.1 to Teltronics' Form 8-K filed March 9, 1998.
4.3	Amended Designation of Teltronics, Inc. filed with the Delaware Secretary of State on February 25, 1998. Filed as Exhibit 3.2 to Teltronics' Form 8-K filed March 9, 1998.
4.4	Certificate of Designations Establishing Series of Shares and Articles of Amendment of Teltronics, Inc. filed with the Delaware Secretary of State on March 27, 2002. Filed as Exhibit 3.6 to Teltronics' Form 10-K filed April 1, 2002.
4.5	Amended Designations Establishing Series of Shares and Articles of Amendment of Teltronics, Inc. filed with the Delaware Secretary of State on April 29, 2002. Filed as Exhibit 3 to Teltronics' Form 10-Q filed August 14, 2002.
10.1	Loan and Security Agreement between Sirrom Capital Corporation and Teltronics, Inc. and its Subsidiaries dated February 25, 1998. Filed as Exhibit 10.4 to Teltronics' Form 8-K filed March 9, 1998.
10.2	Secured Senior Subordinated Promissory Note of Teltronics, Inc. in the principal amount of $1,000,000 dated February 28, 1998 delivered to Sirrom Capital Corporation. Filed as Exhibit 10.5 to Teltronics' Form 8-K filed March 9, 1998.
10.3	Secured Senior Promissory Note of Teltronics, Inc. in the principal amount of $280,000 dated February 26, 1998 delivered to Sirrom Capital Corporation. Filed as Exhibit 10.6 to Teltronics' Form 8-K filed March 9, 1998.
10.4	Common Stock Purchase Warrant covering 525,000 shares of Common Stock of Teltronics, Inc. issued to Sirrom Capital Corporation dated February 26, 1998. Filed as Exhibit 10.7 to Teltronics' Form 8-K filed March 9, 1998.
10.5	Common Stock Purchase Warrant covering 365,000 shares of Common Stock of Teltronics, Inc. issued to Sirrom Capital Corporation dated February 26, 1998. Filed as Exhibit 10.8 to Teltronics' Form 8-K filed March 9, 1998.
10.6	Registration Rights Agreement dated February 25, 1998 between Teltronics, Inc. and Sirrom Capital Corporation. Filed as Exhibit 10.9 to Teltronics' Form 8-K filed March 9, 1998.
10.7	Agreement of Sale dated March 5, 1998 between AT Supply, Inc. and AT2 Communications, Incorporated. Filed as Exhibit 10.7 to Teltronics' Form 8-K filed March 19, 1998.
10.8	Amendment dated December 22, 1998, to Ninth Amendment to Loan and Security Agreement and First Note Modification Agreement dated July 23, 1997 between The CIT Group/Credit Finance, Inc. and Teltronics, Inc., AT Supply, Inc. and Interactive Solutions, Inc. Filed as Exhibit 10.1 to Teltronics' Annual Report on Form 10-K filed March 31, 1999.
10.9	Global Amendment dated March 29, 1999 between Sirrom Capital Corporation and Teltronics, Inc. and its Subsidiaries. Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed May 14, 1999.
10.10	Amended and Restated Senior Secured Promissory Note in the amount of $1,000,000.00 dated and delivered March 29, 1999 by Teltronics, Inc. to Sirrom Capital Corporation. Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed May 14, 1999.
10.11	Amended and Restated 12% Subordinated Secured Debenture Due February 13, 2002 dated and delivered March 29, 1999 by Teltronics, Inc. to Sirrom Capital Corporation. Filed as Exhibit 10.3 to Teltronics' Form 10-Q filed May 14, 1999.

10.12	Lease Rider No. 990325 dated March 25, 1999, between Teltronics, Inc. and SunShore Leasing Corporation. Filed as Exhibit 10.4 to Teltronics' Form 10-Q filed May 14, 1999.
10.13	Amended and Restated Employment Agreement between Teltronics, Inc. and Ewen R. Cameron dated May 3, 1999. Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed August 2, 1999.
10.14	Amended and Restated Employment Agreement between Teltronics, Inc. and Norman R. Dobiesz dated May 3, 1999. Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed August 2, 1999.
10.15	Agreement of Sale dated December 31, 1999 between Teltronics, Inc. and Telident, Inc. Filed as Exhibit 10.1 to Teltronics' Form 8-K filed January 14, 2000.
10.16	Amendment to Agreement of Sale dated February 16, 2000 between Teltronics, Inc., and Telident, Inc. Filed as Exhibit 10.1 to Teltronics' Form 8-K/A filed February 24, 2000.
10.17	Asset Sale Agreement dated June 30, 2000 by and between Teltronics, Inc. and Harris Corporation. Filed as Exhibit 10.1 to Teltronics' Form 8-K filed July 12, 2000.
10.18	Amended Agreement dated October 30, 2000 between Harris Corporation and Teltronics, Inc. Filed as Exhibit 10 to Teltronics' Form 10-Q filed November 13, 2000.
10.19	Amended and Restated Employment Agreement between the Company and Ewen R. Cameron dated August 31, 2002 Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed November 13, 2001.
10.20	Amended and Restated Employment Agreement between the Company and Norman R. Dobiesz dated August 31, 2001 Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed November 13, 2001.
10.21	Amended, Restated and Consolidated Secured Promissory Note restated as of March 28, 2002 delivered to Harris Corporation. Filed as Exhibit 10.21 to Teltronics' Form 10-K filed April 1, 2002.
10.22	Third Amended and Restated Senior Secured Promissory Note in the amount of $1,000,000 dated and delivered May 2, 2002 by Teltronics, Inc. to Finova Mezzanine Capital, Inc. f/k/a/ Sirrom Capital Corporation. Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed August 14, 2002.
10.23	Amended and Restated Stock Purchase Warrant covering 525,000 shares Common Stock of Teltronics, Inc. issued May 2, 2002 to Finova Mezzanine Capital, Inc. f/k/a Sirrom Capital Corporation. Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed August 14, 2002.
10.24	Amended and Restated Stock Purchase Warrant covering 365,000 shares Common Stock of Teltronics, Inc. issued May 2, 2002 to Finova Mezzanine Capital, Inc. f/k/a Sirrom Capital Corporation. Filed as Exhibit 10.3 to Teltronics' Form 10-Q filed August 14, 2002.
10.25	Employment Agreement between the Company and Patrick G. Min dated September 9, 2002. Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed November 14, 2002.
10.26	Employment Agreement between the Company and Robert B. Ramey dated September 9, 2002. Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed November 14, 2002.
10.27	Thirteenth Amendment to Loan and Security Agreement dated October 16, 2002 between The CIT Group/Business Credit, Inc. and Teltronics. Filed as Exhibit 10.3 to Teltronics' Form 10-Q filed November 14, 2002.
10.28	First Amendment to Loan and Security Agreement, Fourth Amended and Restated Senior Secured Promissory Note and Pledge and Security Agreement dated September 30, 2002 between Finova Mezzanine Capital Inc. and Teltronics, Inc. Filed as Exhibit 10.4 to Teltronics' Form 10-Q filed November 14, 2002.
10.29	Secured promissory note for $2,250,000 aggregate principal amount issued by Teltronics, Inc. in favor of Tri-Link Technologies, dated as of June 4, 2003.
10.30	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. Filed as Exhibit 10 to Form 10-Q filed November 14, 2003.
10.31	Patent Transfer Agreement dated August 16, 2004 by and between Harris Corporation and Teltronics, Inc. Filed as Exhibit 10 to Form 10-Q filed August 16, 2004.
10.32	Investment Agreement between Teltronics, Inc. and International Media Network AG dated October 19, 2004. Filed as Exhibit 10.1 to Form 10-Q filed November 15, 2004.
10.33	Share Exchange Agreement between International Media Network AG and Norman R. Dobiesz dated October 19, 2004. Filed as Exhibit 10.2 to Form 10-Q filed November 15, 2004.

10.34	Extension and Amendment of Lease between ARE Sarasota Limited Partnership and Teltronics, Inc. dated March 31, 2005. Filed as Exhibit 10.1 to Form 10-Q filed May 11, 2005.
10.35	New York State Department of Education/DIIT Minibid #2189 Awarded January 31, 2005 to Teltronics, Inc. Filed as Exhibit 10.2 to Form 10-Q filed May 11, 2005.
10.36	Amended Loan and Security Agreement between Teltronics, Inc. and The CIT Group/Business Credit, Inc. dated April 25, 2005. Filed as Exhibit 10.3 to Form 10-Q filed May 11, 2005.
10.37	Settlement Agreement and Mutual Release among Teltronics, Inc., Tri-Link Technologies Inc., and Hargan-Global Ventures Inc. dated October 12, 2005. Filed as Exhibit 10.1 to Form 10-Q filed November 14, 2005.
10.38	Promissory Note of Teltronics, Inc. in the principal amount of $750,000 dated October 12, 2005 delivered to Tri-Link Technologies Inc. Filed as Exhibit 10.2 to Form 10-Q filed November 14, 2005.
10.39	Promissory Note of Teltronics, Inc. in the principal amount of $250,000 dated October 12, 2005 delivered to Dove Ventures, Ltd. Filed as Exhibit 10.3 to Form 10-Q filed November 14, 2005.
10.40	Amended and Restated Employment Agreement between Teltronics, Inc. and Ewen R. Cameron dated October 21, 2005.
10.41	Amended and Restated Employment Agreement between Teltronics, Inc. and Norman R. Dobiesz dated October 21, 2005.
10.42	Amendment to Revolving Credit, Term Loan and Security Agreement by and among CapitalSource Finance LLC and Teltronics, Inc. dated May 15, 2007. Filed as Exhibit 10.1 to Form 10-Q filed August 14, 2007.
10.43	Credit Agreement by and among Teltronics, Inc. and Wells Fargo Foothill, Inc. dated May 31, 2007. Filed as Exhibit 10.1 to Form 8-K filed June 4, 2007.
10.44	Security Agreement by and among Wells Fargo Foothill, Inc. and Teltronics dated May 31, 2007. Filed as Exhibit 10.2 to Form 8-K filed June 4, 2007
10.45	Amendment Number One to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated May 31, 2007. Filed as Exhibit 10.2 to Form 10-Q filed August 14, 2007.
10.46*	Employment Agreement between Teltronics Limited and Duncan Anderson dated March 1, 2005.
10.47*	Asset Purchase Agreement dated December 19, 2007 by and among Access Communications, Collier Business Systems, John Mitchell, Chris R. Fickey and Teltronics Direct, Inc.
14.1	Code of Ethics. Filed as Exhibit 14 to Form 10-K for the fiscal year ended December 31, 2003.
14.2*	Code of Ethics. Teltronics, Inc. Board of Directors Code of Ethical Business Conduct.
21*	List of Subsidiaries.
23*	Consent of Independent Registered Certified Public Accountants, Kirkland, Russ, Murphy & Tapp, P.A.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
_____ (*)	Filed as an Exhibit to this Annual Report on Form 10-K for the fiscal year ended December 31, 2007.