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, 2008
£	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/AT

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  £ Small reporting company T

(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, 2008), was approximately $974,608.  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 April 9, 2009, 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 59.

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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	21
	ITEM 8.	FINANCIAL STATEMENTS	22
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE	44
	ITEM 9A(T).	CONTROLS AND PROCEDURES	44
PART III
	ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	45
	ITEM 11.	EXECUTIVE COMPENSATION	48
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	53
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	55
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	55
PART IV
	ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	56
SIGNATURES			58
CERTIFICATIONS

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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.  During 2008 the Company closed the Mexico segment.  This segment’s closing does not indicate a discontinuation of the Mexico business.  Existing business and new business within Mexico will be handled by United States personnel.  Operating segment data for 2008, 2007 and 2006 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

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 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®.  TheNET-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 calculates real-time performance data used 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.

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  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 shelves and low density expansion shelves.  Any combination of expansion shelves can extend up to 9,216 ports.

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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.

4

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 9001:2000.  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 U.S. patents relating to the 20-20 digital switching systems expire on various dates between 2008 and 2020.  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.

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Backlog

The Company's backlog at December 31, 2008 was approximately $17,181, as compared to $12,374 at December 31, 2007.  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.

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,
	2008	2007	2006
New York City Department of Education	30%	24%	22%
Nielsen Media Research	7%	11%	8%

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, 2008, 2007 and 2006 were $3,150, $4,127 and $4,108, 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.

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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, 2008, the Company had 175 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.

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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 FGC 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.

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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
	2008				2007
	High		Low		High		Low
PERIOD
1st Quarter	$	0.34	$	0.30	$	0.57	$	0.35
2nd Quarter		0.33		0.17		0.77		0.42
3rd Quarter		0.21		0.10		0.72		0.35
4th Quarter		0.12		0.03		0.50		0.30

On April 9, 2009, the last reported sales price for the Company's common stock as reported on the OTC Bulletin Board was $0.03 per share.  As of April 9, 2009, there were approximately 428 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, 2008 and 2007.  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, 2008 and 2007.  The Preferred Series C Convertible stock, which is owned by an entity controlled by the Company’s Director and Executive 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.

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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.

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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, 2003 and assumes that no dividends were paid.

Five Year Cumulative Total Return Chart

(Per $100 Invested)

	2003	2004	2005	2006	2007	2008
Teltronics, Inc.	100	106	86	67	59	6
NASDAQ Stock Market – US Companies	100	109	110	121	132	77
NASDAQ Stock Market – Telecommunications Stock	100	108	100	128	140	80

Five Year Cumulative Total Return Graph

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

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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.

	2008			2007			2006			2005			2004
Statement of Operations Data:
Net sales	$	34,638		$	40,631		$	46,891		$	46,111		$	46,046
Gross profit		11,442			15,448			19,311			18,178			17,543
Recurring operating expense		14,550			15,441			16,198			16,182			16,707
Impairment of fixed assets		---			---			---			1,583			---
Impairment of goodwill and intangible assets		169			---			---			---			---
Total operating expenses		14,719			15,441			16,198			17,765			16,707
Income (loss) from operations		(3,277	)		7			3,113			413			836
Other income (expense):
Interest		(1,402	)		(1,948	)		(1,449	)		(1,283	)		(1,631	)
Non-operating gain (loss)		1,407			(136	)		(19	)		4,728			1,341
Total other income (expense)		5			(2,084	)		(1,468	)		3,445			(290	)
Net income (loss)	$	(3,281	)	$	(2,070	)	$	1,607		$	3,816		$	539
Net income (loss) available to common shareholders	$	(4,376	)	$	(3,022	)	$	954		$	3,168		$	(85	)
Net income (loss) per share:
Basic	$	(0.51	)	$	(0.35	)	$	0.11		$	0.39		$	(0.01	)
Diluted	$	(0.51	)	$	(0.35	)	$	0.10		$	0.36		$	(0.01	)
Shares used to compute amount:
Basic		8,647,539			8,646,706			8,637,246			8,041,323			7,831,051
Diluted		8,647,539			8,646,706			9,280,289			10,540,391			7,831,051
Balance Sheet Data:
Working capital (deficiency)	$	(4,935	)	$	116		$	798		$	(326	)	$	(2,922	)
Total assets		12,644			18,033			16,692			16,980			16,424
Line of credit, current portion of long-term debt and capital lease obligations		5,731			5,788			6,228			5,967			4,831
Long-term debt and capital lease obligations, less current portion		2,214			4,125			2,366			3,081			7,885
Total shareholders' deficiency	$	(9,126	)	$	(4,487	)	$	(1,452	)	$	(2,586	)	$	(6,044	)

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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.

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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.

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:

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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.    Revenues from support and maintenance activities are 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 revenues are 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 in accordance with FASB 144, “Accounting for the Impairment or Disposal of Long Lived Assets.”

The Company assesses the recoverability of goodwill and intangible assets not subject to amortization under FASB 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.

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Results of Operations

The following tables set forth certain data, expressed as a percentage of revenue, from the consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006.

	2008			2007			2006
Net sales		100.0	%		100.0	%		100.0	%
Gross profit		33.0			38.0			41.2
Recurring operating expense		42.0			38.0			34.6
Impairment of fixed assets		0.5			---			---
Total operating expenses		42.5			38.0			34.6
Income (loss) from operations		(9.5	)		0.0			6.6
Other income (expense):
Interest		(4.0	)		(4.8	)		(3.1	)
Non-operating gain (loss)		4.0			(0.3	)		0.0
Total other income (expense)		0.0			(5.1	)		(3.1	)
Income (loss) before income taxes		(9.5	)		(5.1	)		3.5
Provision for income taxes		0.0			0.0			0.1
Net income (loss)		(9.5	)%		(5.1	)%		3.4	%

The following is a discussion of results of operations for each of the three years ended December 31, 2008, 2007 and 2006.  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 $5,993 or 14.7% for the year ended December 31, 2008 as compared to the same period in 2007.  Net sales decreased $6,260 or 13.3% for the year ended December 31, 2007 compared to the same period in 2006.

The decrease in net sales for the year ended December 31, 2008 was primarily a result of a decrease of $5,684 in net sales from the US, a decrease of $49 in net sales from UK subsidiary, and a $260 decrease in net sales from the Mexico subsidiary.  The overall decrease in net sales for the year ended December 31, 2008 was a result of the combination of reduced sales in 20-20 by $1,839 resulting from a delay in systems installations in one of Teltronics’ largest customers, ISM by $1,000 due to lower sales volume of product upgrades and installs, EMFG sales of $1,157 due the completion of a few large project contracts in 2007 which were replaced but delayed to 2009 and other reductions mainly due to sale of the Telident division of $1,260.  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.

Gross profit margin for the years ended December 31, 2008, 2007 and 2006 were 33.0%, 38.0% and 41.2%, respectively. Gross profit margin fluctuates based on the volume and mix of sales.

Operating Expenses

 Recurring operating expenses were $14,550, $15,441 and $16,198 for the years ended December 31, 2008, 2007 and 2006, respectively.  Due to the economic downturn, the Company made two cuts in 2008. In June the Company closed down its Research and Development facility in Salt Lake City, Utah.  R&D for the 20-20/Cerato products are now consolidated in California and in Sarasota.  The Company also

16

reduced its personnel in Sarasota in its ISM product line as well as decreased personnel in its manufacturing facility.  These cuts reduce the Company’s operating expenses by $2,700 on an annual basis.

 Further cuts were made in December reducing payroll and related benefits saving an additional $1,800.  The Company also made a decision to cut the Company’s payroll across the board by 10%, suspending its 401(k) match and freezing future pay increases until further notice.  This will save an additional $1,500 in 2009.

2008

General and administrative expenses increased $314 for the year ended December 31, 2008 as compared to the same period in 2007.  The net increase for the year ended December 31, 2008 was primarily the result of the following items: (a) a $143 increase in compensation and fringe benefit expenses, (b) a $224 increase in severance, (c) a $120 increase in professional fees and (d) an $87 increase in software licenses and support.  These increases were partially offset with the following items: (a) a $68 decrease in bad debt expense and (b) a $168 decrease in audit and legal.

Sales and marketing expenses decreased $480 for the year ended December 31, 2008 as compared to the same period 2007.  The net decrease for the year December 31, 2008 was primarily the result of the following items: (a) a $245 decrease in payroll, (b) a $266 decrease in commission and fringe benefit expenses, (c) a $155 decrease in travel related expense, and (d) a $70 decrease in bad debt expense from the UK operation.  These decreases were partially offset with a $173 increase in severance and a $54 increase in professional fees.

Research and development expenses decreased $977 for the year ended December 31, 2008 as compared to the same period in 2007.  The net increase for the year December 31, 2008 was primarily the result of (a) a $562 increase in compensation and fringe benefits (b) a $110 increase in professional fees, and (c) a $341 increase in R&D material and equipment.  These increases were partially offset with a $75 decrease in rent.

Depreciation and amortization expense increased $252 for the year ended December 31, 2008 as compared to the same period in 2007.  The increase for the year ended December 31, 2008 was primarily the result of (a) $171 increase due to the purchase of customer list that was subsequently written off and (b) $81 increase in depreciation expense due to the purchase of assets that began depreciation in 2008.

For the year ended December 31, 2008 the Company recorded an impairment charge for their US goodwill and their UK customer list of $169.  No impairment was recorded in 2007.

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 and (b) a $98 decrease in telephone expense.

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, (b) 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.

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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.

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.

Other Income (Expense)

For the year ended December 31, 2008, interest expense decreased $546 and non-operating gain (loss) increased $1,543 as compared to the same period in 2007.  The decrease in interest costs was primarily the result of an additional charge of approximately $489 from the debt restructuring in 2007.  The increase in non-operatinggain of $1,543 was primarily related to a gain on the sale from Telident.

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.

Liquidity and Capital Resources

Net cash flows provided by (used in) operating activities

Net cash provided by operating activities was $392 for the year ended December 31, 2008.  The $392 was comprised of the following items: (a) net loss of $3,282, (b) net non-cash income of $485, (c) a decrease in operating assets of $3,562, and (d) an increase in operating liabilities of $596.  The net decrease in operating assets was primarily the result of a decrease in accounts receivables of $3,720, a $16 increase in inventory and a $169 increase in other assets.  The net increase in operating liabilities was primarily the result of increased accounts payable of $1,409, offset with a decrease in accrued liabilities of $737, and a $76 decrease in deferred revenue.  The net non-cash income in 2008 of $485 was primarily comprised of the $1,436 gain from the sale of the Telident line of products offset by depreciation and amortization of $367, the amortization and impairment of other intangible assets of $382, and a $312 provision for slow moving inventory.

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.

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Net cash flows provided by (used in) investing activities

Net cash flows provided by investing activities were $1,520 for the year ended December 31, 2008 primarily driven by the $1,750 proceeds from the sale of the Telident.

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 (used in) financing activities

Net cash flows used in financing activities for the year ended December 31, 2008 were $2,221.  The Company had net borrowings on its line of credit of $262 and net principal repayments of $2,230. Additionally, the Company paid dividends on the Preferred Series B convertible stock of $253.

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 $253.

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.

Liquidity

As of December 31, 2008 the Company had cash and cash equivalents of $548 as compared to $1,123 as of December 31, 2007.  Working capital deficiency as of December 31, 2008 was $4,935 and a working capital surplus was $116 as of December 31, 2007.

The current state of the global economy and credit crunch have resulted in challenging times for all businesses.  As of and for the year ended December 31, 2008, the Company has incurred a net loss of $3,281, working capital deficiency of $4,935 and has limited availability of cash.  The Company’s management implemented plans during 2008 to increase gross margin and decrease operating costs, as described in management’s discussion and analysis section.  If these plans are not successful it may impair the Company’s ability to meet the financial covenants associated with the Company’s credit facility as described in Note 6.  Should these plans not meet management’s objectives the Company may need to raise additional funds through debt or equity offerings.  There can be no assurance as to the availability of any needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to management.

Additionally, management has lead an effort to increase sales worldwide, but more specifically in the promotion of its higher gross profit margin products.  That effort has lead to an increase in orders of 20-20 switching system installations with some of the Company’s largest customers.  Through mid-April 2009 the Company has orders or has completed installations including several which had been originally budgeted for 2008.  Management anticipates an increase in 20-20 switching system installations in 2009 over those installed in 2008 based on the installations which have occurred and the orders they have received.

If the Company is unable to increase sales, lower operating costs, or raise additional funds this will have a material adverse effect on its business.  No adjustments have been made to the accompanying Consolidated Financial Statements based upon these plans and assumptions.

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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.

The Company has 12,625 shares of Series B and 40,000 shares of Series C Preferred Stock outstanding as of December 31, 2008.  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 twenty-three dividend payments until January 2010.  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, 2008 for the fiscal years ending December 31:

	2009		2010		2011		2012		2013		2014 and thereafter
Operating leases	$	1,258	$	1,126	$	432	$	173	$	165	$	---
Debt financing		1,440		1,207		988		14		5		---
Preferred Series B and C convertible stock dividends		1,053		1,053		1,053		1,053		1,053		1,053
Total contractual cash obligations	$	3,751	$	3,386	$	2,473	$	1,240	$	1,223	$	1,053

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 $253 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.

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ITEM  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company had no holdings of derivative financial or commodity instruments at December 31, 2008.  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)

2008	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	8,327		$	9,761		$	8,096		$	8,454
Cost of goods sold		5,524			6,456			4,954			6,262
Net income (loss)		87			(1,596	)		75			(1,847	)
Net income (loss) per share:
Basic	$	(0.03	)	$	(0.22	)	$	(0.02	)	$	(0.24	)
Diluted	$	(0.03	)	$	(0.22	)	$	(0.02	)	$	(0.24	)
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	)

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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	23
	Consolidated Balance Sheets – December 31, 2008 and 2007	24
	Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006	25
	Consolidated Statements of Shareholders' Deficiency for the Years Ended December 31, 2008, 2007 and 2006	26
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006	27
	Notes to Consolidated Financial Statements	29
Financial Statement Schedule:
	Item 15(a)(2):	57
	Schedule II – Valuation and Qualifying Accounts
	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.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Teltronics, Inc.:

We have audited the accompanying consolidated balance sheets of Teltronics, Inc. and subsidiaries as of December 31, 2008 and 2007, 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, 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, 2008 and 2007, 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

April 13, 2009

23

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

ASSETS

	December 31,
	2008			2007
Current assets:
Cash and cash equivalents	$	548		$	1,123
Accounts receivable, net		5,366			9,122
Inventories, net		5,085			5,423
Prepaid expenses and other current assets		622			643
Total current assets		11,621			16,311
Property and equipment, net		748			949
Goodwill		---			241
Other assets, net		275			532
Total assets	$	12,644		$	18,033
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
Current liabilities:
Line of credit	$	4,291		$	4,029
Current portion of long-term debt and capital lease obligations		1,440			1,759
Accounts payable		7,687			6,279
Accrued expenses and other current liabilities		2,639			3,221
Deferred revenue		499			907
Total current liabilities		16,556			16,195
Long-term liabilities:
Deferred dividends		3,000			2,200
Long-term debt and capital lease obligations, net of current portion		2,214			4,125
Total long-term liabilities		5,214			6,325
Commitments and contingencies Shareholders' deficiency:
Common stock, $.001 par value, 40,000,000 shares authorized, 8,647,539 issued and outstanding at December 31, 2008 and 2007		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		24,725			24,722
Other comprehensive income (loss)		(239	)		27
Accumulated deficit		(33,621	)		(29,245	)
Total shareholders' deficiency		(9,126	)		(4,487	)
Total liabilities and shareholders' deficiency	$	12,644		$	18,033

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

24

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

	Years Ended December 31,
	2008			2007			2006
Net sales
Product sales and installation	$	23,228		$	29,035		$	33,390
Maintenance and service		11,410			11,596			13,501
		34,638			40,631			46,891
Cost of goods sold		23,196			25,183			27,580
Gross profit		11,442			15,448			19,311
Operating expenses:
General and administrative		5,273			4,959			4,694
Sales and marketing		5,604			6,084			7,017
Research and development		3,150			4,127			4,108
Depreciation and amortization		523			271			379
Impairment of goodwill and intangible assets		169			---			---
		14,719			15,441			16,198
Income (loss) from operations		(3,277	)		7			3,113
Other income (expense):
Interest		(1,402	)		(1,948	)		(1,449	)
Non-operating gain (loss)		1,407			(136	)		(19	)
		5			(2,084	)		(1,468	)
Income (loss) before income taxes		(3,272	)		(2,077	)		1,645
Income taxes		9			(7	)		38
Net income (loss)		(3,281	)		(2,070	)		1,607
Dividends on Preferred Series B and C Convertible stock		1,095			952			653
Net income (loss) available to common Shareholders	$	(4,376	)	$	(3,022	)	$	954
Net income (loss) per share:
Basic	$	(0.51	)	$	(0.35	)	$	0.11
Diluted	$	(0.51	)	$	(0.35	)	$	0.10
Weighted average shares outstanding:
Basic		8,647,539			8,646,706			8,637,246
Diluted		8,647,539			8,646,706			9,280,289

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

25

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY

(In thousands, except share data)

	COMMON STOCK		PREFERRED STOCK		ADDITIONAL PAID-IN CAPITAL	ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)	ACCUMULATED DEFICIT	TOTAL
	SHARES	AMOUNT	SHARES	AMOUNT
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)
Stock based compensation expense	---	---	---	---	3	---	---	3
Comprehensive income:
Net loss	---	---	---	---	---	---	(3,281)	(3,281)
Foreign currency	---	---	---	---	---	(266)	---	(266)
Comprehensive loss	---	---	---	---	---	---	---	(3,547)
Dividends on Preferred Series B and C Convertible stock	---	---	---	---	---	---	(1,095)	(1,095)
BALANCE, DECEMBER 31, 2008	8,647,539	$   9	152,625	---	$ 24,725	$(239)	$ (33,621)	$ (9,126)

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

26

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except share data)

	Years Ended December 31,
	2008			2007			2006
OPERATING ACTIVITIES:
Net income (loss)	$	(3,281	)	$	(2,070	)	$	1,607
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Impairment of goodwill and intangible assets		169			---			---
Depreciation and amortization		367			394			537
Provision for slow moving inventories		312			85			454
Provision (recovery) for doubtful accounts		(171	)		(17	)		222
Amortization of deferred financing costs		58			247			119
Amortization of other intangible assets		213			46			37
Stock based compensation expense		3			15			49
Other non-operating gains		(1,436	)		---			---
Changes in operating assets and liabilities:
Accounts receivable		3,720			(593	)		(2,166	)
Inventories		(16	)		(281	)		709
Prepaid expenses and other current assets		27			(100	)		410
Other assets		(170	)		(259	)		(11	)
Accounts payable		1,409			2,239			(1,590	)
Accrued expenses and other current liabilities		(736	)		473			446
Deferred revenue		(76	)		(355	)		(188	)
Net cash flows provided by (used in) operating activities		392			(176	)		635
INVESTING ACTIVITIES:
Acquisition of property and equipment		(230	)		(534	)		(379	)
Proceeds from sale of property and equipment		1,750			---			---
Net cash flows provided by (used in) investing activities		1,520			(534	)		(379	)
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit		262			(1,366	)		282
Net principal borrowings (repayments) on loans, notes and capital leases		(2,054	)		2,685			(777	)
Dividends paid on Preferred Series B Convertible stock		(253	)		(252	)		(248	)
Repayment of loan from related party		(176	)		---			---
Net cash flows provided by (used in) financing activities		(2,221	)		1,067			(743	)
Effect of exchange rate changes on cash		(266	)		(28	)		131
Net increase (decrease) in cash and cash equivalents		(575	)		329			(356	)
Cash and cash equivalents - beginning of year		1,123			794			1,150
Cash and cash equivalents - end of year	$	548		$	1,123		$	794

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

27

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands, except share data)

	Years Ended December 31,
	2008		2007		2006
SUPPLEMENTAL NONCASH FINANCING AND
INVESTING ACTIVITIES:
Equipment acquired under notes payable and capital lease	$	134	$	---	$	88
SUPPLEMENTAL DISCLOSURES:
Interest paid	$	1,113	$	1,702	$	1,365
Income taxes paid	$	---	$	28	$	---

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

28

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

(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.

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.

As part of the Company’s overall review of its operations and a review of TDI’s accumulated losses since the acquisition and low sales volume, it ceased operation of this subsidiary and as such, the Company recorded a $164 impairment of the customer list in depreciation and amortization, and a $30 reserve to inventory in cost of sales.  The Company ceased operations of TDI during August 2008 and disposed of its remaining assets.

On January 18, 2008, the Company sold certain 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.  A gain of $1,436 has been recognized from this disposal and is recorded in other income in the accompanying Consolidated Statement of Operations.

The assets sold to Amcom included in the accompanying Consolidated 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 which includes goodwill of $167.  Amcom assumed $17 of accounts payable and $402 of other liabilities.

The Company used $718 to pay down the term loan balance as stipulated in the Revolving Credit Term Loan and Security Agreement.

The current state of the global economy and credit crunch have resulted in challenging times for all businesses.  As of and for the year ended December 31, 2008, the Company has incurred a net loss of $3,281, working capital deficiency of $4,935 and has limited availability of cash.  The Company’s management implemented plans during 2008 to increase gross margin and decrease operating costs, as described in management’s discussion and analysis section.  If these plans are not successful it may impair the Company’s ability to meet the financial covenants associated with the Company’s credit facility as described in Note 6.  Should these plans not meet management’s objectives the Company may need to raise additional funds through debt or equity offerings.  There can be no assurance as to the availability of any needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to management.

29

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Additionally, management has lead an effort to increase sales worldwide, but more specifically in the promotion of its higher gross profit margin products.  That effort has lead to an increase in orders of 20-20 switching system installations with some of the Company’s largest customers.  Through mid-April 2009 the Company has orders or has completed installations including several which had been originally budgeted for 2008.  Management anticipates an increase in 20-20 switching system installations in 2009 over those installed in 2008 based on the installations which have occurred and the orders they have received.

If the Company is unable to increase sales, lower operating costs, or raise additional funds this will have a material adverse effect on its business.  No adjustments have been made to the accompanying Consolidated Financial Statements based upon these plans and assumptions.

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 30%, 24% and 22% of sales in 2008, 2007 and 2006, respectively.  The second largest customer in 2008 was 7% and the second largest customer in 2007 and 2006 was 11% and 8%, respectively.  The third largest customer in 2008 and 2007 was 7% and the third largest customer in 2006 was 7%.  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 and cash equivalents, 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 – In accordance with Statement 123R, the Company measures compensation cost for employees stock options at fair value and recognizes cost over the vesting period.

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

30

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

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.  During 2008 the Company recognized impairment charges of $95 related to a customer list in connection with these reviews.

The Company assesses the recoverability of goodwill and intangible assets not subject to amortization under FAS No. 142 “Goodwill and Other Intangible Assets.”  During 2008 the Company recognized impairment charges of $74 related to capitalized goodwill in connection with these reviews.

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.

31

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 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.

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.

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, at the Company's sole discretion, units defective in material or workmanship, provided the equipment has not been subjected to alteration or abuse.

32

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Changes in the Company's product liability during the years ended December 31, 2008, 2007 and 2006 are as follows:

	2008			2007			2006
Balance, beginning of the year	$	212		$	221		$	171
Warranties issued during the year		83			97			259
Payments made during the year		(85	)		(111	)		(198	)
Change in liability based on sale of line of products		(38	)		---			---
Changes in liability for pre-existing warranties during the year		(63	)		5			(11	)
Balance, end of the year	$	109		$	212		$	221

Accounting for Fair Value Measurement - In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157 with an effective date on or after November 15, 2007.  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.  The requirements of SFAS 157 did not have a material effect on the Company’s Consolidated Financial Statements.

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, 2008 and 2007 are as follows:

	December 31,
	2008			2007
Accounts receivable	$	5,543		$	9,470
Allowance for doubtful accounts		(177	)		(348	)
	$	5,366		$	9,122

As of December 31, 2008 and 2007, accounts receivable included $313 and $124 of retainage, respectively.

NOTE 4 - INVENTORIES, NET

The major classes of inventories, net at December 31, 2008 and 2007 are as follows:

	December 31,
	2008		2007
Raw materials	$	2,697	$	2,670
Work-in-process		841		1,237
Finished goods		1,547		1,516
	$	5,085	$	5,423

At December 31, 2008 and 2007, there were no contracts accounted for using percentage of completion accounting method.

The reserve for slow moving inventories was $1,033 and $1,069 as of December 31, 2008 and 2007, respectively.

33

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 5 - PROPERTY AND EQUIPMENT, NET

The major classifications of property and equipment, net at December 31, 2008 and 2007 are as follows:

	December 31,
	2008			2007
Machinery and equipment	$	7,400		$	7,802
Furniture, fixtures and computers		4,859			4,994
Equipment under capital leases		780			646
Capitalized software		2,254			2,565
Leasehold improvements		573			580
		15,866			16,587
Accumulated depreciation and amortization		(15,118	)		(15,638	)
	$	748		$	949

Depreciation and amortization expense was $367, $394 and $537 for the years ended December 31, 2008, 2007 and 2006, respectively. For the years ended December 31, 2008, 2007 and 2006, depreciation and amortization expense of $58, $170 and $158, 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 unamortized cost of capitalized software to be sold, leased or otherwise marketed was $30, $94, and $143 as of December 31, 2008, 2007 and 2006, respectively.  For the years ended December 31, 2008, 2007 and 2006, amortization and impairment expense related to capitalized software was $64, $50 and $60, respectively.

NOTE 6 - LINE OF CREDIT AND LONG-TERM DEBT

The Company’s credit facility, as amended in February 2009, is subject to compliance with various financial covenants and borrowing base criteria.  The Company received a waiver for these covenants as of December 31, 2008.  The credit facility consists of a $6,000 revolving line of credit and a five year term-loan with a 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 at an annual rate of Prime Rate, plus 3.75%, with a minimum rate of 9.75%, and are subject to mandatory prepayments in certain situations.  The obligations of the agreement are secured by a first lien and security interest in all of the Company’s assets.  The availability under this facility as of December 31, 2008 was $468.

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

During 2005 the Company borrowed $250 from an entity controlled by a director.  Principal and cumulative interest, at an annual rate of fifteen percent (15%), is due November 2009.  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.  The Company made a partial payment of $176 in February 2008.  As of December 31, 2008 the balance was $203.

34

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Long-term debt at December 31, 2008 and 2007 consists of the following:

	December 31,
	2008		2007
Term Loan, payable in monthly installments of $97 plus interest (9.75% at December 31, 2008) at prime plus 3.75%.	$	3,303	$	5,258
Note payable to Tri-Link in monthly principal installments of $21 plus interest with final maturity October 2008.		---		208
Note payable to related party, principal and interest due November 2009.		203		348
Notes payable to finance companies, payable in monthly installments of $6with interest at approximately 20%.  The notes mature through 2013 and are collateralized by vehicles.		99		67
Capital lease obligations, interest at approximately 14%		49		3
Total		3,654		5,884
Less current portion		1,440		1,759
Long-term portion	$	2,214	$	4,125

Future principal maturities of long-term debt and capital lease obligations, as of December 31, 2008, are as follows:

2009	$ 1,440
2010	1,207
2011	988
2012	14
2013	5
	$ 3,654

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.

The Preferred Series B Convertible stock, which is owned by a company controlled by a 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.

35

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company is in arrears on three quarterly dividend payments due on Preferred Series B Convertible stock at December 31, 2008 that total $189, which represents $20 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 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.

36

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, 2008, 2007 and 2006:

December 31, 2008:				Outstanding				Exercisable
				Weighted Average
Exercise Price Range		Shares		Exercise Price		Remaining Contractual Life (yrs)		Shares		Weighted Average Exercise Price
	$0.07 - $0.49		500,000	$	0.15		5.4		427,000	$	0.14
	$0.50 - $1.00		558,000		0.99		2.1		556,000		1.00
	$1.63 - $3.03		123,000		2.18		1.4		123,000		2.18
			1,181,000	$	0.76		3.4		1,106,000	$	.80

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

The per share weighted average fair value of options granted during the years ended December 31, 2008 and 2007 were $0.14 and $0.35, 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 830,000 shares were available for grant under the 2005 Plan at December 31, 2008.

37

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:

	2008	2007	2006
Risk-free interest rates	2.6%	4.75%	---
Weighted average expected life of the options	5 years	5 years	---
Volatility factor of the expected market price of the Company's Common Stock	101%	116%	---
Dividend yield	None	None	---

Weighted average exercise prices for option activity:

	Number of Shares			Weighted Average Exercise Price
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
Granted		130,000			0.14
Exercised		---			---
Forfeited		(402,000	)		0.51
Expired		---			---
Outstanding, December 31, 2008		1,181,000			0.76
Exercisable, December 31, 2008		1,106,000		$	0.80

NOTE 8 - INCOME TAXES

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

	Years ended December 31,
	2008		2007			2006
Current:
Federal	$	3	$	(14	)	$	23
State		6		7			15
		9		(7	)	$	38
Deferred:
Federal		---		---			---
State		---		---			---
		---		---			---
	$	9	$	(7	)	$	38

38

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 2008, 2007 and 2006 to income before income taxes:

	Years ended December 31,
	2008			2007			2006
Federal tax at the statutory rate	$	(1,113	)	$	(624	)	$	556
Foreign income tax at statutory rate		4			(83	)		---
State income taxes, net of federal tax benefit		(114	)		4			59
Change in valuation allowance for deferred tax assets		1,419			696			(612	)
Permanent differences		15			---			35
Change in rate for tax credits	$	(202	)		---			---
	$	9		$	(7	)	$	38

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

	December 31,
	2008			2007
Deferred tax assets:
Net operating loss carryforward	$	7,223		$	6,275
Accrued vacation		169			239
Inventory		390			420
Fixed assets and intangible		315			180
Bad debt reserve		67			122
Accrued expenses		434			202
Change in tax credits and other		259			---
		8,857			7,438
Valuation allowance	$	(8,857	)	$	(7,438	)

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 $1,419 in 2008, increased $696 in 2007, and decreased $612 in 2006.

At December 31, 2008, for federal income tax purposes, the Company had a net operating loss carryforward of approximately $19.2 million, which will expire in the years 2016 through 2028.  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.

39

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:

	2008			2007			2006
Basic
Net income (loss)	$	(3,281	)	$	(2,070	)	$	1,607
Preferred dividends		(1,095	)		(952	)		(653	)
Net income (loss) available to common shareholders		(4,376	)	$	(3,022	)	$	954
Weighted average shares outstanding		8,647,539			8,646,706			8,637,246
Net income (loss) per share	$	(0.51	)	$	(0.35	)	$	0.11
Diluted
Net income (loss)	$	(3,281	)	$	(2,070	)	$	1,607
Preferred dividends		(1,095	)		(952	)		(653	)
Net income (loss) available to commonshareholders	$	(4,376	)	$	(3,022	)	$	954
Weighted average shares outstanding		8,647,539			8,646,706			8,637,246
Effect of dilutive securities:
Employee stock options		---			---			406,807
Warrants		---			---			236,236
Dilutive potential common shares		8,647,539			8,646,706			9,280,289
Net income (loss) per share	$	(0.51	)	$	(0.35	)	$	0.10

For the years ended December 31, 2008, 2007 and 2006, options to purchase 1,181,000, 1,453,000 and 873,000 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, 2008, 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 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 $195,  $217 and $218 in 2008, 2007 and 2006, respectively.

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 2008, 2007 or 2006.

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.

40

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(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, 2008 are as follows:

2009	$  1,258
2010	1,126
2011	432
2012	173
Thereafter	165
	$  3,154

Rental expense for operating leases totaled approximately $1,691, $1,372 and $1,361 for the years ended December 31, 2008, 2007 and 2006, 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 and 150 square feet of the office space in the Company’s New York office.  The annual rent payment was approximately $101 for 2008 and $8 for 2007 and 2006.

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%), is due November 2009.  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.  The Company made a partial payment of $177 in February 2008.  As of December 31, 2008 the balance was $203.

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.

41

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 13 - SEGMENT INFORMATION

For the years ended December 31, 2008, 2007 and 2006, the Company’s operations were classified into the following reportable segments:  Teltronics, Teltronics S.A. de C.V., (Mexico) and Teltronics Limited (UK).  During 2008 the Company closed the Mexico segment.  This segment’s closing does not indicate a discontinuation of the Mexico business.  Existing business and new business with in Mexico will be handled by United States personnel.

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,
	2008			2007			2006
Net Sales
Teltronics	$	33,106		$	38,790		$	44,418
Mexico		---			260			469
UK		1,532			1,581			2,004
Total net sales	$	34,638		$	40,631		$	46,891
Depreciation, Amortization and Impairment
Teltronics	$	548		$	386		$	526
Mexico		1			2			2
UK		143			52			46
Total depreciation and amortization	$	692		$	440		$	574
Interest and Financing Costs
Teltronics	$	(1,410	)	$	1,943		$	1,449
Mexico		(1	)		5			---
UK		9			---			---
Total interest and financing costs	$	(1,402	)	$	1,948		$	1,449
Segment Income (Loss)
Teltronics	$	(4,377	)	$	(1,747	)	$	1,537
Mexico		(111	)		(19	)		(29	)
UK		(221	)		(311	)		137
Subtotal	$	(4,709	)	$	(2,077	)	$	1,645
Non-operating gain		1,438			---			---
Income before income taxes	$	(3,272	)	$	(2,077	)	$	1,645
Segment Assets
Teltronics	$	12,053		$	16,670		$	15,150
Mexico		---			29			28
UK		591			1,334			1,514
Total segment assets	$	12,644		$	18,033		$	16,692
Acquisition of Property and Equipment
Teltronics	$	228		$	530		$	369
Mexico		---			---			---
UK		2			4			10
Total acquisition of property and equipment	$	230		$	534		$	379

42

TELTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

43

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, 2008, 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, 2008, 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, 2008.

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.

44

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
Angela L. Marvin	Vice President Finance, Chief Financial Officer, Secretary and Treasurer
Norman R. Dobiesz	Director and Executive Vice President Business Development
Duncan J. Anderson	Senior Vice President, Sales and Marketing
Richard W. Begando	Senior Vice President, International Sales
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 34 years in the computer and telecommunications industry.

Angela L. Marvin, Vice President of Finance, Chief Financial Officer, Secretary and Treasurer joined Teltronics in 2008.  Prior to joining Teltronics, Ms. Marvin served as Chief Financial Officer and Treasurer at JCI Jones Chemicals, Inc., a privately held manufacturer and distributor of water treatment chemicals, and a senior auditor at Deloitte.  She holds a Bachelors of Science in Accounting from St. John Fisher College and is a Certified Public Accountant licensed in the State of New York.

Norman R. Dobiesz has served as a Director of the Company since October 25, 1991 and is the Company's Executive 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.

Duncan J. Anderson, Senior Vice President, Sales and Marketing, joined Teltronics in 2001 as Managing Director of Teltronics Limited to handle the sale of Teltronics products in the UK and Western Europe.  In his current position, Mr. Anderson heads up the sales and marketing organization for North America.  He has held senior positions in management and sales for a number of other computer and telecom companies for the last 22 years.

45

Richard W. Begando, Senior Vice President, International Sales, has been in charge of our overseas sales since he started at Teltronics in June 2000.  He also serves as Product Manager for the 20-20 Digital Switching products.  Mr. Begando's former position was with Harris Communications Corporation as Managing Director of Harris Corporation Moscow Office.  Prior to this position at Harris, he established the Harris Communications Products Division Regional Sales office in London and was Director of International sales for Africa, Middle East, Eastern Europe, and Asia.  Mr. Begando has more than 35 years of experience in digital switching sales for both domestic and international companies.

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 expert” 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.

Russell R. Lee III served as Vice President Finance, Chief Financial Officer, Secretary and Treasurer until June 30, 2008.

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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, 2008, all filing requirements applicable to our directors, officers and greater than 10% shareholders were satisfied.

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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 2008.

Table 1 – Summary Compensation During 2008
Name and Principal Position	Year	Salary		Non-Equity Incentive Plan Compensation		Other Annual Compensation (Car/401(k) match//Life Ins)		Total
Ewen R. Cameron	2008	$	449,038		---	$	9,675	$	458,713
President & CEO	2007	$	424,038		---	$	9,550	$	433,588
	2006	$	400,000		---	$	22,789	$	422,789
Angela L. Marvin	2008	$	22,885		---	$	738	$	23,623
Vice President Finance, CFO,
Secretary & Treasurer
Russell R. Lee III	2008	$	228,337		---	$	5,560	$	233,897
Vice President Finance,	2007	$	211,538		---	$	9,800	$	221,338
CFO, Secretary & Treasurer	2006	$	204,092		---	$	9,884	$	213,976
Norman R. Dobiesz	2008	$	449,038		---	$	4,550	$	453,588
Executive Vice President	2007	$	424,038		---	$	4,500	$	428,538
Business Development	2006	$	400,000		---	$	17,784	$	417,784
Duncan J. Anderson	2008	$	238,318		---	$	22,510	$	260,829
Senior Vice President	2007	$	299,595		---	$	27,762	$	327,357
Sales & Marketing	2006	$	267,188		---	$	27,760	$	294,945
Richard W. Begando	2008	$	152,740	$	103,770	$	9,925	$	266,435
Senior Vice President	2007	$	155,480	$	185,276	$	9,800	$	350,556
International Sales	2006	$	105,990	$	210,955	$	9,884	$	326,829

 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.

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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 2008.  The only plan based compensation resulted from sales commission plans.

Table 2 – Grants of Plan-Based Awards During 2008
Name and Principal Position	Grant Date	Estimated Future Payouts Under Non-equity Incentive Plans
		Threshold	Target	Maximum
Ewen R. Cameron President & CEO	---	---	---	---
Angela L. Marvin Vice President Finance, CFO, Secretary & Treasurer	---	---	---	---
Norman R. Dobiesz Executive Vice President Business Development	---	---	---	---
Duncan J. Anderson Senior Vice President Sales & Marketing	---	---	---	---
Richard W. Begando Senior Vice President International Sales	1/1/2008	$75,400	$223,416	$103,770 (1)

(1)           Based on 2008 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 for which he is responsible.

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.

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The table below sets forth the number of the Company’s common shares and value thereof of options which vested during 2008.

Table 3 – Option Vesting During 2008
Name and Principal Position	Number of Shares Acquired on  Vesting (#)	Value Realized on Vesting ($)
Ewen R. Cameron President & CEO	---	---
Angela L. Marvin Vice President Finance, CFO, Secretary & Treasurer	---	---
Norman R. Dobiesz Executive Vice President Business Development	---	---
Duncan J. Anderson Senior Vice President Sales & Marketing	10,000	$300
Richard W. Begando Senior Vice President International Sales	6,000	$180

The following table shows the outstanding equity awards to named executive officers at December 31, 2008.

Table 4 – Outstanding Equity Awards at December 31, 2008
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	---	---
Angela L. Marvin	---	---	---	---	---	---
Vice President Finance,
CFO, Secretary &
Treasurer
Norman R. Dobiesz	30,000	---	$ 0.40	12/23/2015	---	---
Executive Vice President
Business Development
Duncan J. Anderson	20,000	---	$ 1.00	10/05/2011	---	---
Senior Vice President	50,000	---	$ 0.07	1/3/2013	---	---
Sales & Marketing	---	30,000	$ 0.14	8/15/2018	30,000	$ 900
Richard W. Begando	5,000	---	$ 2.56	9/19/2010	---	---
Senior Vice President	30,000	---	$ 0.07	1/3/2013	---	---
International Sales

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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, 2008, an aggregate of 830,000 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 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.

During 2008, the Company granted options to purchase 20,000 shares to non-executive employees under the 2005 Plan and options to purchase 90,000 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.

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The table below shows director’s compensation for the year ended December 31, 2008.  As with our named executive officers, we did not grant any options to our directors in 2008.

Table 5 – Director’s Compensation During 2008
Name and Principal Position	Fees Earned or Paid in Cash
Gregory G. Barr	$14,000
Director
Richard L. Stevens	$15,000
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, 2008 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

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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, 2009.  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 18,824	17.66% 100% 47.06%	(3) (9)(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) (9)(11)
Angela L. Marvin 2150 Whitfield Industrial Way Sarasota, Florida 34243	(4)	Common Stock	---	---
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)
Duncan Anderson Regent Court, Laporte Way Luton, Bedfordshire LU48AE	(4)	Common Stock	100,000	1.16%	(8)
Peter G. Friedmann 4850 Keele Street Toronto, Ontario M3J 3K1	(2)	Preferred Series B Convertible Stock Preferred Series C Convertible Stock	12,625 9,412	100% 23.53%	(9)(10) (9)(11)
All Directors and Officers as a Group (10 persons)		Common Stock Preferred Series A Stock	3,110,167 100,000	35.97% 100%
		Preferred Series B Convertible Stock	12,625	100%
		Preferred Series C Convertible Stock	40,000	100%
Greater than 5% Ownership	(9)
FGC Holdings Ltd. 4850 Keele Street Toronto, Ontario M3J 3K1	(10)	Preferred Series B Convertible Stock Common Stock	12,625 721,429	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%

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(1)	Does not include an aggregate of 830,000 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)	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.
(10)	FGC Holdings Ltd. Is controlled by Peter G. Friedmann, a Director of the Company.
(11)	IHL Investments, LLC is controlled by Norman R. Dobiesz, Ewen R. Cameron and Peter G. Friedman, Directors of the Company.

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, 2008, 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	1,011,000	$ 0.85	---
2005 Incentive Stock Option Plan	170,000	0.29	830,000

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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.

An entity controlled by a Director of the Company occupies approximately 1,000 square feet of the office space in our Sarasota facility and 150 square feet of the office in the Company’s New York office.  The annual rent payment was approximately $101 for 2008 and $8 for 2007 and 2006.

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%), is due November 2009.  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.  The Company made a partial payment of $177 in February 2008.  As of December 31, 2008 the balance was $203.

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, 2006, 2007 and 2008.  The following table summarizes the aggregate fees billed to the Company by Kirkland, Russ, Murphy & Tapp, P.A. for professional services performed in 2008, 2007 and 2006:

Fees	2008	2007	2006
Audit Fees (1)	$159	$155	$ 147

1.           Audit Fees.

Fees for audit services billed in 2008, 2007 and 2006 consisted of:

--           Audit of the Company’s annual financial statements for 2008, 2007 and 2006.

--           Reviews of the Company’s quarterly financial statements for 2008, 2007 and 2006.

--           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 2008, 2007 and 2006 as identified above.

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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 22.
	(2)	Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts is on page 57. 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 one report on Form 8-K during the fourth quarter of fiscal year ended December 31, 2008.  Information regarding the item reported on is as follows:
	Date		Item Reported On
	October 28, 2008		5.02 Appointment of Certain Officers.
(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.

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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, 2008	$	348	$	(171	)	$	---		$	---		$	177
Year ended December 31, 2007		365		(17	)		---			---			348
Year ended December 31, 2006		217		222			---			(74	)		365
Reserve for slow-moving inventories:
Year ended December 31, 2008	$	1,069	$	312		$	---		$	(348	)	$	1,033
Year ended December 31, 2007		1,185		85			---			(201	)		1,069
Year ended December 31, 2006		989		454			---			(258	)		1,185
Valuation allowance for deferred tax assets:
Year ended December 31, 2008	$	7,438	$	---		$	1,419		$	---		$	8,857
Year ended December 31, 2007		6,742		---			696			---			7,438
Year ended December 31, 2006		7,354		---			(612	)		---			6,742

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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:   April 14, 2009	By:	/s/ Angela L. Marvin                                                       Angela L. Marvin 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  Ewen R. Cameron	Director, President and Chief Executive Officer	April 14, 2009
/s/ Angela L. Marvin  Angela L. Marvin	Vice President Finance, Chief Financial Officer, Secretary and Treasurer	April 14, 2009
/s/ Norman R. Dobiesz  Norman R. Dobiesz	Director	April 14, 2009
/s/ Gregory G. Barr  Gregory G. Barr	Director	April 14, 2009
/s/ Richard L. Stevens  Richard L. Stevens	Director	April 14, 2009
/s/ Peter G. Friedmann Peter G. Friedmann	Director	April 14, 2009

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 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 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.

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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.

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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.  Filed as Exhibit 10.46 to Form 10-K for the fiscal year ended December 31, 2007.
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.  Filed as Exhibit 10.47 to Form 10-K for the fiscal year ended December 31, 2007.
10.48	Amendment Number Two to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated August 13, 2008.  Filed as Exhibit 10 to Form 10-Q filed August 14, 2008.
10.47	Stock Purchase Agreement between Teltronics, Inc., John Mitchell, Chris R. Fickey dated August 21, 2008.  Filed as Exhibit 10 to Form 8-K filed August 26, 2008.
10.50*	Amendment Number Three to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated February 18, 2009.
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 filed as Exhibit 14.2 to Form 10-K for the fiscal year ended December 31, 2007.
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, 2008.

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