TELTRONICS INC, 10KSB, 1997-04-02

TELTRONICS INC
10KSB, 1997-04-02
TELEPHONE & TELEGRAPH APPARATUS

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THIS DOCUMENT IS A COPY OF THE FORM 10-KSB FILED ON APRIL 1, 1996 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB
(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)

For the transition period from ________________ to ________________________

Commission File Number: 0-17893

TELTRONICS, INC.
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(Name of small business issuer in its charter)

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

2150 Whitfield Industrial Way, Sarasota, Florida 34243
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(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)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes: X No:
------- -------

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation SB contained in this form, and no disclosure will 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-
KSB or any amendment to this Form 10-KSB. [ X ].

Issuer's revenues for its most recent fiscal year: $28,878,016

The aggregate market value (closing sale price) of the Registrant's Common
Stock held by non-affiliates at March 21, 1997, was approximately $5,432,371.
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 purpose.

Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate
market value of the common equity held by non-affiliates on the basis of
reasonable assumptions, if the assumptions are stated.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

As of March 21, 1997, 3,366,013 shares of the Registrant's Common Stock, par
value $.001, were issued and outstanding.

Exhibit index appears on pages 27-29.

<PAGE>
PART I

ITEM 1. BUSINESS

GENERAL

Teltronics, Inc. ("Teltronics" or "Company"), a Delaware corporation
incorporated on February 15, 1989, and successor to Comnet Systems, Inc.,
designs, develops, manufactures and markets telecommunication equipment and
application software products, and engages in contract manufacturing.

In October 1995, the Company formed a subsidiary, AT Supply, Inc. ("AT
Supply"), to engage in sales and distribution of telecommunications hardware,
software and related products as Advantage Telcom Supply Company. The
Company, through its wholly-owned subsidiary TTG Acquisition Corp. ("TTG"),
owns a majority of the outstanding Common Stock of AT Supply.

On April 18, 1996, ISL, Inc. ("ISI"), a majority owned subsidiary of the
Company acquired certain assets and technology from Interactive Solutions,
LLC, a Kentucky limited liability company ("Interactive") and its three
members ("Members") pursuant to an Agreement of Sale dated March 27, 1996 as
amended by an Amendment to Agreement of Sale dated April 18, 1996
("Agreement"). Under the Agreement, ISI acquired all of Interactive's and
its Members' rights to and in certain technology for a wearable, self-
contained, voice activated, portable, Pentium (Registered Trademark)
processor driven, multimedia computer ("Technology") and other Purchased
Assets described in the Agreement in exchange for the assumption of certain
indebtedness of Interactive and its Members and possible future issuance of
up to 1,000,000 shares of the Company's Non-Voting Common Stock ("NVC
Shares") upon the satisfaction of certain conditions, including the award of
a significant contract ("Contract") to ISI utilizing the Technology. The NVC
Shares, if issued, would be convertible at the option of the holders on a one
to one basis into shares of the Voting Common Stock of the Company and would
be subject to several conditions, including an escrow to secure certain
indemnification obligations of Interactive and its Members. See BUSINESS -
WEARABLE, MULTI-MEDIA COMPUTERS.

On September 20, 1996, Teltronics/SRX, Inc. ("Teltronics/SRX"), a
Delaware corporation wholly owned by the Company acquired substantially all
of the assets of Shared Resource Exchange, Inc., a Delaware corporation
("Seller") located in Dallas, Texas, under an Agreement of Sale among Seller,
Teltronics/SRX and the Company dated September 19, 1996 ("Agreement")
approved by order of the United States Bankruptcy Court, Eastern District of
Texas, Sherman Division. In addition to the Company's issuing 650,000
restricted shares of its Voting Common Stock for substantially all of
Seller's assets, the Company issued 100,000 restricted shares of Voting
Common Stock to discharge indebtedness Seller owed to certain lenders, and
the Company and Teltronics/SRX assumed certain obligations as described in
the Agreement. Teltronics/SRX sells PBX systems, switches and related PBX
telecommunication and peripheral devices. See BUSINESS - PBX AND WIRELESS
SWITCHING.

The Company and its subsidiaries employ 258 people as of March 21, 1997.

<PAGE>

DESCRIPTION OF BUSINESS

PRODUCTS PRODUCED AND SERVICES PROVIDED

The Company designs, develops, manufactures, and markets electronic
hardware and application software for the telecommunications marketplace, and
engages in electronic manufacturing.

During the year ended December 31, 1996, sales to the Company's four
largest customers accounted for approximately 34% of the total sales revenue.

In 1995, the Company sold its rights for ORBi-TEL/UNIX to TSB
International of Canada. The Company, however, retained its rights to ORBi-
TEL/CO. Both are call accounting systems.

The Company's key markets within the telecommunications industry
include: Long Distance Management, Remote Maintenance, Call Accounting and
Telecommunications Management. The Company is now active in the PBX and
wireless local loop ("WLL") switch market. External to telecommunications,
but also considered key markets are Electronic Manufacturing, and the
Wearable, Multi-Media Computer Markets.

LONG DISTANCE MANAGEMENT ("LDM")

In today's largely deregulated telecommunications industry, there are
many long distance carriers. The largest and best known are AT&T, Sprint,
and MCI. However, there are more than 300 smaller companies in the United
States that sell or re-sell long distance and Intra-lata telephone service.
These carriers compete to provide their customers with lower priced telephone
calling, and until recently, were known as Inter-Exchange Carriers ("IXCs").

The advent of Intra-lata, or long distance calling within the same area
code, competition changed the definition of these carriers, and added a new
dimension to the market for the Company's LDM products. Additional
regulatory changes have taken place allowing these carriers to compete in the
area of long distance call traffic, further broadening the market for the
Company's products.

The Company's LDM products assist these carriers in creating revenue.
These products are divided in two categories: the Network Manager products
and the Automatic Call Processor products. Both categories have evolved in
great part as a result of deregulation of the telecommunications industry in
the United States.

The first category consists of the Network Manager products, more
commonly known as "one plus" products, which are purchased primarily by long
distance and Intra-lata telephone carriers. The Network Manager products
analyze the digits dialed by a caller and determine which calls are best
handled by the carrier. They translate the caller's dialed digits as
required to access the carrier's facilities in a totally transparent fashion
to the caller.

Automatic Call Processors or "zero plus", the second category of LDM
products, are designed to address vertical market niches such as the lodging
industry and correctional institutions, where resale of telephone services is
permitted. These products provide a transaction based revenue stream for the
owner of the product by producing a margin between what legally may be
charged for calls and the price the owner pays to process the call through
the telephone network. The Company continues to look at export markets both
in Australia and Europe.

As regulatory issues change, a niche may open for LDM products which
can, in general, translate the old way of doing things to the new. The
Company is now observing continued regulatory changes in the United States,
and an accelerated rate of deregulation in other parts of the world. As
deregulation and competition increase, the Company is adapting its LDM
products to take advantage of these domestic and international market
opportunities.

Management of the Company believes the Company has established a strong
competitive position in the Long Distance Management market. The Company's
products competing in the Long Distance Management market include the Network
Manager, Network Manager +, and ACP PLUS. A brief description of these
products follows.

NETWORK MANAGER (Trademark) AND NETWORK MANAGER + (Trademark). These
two call routing products are functionally identical but are available in
different physical configurations to address varying market requirements.

The principal function of the Network Manager (TM) product is to route
"one plus" or direct dialed calls from their originating point to the desired
carrier. This is accomplished by analyzing the digits dialed by a caller and
translating them to the necessary digit patterns to be dialed on the public
telephone network. The Network Manager can route individual calls to the
user's most cost-effective long distance carrier based on the telephone
number dialed.

The Network Manager also provides cost-effective long distance calling
and toll restriction for all tone and rotary dial telephones. The Network
Manager screens calls and can block, a) calls without a proper authorization
code, b) all or certain local calls based on the number dialed, and c) all or
certain long distance calls based on the number dialed (including special
access phone numbers such as those beginning with 950 and 976).

The design of the Network Manager is modular and allows the customer to
purchase the exact number of lines required. This is often a competitive
advantage, both in very small and very large applications. The Network
Manager + (TM) is a value engineered, four line product that addresses a
specific high volume application. It is designed for quick installation and
simple programming through automated tools provided by the Company.

The Network Manager and Network Manager + are used primarily in
businesses, schools, prisons and hospitals. The market for Network Managers
has been mature and stable.

AUTOMATED CALL PROCESSOR ("ACP") PRODUCTS. The ACP product family is
designed to automatically process "zero-plus" calls that would normally
require an operator or would utilize the automated calling card functions
provided by the telephone company. Typical examples are calls charged to a
telephone company calling card or collect calls. In the industry, these calls
are referred to as 0+ calls because they all start by dialing 0 plus the
destination number.

ACP products become involved in call processing when a caller dials 0+ a
destination number to make a call charged to a telephone company calling
card. The ACP intercepts the destination number before it is dialed onto the
public telephone network. The ACP then presents the industry standard "bong"
tone, and prompts the caller to enter the calling card number. Once
completed, the ACP dials a 1+, direct-distance-dialed call to the destination
and connects the caller. This 1+ call is placed over very low cost long
distance facilities that have been contracted for by the owner of the ACP.

The destination number and the calling card number are stored in the ACP
along with the duration of the call, and this transaction data is collected
automatically, via teleprocessing, by host software marketed by the Company.
The calls are priced at the permitted operator-assisted rates, sent to a
clearing house to be processed and ultimately are placed on the caller's home
telephone bill. Thus, by charging the permitted premium rates for these 0+
calls, but paying a lower charge to route the call via a low cost carrier,
the owner of the ACP realizes a profit on each call.

ACP PLUS (Trademark). The first member of the ACP product family is ACP
PLUS (TM). It provides the 0+ re-selling functions described previously.

ACP PLUS also provides a means of adhering to an industry regulation
which does not permit a re-seller to knowingly bill for an unanswered call.
Since the public telephone network does not provide any formal indication to
the caller that a call has been answered, a significant technical challenge
is presented to the ACP. The ACP PLUS uses sophisticated answer detection
hardware and software for indications that a call has been answered.

REMOTE MAINTENANCE

Emphasis on service as a product (the maintenance and repair of
systems), caused a market for automated fault/alarms management systems to
emerge in the 1980's. The market is based on the need to monitor a
population of remotely located, computer based systems from a Technical
Assistance Center (TAC.) This capability is extremely important in the
telecommunications industry as well as in other service environments. To
effectively address this market, service providers need state of the art
technology to manage and maintain their equipment, and to project a proactive
service image to their customers.

Management of the Company believes that it has established a strong
competitive position in the Remote Maintenance market through sales of the
following products: Dispatcher (Registered Trademark), Site Event Buffer-II
(Registered Trademark), SEBjr. (TM), and IRIS (Registered TM).

DISPATCHER (Registered Trademark). The Dispatcher, the Company's entry
level product into the market, is a microprocessor based monitoring system
that is co-located with monitored system to identify faults. These remote
systems are often referred to as Network Elements.

Most Network Elements, such as PABXs or voice mail systems, generate
maintenance information as events occur; they may also be queried for this
information. The Dispatcher constantly evaluates the maintenance data stream
from the Network Element. Once a problem has been identified, the Dispatcher
automatically calls the Technical Assistance Center (TAC) responsible for
servicing the Network Elements and reports the specific location and the
associated problem. The Dispatcher also provides secure access to the Network
Element enabling the TAC to remotely perform scheduled or emergency
maintenance while hackers and other unauthorized users are blocked from
access.

GTE, NORTEL Communications Systems, Southwestern Bell, and the Puerto
Rican Telephone Company (PRTC) use the Dispatcher as part of an integrated
system to provide enhanced maintenance services to their customer bases. As
these customers demand more enhanced features, there will be a gradual phase
out of the Dispatcher product line, moving to the more feature-rich SEB-II.

SITE EVEN BUFFER-II ("SEB-II") (Registered Trademark). Like the
Dispatcher, the SEB-II (Registered TM) monitoring system monitors remotely
located Network Elements, but is a much more comprehensive system.

The SEB-II product may simultaneously monitor up to four Network
Elements. In addition to fault/alarm reporting and security functionality
that exceeds that of the Dispatcher, the SEB-II also has data storage and
retrieval capabilities. Its multi-port configuration allows the SEB-II to
concurrently collect and store various forms of data, such as Station Message
Detail Records (SMDR), Automatic Call Distribution (ACD) data, and PABX
traffic information. By using IRIS, the Company's Management Information
System (MIS), this data may be retrieved and processed into useful reports.

The SEB-II is a multi-application product whose architecture permits its
operational characteristics to be completely changed by remotely downloading
new software. Introduced in mid-1991, the SEB-II replaces the original Site
Event Buffer-I (SEB-I) with a product that offers increased functionality,
twice the data storage capacity, and support for additional Network Elements.

In late 1993, development efforts were initiated which provided for
scripts, written in a high-level language, that may be used to create a
dialogue between the SEB-II and the Network Element. This dialogue will
allow the SEB-II to clear fault conditions present in the Network Element and
to perform more complex analysis of maintenance data. Included in these
development activities is the design of high speed internal modems required
for more demanding applications and for international markets. These
developments were completed in 1994.

BellSouth, GTE, NORTEL Communications Systems, Bell Atlantic Meridian
Systems, British Columbia Telephone, Mitel, NEC, ROLM, and Crytycal Services
Management use SEB (Registered TM) and SEB-II (Registered TM) remote monitors
as part of an integrated system to provide enhanced maintenance services to
their customers.

SEB jr. (Trademark). Teltronics' latest entry in the Remote
Maintenance marketplace, the SEB jr. (TM) remote monitor was introduced to
penetrate a new segment of the market. SEB jr. (TM) is an affordable remote
monitor for smaller, less expensive Network Elements, yet provides virtually
all of the features of the SEB-II. SEB jr. is positioned to allow service
providers to offer complete end-to-end monitoring of networks consisting of a
wide variety of elements. With the introduction of SEB jr., Teltronics
Remote Maintenance product line now offers one-stop capability of providing
efficient, cost-effective monitoring to every link in the chain of Network
Elements, regardless of size or cost.

Iris (Registered Trademark). The IRIS (Registered TM) system is a
comprehensive software package that is used by service providers in Technical
Assistance Centers to monitor alarms and to process data collected from the
Network Elements. IRIS currently utilizes a UNIX operating system.

Dispatcher and SEB remote monitors associated with remote Network
Elements report events to the IRIS software. These events may represent alarm
conditions in the Network Elements, or may simply be status information to
indicate that everything is working properly. Using IRIS software, the
service provider often identifies and resolves problems before the customer
is aware of them. IRIS software is also used to collect data stored in SEBs
and direct the data to the proper software application for processing. The
software also provides the tools required to manage remotely located SEBs and
to access Network Elements for routine maintenance.

A database of Network Element alarms is maintained in IRIS so that the
service provider may obtain reports on alarm status at any time.
Comprehensive reports that provide statistical analysis of received alarms
are also available. Service personnel use them to isolate faulty components,
identify trends, and track the historical performance of Network Elements.

IRIS software is used by BellSouth, GTE, PacTel Meridian Systems, NYNEX
Meridian Systems, Bell Atlantic Meridian Systems, British Columbia Telephone,
Mitel, NEC, Sprint, and Crytycal Services Management as the Management
Information System that is the heart of their service offerings.

IRIS (Registered TM) Traffic. This optional IRIS (Registered TM)
software module is a traffic analysis system that allows service providers to
perform traffic studies on Northern Telecom SL-1 and Meridian-1 PABX systems.
The information created by this application assists the service provider in
"fine tuning" their customer's PABX to operate more efficiently. The IRIS
Traffic system has proven to be a very effective revenue generator for
service providers. The system aLlows the service provider to identify PABX
enhancements that can be sold to the end-user to improve PABX performance.

TELECOMMUNICATION MANAGEMENT

The Telemanagement and Call Accounting markets are very competitive in
North America with over 150 companies competing for market share.

The Company negotiated a distribution agreement with the software
developer (MDR Telemanagement Limited) for an OEM version of their
DOS/Windows product. The product is sold under the trade name of ORBi-TEL
for Windows. The Company has agreements with Nortel, South Western Bell and
Fujitsu Communications to sell, install, and train their customers on this
product.

In 1995, the Company sold its rights for ORBi-TEL/UNIX to TSB
International of Canada. The Company, however, retained its rights to ORBi-
TEL/CO. Both are call accounting systems.

In October, 1996, the Company and Ascom Hasler, a Belgium company
entered into a Distribution Agreement to market, sell, install and train on a
Windows based PABX console product developed by Ascom Hasler. The screen
based console operates in conjunction with the Northen Telecom Meridian
Switch.

ORBi-TEL/Windows (Trademark). ORBi-TEL/Windows is a Telemanagement
software package that runs on a personal computer under Windows.

The ORBi-TEL family of products provides comprehensive Call Accounting
as well as several other Telemanagement modules: Inventory, Work Order, and
Directory Look-up. The Windows version supports multiple PABX sites by
polling data from collection devices associated with remote PABXs, and
delivering useful MIS reports on telephone usage.

ORBi-TEL/Windows is targeted at users with PABXs ranging in size from
100 stations to 10,000 stations and multiple sites are supported. These
products are marketed directly to end-users and through distributors who sell
and service PABXs and key systems.

ORBi-TEL/CO (TM). A longstanding rivalry for the business telephone
market has existed between the operating telephone companies (Telcos) and
interconnect companies. In recent years, the Telcos have enhanced their
central office based offering (Centrex) to be very competitive in price and
feature content with PABX systems. Because the most requested value-added
feature in the business telephone market today is Call Accounting, the Telcos
must be able to offer PABX-like Call Accounting features to their Centrex
customers. ORBi-TEL/CO (TM) software and hardware provide Telcos with a
central office based platform for Call Accounting services.

ORBi-TEL/CO software was derived from the standard ORBi-TEL/UNIX system,
and provides two different feature sets which may be selected on a per
customer basis. First, the system may be configured to deliver call detail
records, or SMDR, to the Centrex customer's location so that a Call
Accounting system such as ORBi-TEL/Windows (TM) system may be used to further
process the data. Alternatively, the ORBi-TEL system may be configured to
provide complete Call Accounting processing and reporting to the Centrex
customer. These reports are available through teleprocessing or may be
provided by the Telco on a service bureau basis.

ORBi-TEL Console (TM). The ORBi-TEL Console (TM) product is a PC based
attendant console for Nortel Meridian 1 systems. When used in place of a
traditional attendant console, the operator's PC becomes the single point of
focus for work activity. Features such as dynamic directory, call-on-hold
labeling and notepad, assure fast accurate call handling and put the ORBi-TEL
Console product far ahead of the standard attendant consoles. The system
utilizes Microsoft Windows as an operating system.

PBX/ACD AND WIRELESS LOCAL LOOP

VisionLS (Trademark) / VisionMS (Trademark). The Vision (Registered
Trademark) Systems are multi-function Key/PBX/CENTREX/Hybrid
telecommunications systems. They are used to process calls by: general
business and professional organizations, health care, financial, government,
technology, transportation, and education, call centers, service centers, and
other organizations that need flexible, value added telecommunications
capabilities. These systems are also used to pass data to and receive
commands from computers via a Computer Telephone Interface ("CTI").
Inherent in the software of these telecommunications platforms are automatic
call distribution (ACD), automated attendant (AIR), intelligent call handling
and dynami call routing based on ANI, DNIS, and Caller ID. Some features,
such as automatic telephone relocation, copy, and replace are unmatched in
the telecommunications industry.

QVision (Trademark). QVision (TM) is a call center management
product, using CTI techniques, that accepts call events from Vision
(Registered TM) systems and uses that data to deliver real-time information
enabling supervisors to effectively manage either formal or informal call
center activity. The system provides on-demand and scheduled reports and
supports the use of a wall mounted display sign to let all agents see the
performance of the call center.

CENTRALINK911. A Vision switching platform privately labeled by
Motorola as CENTRALINK, this system provides both the telecommunications
link and automatic location identification to over six-hundred Public Safety
Answering Points (911 emergency call centers). The system is comprised of two
parts: The ANI Controller which is a Vision telecommunications platform with
specialized features and the ALI controller, a computer running SRX software
that allows it to retrieve and display information about the location of a
911 caller based on the caller's telephone number. The system integrates
into the Motorola CENTRACOM radio console that links it directly to radio
communications.

WIRELESS DIGITAL LOOP CONCENTRATOR (Trademark). This product enables
users to have telephone service in rural locations and emerging countries
where traditional "wire" service is not available. The Wireless Digital Loop
Concentrator voice and data telecommunications platform provides an
interface between wireless loop full-duplex audio channels and two-wire
analog central office subscriber loops.

ELECTRONIC MANUFACTURING

The size of the Electronic Manufacturing market is currently in excess
of $19 billion annually worldwide, and has been growing at approximately 20%
per year.

The Company's initial efforts to gain a foothold in the Electronic
Manufacturing market were modest and limited to a few select customers.
Encouraged by acceptable profits and high quality results on smaller
projects, and in the belief that a relevant share of the market could be
captured, the Company entered the Contract Manufacturing market more
aggressively in mid-1993. The Company's revenues during 1996 were $5.5
million, as compared to $3.0 million in 1995, an increase of 80%.

The Company's current manufacturing capacity should allow for increased
growth of existing product lines, and should also accommodate an increase in
Electronic Manufacturing activities. Electronic Manufacturing should enable
the Company to profit from economies of scale through increased purchasing
power and utilization of excess plant capacity, thus reducing direct material
costs and overhead on the Company's baseline products. This should make
those products more profitable and competitive in their respective markets.

WEARABLE, MULTI-MEDIA COMPUTERS

MENTIS (Trademark). The MENTIS (TM) computer is a wearable, Pentium
(Registered TM) processor powered, multi-media computer that could set the
standard for multimedia computer based instruction. MENTIS (TM) hardware and
MentiSoft (TM) software provide full multimedia capability and a human to
human interface. The first product of its kind, MENTIS computer's approach
to training is called Real Time Mentoring or RTM (TM). Using full motion
video and responding to voice activated commands, MENTIS computer systems
have the potential to minimize or eliminate classroom training in the
workplace.

PATENTS, COPYRIGHTS AND TRADEMARKS

The Company has no patents or copyright registrations. The Company has
registered the following trademarks: Ideas That Communicate, Site Event
Buffer, SuperVizor, CallQuest, IRIS, Dispatcher, Net-Path, and SEB InterAct.

Teltronics/SRX has the following patents, copyrights and trademarks:
(i) Trademarks: Shared Resource Exchange, SRX, SRX and design, Vision and
design, OmniWorks and design, SRX OmniWorks and design, VisionPath,
VisionMS, VisionLS, VisionPhone, VisionXPhone, VisionPhonePC, VisionACD,
VisionVM, VisionTAS, and VisionOS; (ii) Copyrights: SRX Call processing,
CENTRALINK911 release 1.0 software, SRX E911 software, CENTRALINK911 ALI
release 1.2 software (co-owned with Pro-Tel, Inc.), VisionMS (System Two)
release 2.2, and SRX call processing, System One release 4.6 software and
call processing; (iii) US Patents: Station Controller for Enhanced Multi-
Line Pick-Up in a Centrex Exchange Telephone System and Station Controller
for Multi-Line Pick-up and Automatic Monitoring of Telephone System and
Station Moves; and (iv) Canadian Patents: Station Controller for Enhanced
Multi-Line Pick-Up in a Centrex Exchange Telephone System.

ISI markets products under the trademarks Interactive Solutions, Mentis,
MentiSoft, RTM (Real Time Mentoring) and ISI and design.

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

WARRANTY AND SERVICE

The Company provides a limited warranty on most of its products, for a
period of from 3 to 36 months (depending on the product), under which the
Company agrees to repair or replace, in the Company's sole discretion, units
defective in material or workmanship, provided the equipment has not been
subjected to alteration or abuse. The Company's technical service and
engineering staff provide support services over the telephone to customers
with installation or operational questions. Warranty and other repair
services are provided by the Company at its facility in Sarasota, Florida.
To date, warranty expenses have been insignificant in proportion to the
Company's gross revenues.

COMPONENT PROCUREMENT

The Company assembles all of its products at its facility in Sarasota,
Florida, except certain products sold by Teltronics/SRX. Management of the
Company anticipates that all Teltronics/SRX products will be assembled at the
Company's Sarasota facility by May, 1997. All components used in the
assembly of the Company's products are purchased from distributors, except
certain products sold by its subsidiary, Teltronics/SRX, which are
manufactured by subcontractors and component manufacturers.

Purchase orders for components are placed from one (1) month to six (6)
months in advance, depending on the supply sensitivity of a particular
component. All of the necessary components are available from one of several
sources, based upon current price quotations. The Company believes that
several suppliers for its product components are available. If these
suppliers should stop carrying our manufacturing components for the Company,
the Company's operations could, however, 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, the Company has not experienced and does
not anticipate experiencing any significant difficulty in obtaining
components.

BACKLOG

The Company's backlog at December 31, 1996 and 1995 was $9,942,900 and
$3,766,800 respectively. At February 29, 1997 and February 28, 1996 the
Company's backlog was $11,319,000 and $4,887,700 respectively.

COMPETITION

The Company has two significant competitors in the Alarm Management
marketplace, Microframe, Inc. and TSB International. The Call Accounting
market is saturated with numerous competitors and no one company dominates
the market. The PBX market has many competitors with the dominant players
being AT&T and Northern Telecom. The Vision PBX is active in the ACD and
small PBX market. The Wireless Interface Switch (WiLL) is supplied to a
number of customers whose markets are in third world countries. The
Wearable, Multi-Media Computer market is new and evolving, with a small
number of competitors. The Company has one significant competitor in its
Long Distance Management product group (Mitel). Management of the Company
believes that the Company's products are competitive in price, product
performance, warranty, technology and service. The Company continues to
spend significant funds to enhance already technologically complex equipment
and develop or acquire new products.

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, 1996, and 1995 were $1,391,000 and $1,449,000
(after capitalization of software development costs), respectively. The
amount of research and development costs capitalized in fiscal 1996 and 1995
was $83,280 and zero, respectively.

During 1996, the Company funded an aggregate of $1,277,000 in connection
with the development of the wearable, multi-media computer acquired in 1996
by ISI, its majority owned subsidiary. The Company expensed $527,218 of
development costs incurred during the year ended December 31, 1996.

REGULATION

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

Certain of the Company's products are also subject to and comply with
regulation under Part 15 of the FCC Rules ("Part 15") which requires
equipment classified as containing a Class A computing device to meet certain
radio and television signal interference requirement. 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.

ITEM 2. PROPERTIES

TELTRONICS - HEADQUARTERS AND PLANT

The Company's headquarters and principal facility consists of
approximately 72,000 square feet, located in a two story concrete and steel
building leased from ARE Sarasota Limited Partnership ("ARE"), a limited
partnership ("ARE Lease"). Approximately 36,000 square feet are used for
laboratories and offices. The plant is located at 2150 Whitfield Industrial
Way, Sarasota, Florida.

The monthly ARE Lease payment is $48,512.68. The ARE Lease expires in
August 2005, and may be extended by the Company for two additional five year
periods.

Included in the ARE Lease is another single story building across the
parking lot of the main facility at 2240 Whitfield Industrial Way. This
building consists of approximately 7,500 square feet which is currently used
for the Company's repair department.

The Company leases approximately 10,655 square feet of office space for
the Teltronics/SRX research and development facility at 4115-4125 Keller
Springs Road, Suite 166 in Dallas, Texas. The monthly lease payment is
$7,325.31 during years one through three and $7,636.08 per month during the
remaining 2 years of the Dallas lease, which is scheduled to expire in
December of 2001.

AT Supply leases 3,200 square feet of office and storage space at 4703
Shavano Oak Drive, Suite 104, San Antonio, Texas. The lease provides for
payments of $1,640 per month and is scheduled to expire in October of 1998.

ITEM 3. LEGAL PROCEEDINGS

On or about September 12, 1995, Commstar, Ltd., a Canadian corporation,
commenced an action in the Circuit Court of the Thirteenth Judicial District,
Hillsborough County, Florida, against the Company, a director of the Company,
and a former majority owned subsidiary of the Company, seeking damages in
connection with a sale of shares of the former subsidiary in 1993. The
complaint, which seeks rescission, damages in excess of $15,000, as well as
costs and attorneys fees, was dismissed on February 9, 1996 without
prejudice. The complaint was subsequently refiled and discovery in the
action has commenced. Although the complaint does not set forth precisely
the damages sought by Commstar, the complaint alleges that Commstar agreed to
pay $600,000 for the shares of the former subsidiary and that Commstar owed
the Company approximately $98,700. The Company believes that it has
meritorious defenses to the allegations and will vigorously defend the
refiled complaint.

In November, 1995, C&L Communications commenced an action in the
District Court, 37th Judicial District Bexar County, Texas against AT Supply,
two AT Supply officers and a former employee. The claims against AT Supply
are for misappropriation/conversion of C&L's trade secrets, conspiracy, and
acceptance of the benefits of an alleged breach of fiduciary duty by the
individual defendants. The Complaint seeks damages equal to profits
allegedly lost as a result of disclosure of the confidential information
allegedly diverted to the Defendants and for exemplary damages. All
Defendants have denied liability and are vigorously defending the allegtions.
Trial is scheduled for June, 1997.

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

During the quarter ended December 31, 1996, no matters were submitted to
a vote of the stockholders of the Company.

<PAGE>

PART II

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

As of August 1, 1989, the Company listed its Common Stock for trading on
the National Association of Securities Dealers, Inc. Automated Quotation
System ("Nasdaq"). The Company's Common Stock trades on The Nasdaq Small Cap
Market (Service Mark) tier of The Nasdaq Stock Market (Service Mark) under
the symbol: TELT. The following table sets forth for the fiscal periods
indicated the high and low closing bid quotations in the over-the-counter
market for the Company's Common Stock as reported on Nasdaq. These
quotations represent inter-dealer prices, without adjustment for retail
markups, markdowns or commissions, and may not represent actual transactions.

COMMON STOCK

1996 1995
Trade Closing Bid
================================
High Low High Low
------ ----- ------ -----
PERIOD

1st Quarter 6.38 4.13 4.19 3.06
2nd Quarter 10.25 4.25 3.56 1.50
3rd Quarter 7.75 4.50 6.25 2.06
4th Quarter 5.75 2.88 6.00 4.50

In September and November, 1996, the Company issued an aggregate of
100,000 shares of its Series A Preferred Stock to Norman R. Dobiesz, a
director and principal shareholder of the Company, for an aggregate
consideration of $25,000 pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act of 1933, as amended. No
underwriter or placement agent assisted with the placement, therefore, no
underwriting discounts or commissions were paid. Each share of Series A
Preferred Stock has no liquidation preference over shares of Common Stock, is
subject to resale restrictions, including the right of the Company to approve
or disapprove of any sale, transfer or disposition to any third party not
controlled by Mr. Dobiesz, and entitles the holder to 400 votes per share,
which will have a dilutive effect on the voting power associated with the
voting Common Stock of the Company.

On March 21, 1997, the closing bid quotation for the Company's Common
Stock as reported on Nasdaq was $4.25. As of March 21, 1997, there were
approximately 1,100 shareholders of the Company's Common Stock. The Company
has not paid cash dividends to holders of its common stock and does
not plan to pay such dividends in the foreseeable future.

<PAGE>

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL OVERVIEW

During the years leading up to 1996, the Company established itself in
its traditional markets. It developed its position in those markets
principally through organic growth. However, the Company believes that
future growth requires development or acquisition of new products and new
markets. To that end, the Company acquired the technology of ISI in March of
1996 and the technology of SRX in September, 1996. These acquisitions,
together with the startup of AT Supply has enabled the Company to enter other
markets. The strategy of the Company is to become a broad based technology
group in a number of different markets. AT Supply recorded sales of $8.4
million during 1996. Its operating profit was $246,000.

ISI, the Company's subsidiary developing Mentis (TM), a wearable, multi-
media computer has successfully completed its design and produced a number of
prototypes. The Company is a member of a consortium consisting of the Army
National Guard, General Motors - Service Technology Group, Hughes, and the
New Jersey Institute of Technology. The Company is experiencing considerable
interest in its design. The Company has produced a number of prototypes that
are currently being evaluated. The market for this product is in
applications where complex equipment requires computer aided assistance for
diagnostics repair and maintenance. The Company expensed all of the
prototype development costs in 1996 and charged $1.3 million to operations
for these costs.

During September of 1996 the Company through its subsidiary
Teltronics/SRX acquired substantially all of the assets and technology of
Shared Resource Exchange, Inc. Shared Resource Exchange produced the SRX
Vision digital switch which has a number of applications in wireless PBX and
911 applications. During the last quarter of 1996 the Company shipped
approximately $1.8 million of product to its customers. Due to the complex
and evolving digital technology employed in the SRX products, the Company
established a design and support center in Dallas, Texas, the original
headquarters of Shared Resource Exchange. The Company believes that there is
a position for this digital switch in a number of markets, not only in the
United States, but also overseas in developing countries, where wireless
networks are becoming evermore acceptable.

The Company's traditional markets of Remote Maintenance continued to
experience an increase during 1996 growing from $5.9 million to $7.2 million.
The Company realized these sales predominantly through a number of major
customers, notably NORTEL Communications Systems, GTE, Wisconsin Wireless,
and a number of the RBOCs.

Electronic Manufacturing grew from $3.0 million to $5.4 million. The
Company continues to investigate its ability to increase its margins. The
Company believes it is active in a niche market of $1 million to $5 million
per annum. The Company currently has thru-hole technology as well as three
Amistar surface mount machines with ratings of over 12,000 placements per
hour, per machine.

As previously expected, the Long Distance Management market reduced from
its high of $10.4 million during 1995 to $4.3 million in 1996. The Company
does not believe that it will continue to realize any significant sales in
the United States marketplace. The Company is successful in selling through
its Australian distributor, Telematic, and enjoys a high share of that
market. During the latter part of 1996 the Company instigated approval
procedures for the European marketplace. Although the European marketplace
is deregulating, there can be no assurances that the Company will be able to
realize significant growth in that marketplace.

Although the Company experienced an increase in its Call Accounting
marketplace, the move towards more integrated solutions provided by the PBX
manufacturers will affect sales in the future. The Company established a
bureau service under the name of CABANA, which provides all of the normal
call accounting services to large companies that do not wish to own and
manage their own telemanagement systems.

RESULTS OF OPERATIONS

1996 resulted in an operating loss of $2.0 million compared to operating
income of $0.8 million in 1995. Costs associated with the development of ISI
prototypes accounted for $1.3 million of the $2.0 million loss. Start-up
costs of $0.8 million associated with the acquisition of Teltronics/SRX were
also charged to operations.

Cost of sales for 1996 was $19.5 million or 67.6% of sales compared to
1995 of $13.2 million or 61.2% of sales. The change is primarily due to
product mix with AT Supply contributing $8.4 million in sales with an 86%
cost of sales.

General and administrative expenses increased to $5.1 million in 1996 as
compared to $2.9 million in 1995. The $2.2 million increase is primarily the
result of funding the development and start-up of the businesses of AT Supply,
ISI and Teltronics/SRX during 1996. Revenues from these businesses were not
realizable in 1996 at levels to fully cover all costs of their development and
start-up.

Selling expenses were $4.9 million or 16.9% of sales in 1996 as compared
to $3.3 million or 15.1% of sales in 1995. This increase is primarily due to
the businesses of AT Supply, ISI and Teltronics/SRX which were not incurred in
1995. In 1996, ISI market development costs were expensed with commensurate
revenues yet to be realized.

R&D expense in 1996 was consistent with 1995 at $1.4 million. In 1996,
the Company expensed all costs associated with ISI product development.

1996 reflected a net loss of $2.9 million compared to net income of $0.2
million in 1995. Interest charges and financing costs were $0.6 million or
2.0% of sales compared to $0.7 million or 3.1% of sales in 1995. In 1996,
the Company also incurred litigation costs of $0.3 million related to AT
Supply. See LEGAL PROCEEDINGS.

CAPITAL RESOURCES AND LIQUIDITY

On May 14, 1996 The CIT Group/Credit Finance ("CIT") agreed to increase
its credit line to $4,950,000 including allowance of $1.5 million of that
amount to be allocated to AT Supply. The Company increased its term loan in
October 1996 to $612,000 to be repaid monthly until fully paid on October 28,
1999. In November of 1996, CIT reduced the interest rate on the credit line
to prime plus 2.5%. The credit facility provided by CIT is a revolving loan
secured by inventory and receivables and continues until October 28, 1998 and
is renewable for successive terms of two years thereafter.

Net cash provided (used in) operations during 1996 was $(1.5 million)
compared to $0.8 million in 1995. This change is primarily due to the
development support of ISI markets and products and the start-up integration
of Teltronics/SRX. Investing activities are primarily fixed asset
acquisitions which amounted to $442,829 in 1996 compared to $279,289 in 1995.
Cash from financing activities was the result of the increased credit line with
CIT.

The Company's working capital ratio at December 31, 1996 was .97:1 as
compared to 1.15:1 for 1995. Net working capital was $(482,000) and $887,000
for 1996 and 1995 respectively.

The Company entered into an agreement in February, 1997 with Sirrom
Capital Corporation ("Sirrom"), pursuant to which the Company issued
$4,250,000 aggregate of 11% Subordinated Convertible Debenture due February
13, 2002. The proceeds of the financing are expected to be used for certain
commitments made during the purchase of Teltronics/SRX together with
relaunching the SRX
product lines, continuing the development of the wearable, multi-media
computer of ISI and for general working capital. See FINANCIAL STATEMENTS -
Page F-24, Note 14 - Subsequent Events

The Company continues to investigate other equity or debt financing.

CURRENT OUTLOOK

During 1996 the Company funded development of products in ISI and
Teltronics/SRX which should bring new technology and new markets to the
Company. The traditional markets that the Company was active in, with the
exception of Electronic Manufacturing, were all small markets of $40 million.
The Company has secured a strong position in the Remote Maintenance arena
with sales of approximately $8 million during 1996. The Company believes it
can continue to grow this market.

The Long Distance Management base is moving away from the United States
but there are potentials for growth in the European marketplace. Although
the Company is pursuing approvals in Europe, this does not guarantee any
significant sales in the near future. The Company has a strong position
through its Australian distributor, Telematic, however, it does not believe
that the Australian market will grow significantly during 1997.

The Company has funded the development program of its subsidiary, ISI to
develop ISI's wearable, multi-media computer into a potential multi-million
dollar market base. The Company has produced a number of prototypes of the
Mentis computer that are currently being tested by significant companies.
Although the Company expects reasonable sales of this product in 1997, it
does not expect that any significant orders will be received until late 1997.

The Company is in the process of relaunching the SRX Vision PBX. It has
managed to regain most of the old distributors and they are actively
marketing this product. The Company currently has wireless switch interfaces
in Ghana and Beta sites in Beijing. The Company believes that there is a
potential for sales in these particular markets.

In summary, the Company believes that with its original core base
businesses, together with its newly acquired businesses, that it should be
able to grow and return to profitability during 1997.

ITEM 7. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:
Page

Independent Auditor's Report F-2
Consolidated Balance Sheet - December 31, 1996 F-3/4
Consolidated Statements of Operations for
Years Ended December 31, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996 and 1995 F-7/8
Notes to Consolidated Financial Statements F-9/24

Financial statement schedules not included in this Annual Report on
Form 10-KSB have been omitted, because they are not applicable or the
required information is shown in the financial statements or notes thereto.

ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE

No disagreements with accountants in any accounting and financial
disclosures occurred during the fiscal years ended December 31, 1995 and
December 31, 1996. While there was no change in accountants during the
fiscal year ended December 31, 1996, there were changes in accountants for
the Company during the 1995 fiscal year as previously disclosed and more
fully described in the Form 8-K reports respectively filed with the
Securities and Exchange Commission on January 4, 1995 and March 2,
1995.

<PAGE>
PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

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

NAME (1)(2)(3) AGE POSITION

Ewen R. Cameron 44 Director, President, Chief Executive
Officer and Assistant Secretary

Michael A. Freid 44 Vice President Finance,
Secretary & Treasurer

William L. Hutchison 51 Executive Vice President, Chief
Operating Officer

Peter G. Tuckerman 50 Vice President and
Chief Technology Officer

Robert B. Ramey 39 Vice President
Electronic Manufacturing

Michael P. Jonas 34 Vice President
Electronic Manufacturing Sales

Norman R. Dobiesz 49 Director and Vice President
Mergers and Acquisitions

Carl S. Levine 50 Director

Craig Macnab 41 Director
____________________

(1) Paul D. Shrader served as Vice President Finance, Secretary and
Treasurer until November 4, 1996.

(2) Gregory L. Deringer served as Senior Vice President Sales and Marketing
until January 6, 1997.

(3) Charles S. Englehardt served as Vice President ComManagement and Remote
Maintenance Business Unit until March 11, 1997.

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 23 years in the computer and
telecommunications industry.

MICHAEL A. FREID, Vice President of Finance, joined the Company in
February, 1997. He received his BBA degree in Accounting from Western
Illinois University in 1974 and earned his Illinois CPA certification in
1978. Prior to joining the Company, Mr. Freid held various financial and
operating positions during his 18 years with Borg-Warner Automotive and 4
years with Bunker-Ramo Corp. These positions included Group vice
Presidencies, Controllerships, Internal Audit Manager and General Manager of
a Joint Venture in Beijing, China.

WILLIAM L. HUTCHISON, Executive Vice President of the Company has been
involved in the telecommunications industry for 28 years having held various
outside plant and engineering positions with the Bell System and United
Telephone Company. He was a Product Manager for Pulsecom Division of Harvey
Hubbell, Inc., from 1970 to 1974 before leaving to form his own company,
ComDev, Inc., where he worked from 1974 through 1985, which in 1990 was
acquired by the Company. He served as President and CEO and was a founder of
Voice Computer Technology from April 1984 through July 1990. He also served
as Vice President of Marketing for Shared Resource Exchange from July 1989
through July 1992, Vice President of Marketing for Melita International July
1992 through December 1994, and Vice President for Computer Communications
Systems from December 1994 through October 1996, both leaders in emerging
computer-telephony integrated technology industries. Mr. Hutchison received
an undergraduate degree from Texas Tech and holds an MBA from Emory
University.

PETER G. TUCKERMAN, Vice President and Chief Technology Officer became
Vice President, Remote Maintenance Business Unit in July of 1995. Prior to
serving as Vice President, Remote Maintenance Business Unit, Mr. Tuckerman
served as Vice President Business Development for the Company commencing in
January 1994 and as Vice President of Product Management from March 1993.
Mr. Tuckerman has also served Vice President of Engineering from March 1991
to March 1992 and as Vice President of Product Management for TCT from August
1990 to March 1991. Prior to this, Mr. Tuckerman has held various management
positions at Com Dev including Vice President of Product Development (1986-
1990), Director of Product Management (1982-1986) and Product Manager (1978-
1985).

ROBERT B. RAMEY joined the Company as Vice President, Manufacturing
Operations in January 1995. Prior to joining the Company Mr. Ramey served
twelve years with Loral Data Systems, a Defense and Commercial electronic
equipment manufacturer. Mr. Ramey has held diverse management positions
including, Manufacturing Engineering, Industrial Engineering, Program
Management, Telecommunications Production, Surface Mount Assembly and Total
Quality Management. Mr. Ramey has been in the electronics industry over 15
years.

MICHAEL P. JONAS, Vice President of Manufacturing Sales, joined the
Company in April 1993 as National Sales Manager. Prior to joining the
Company, Mr. Jonas spent 4 years as Vice President for EMI/EAC, an electronic
Contract Manufacturer specializing in computer related and industrial
products. In previous experience, he served as a sales and business
consultant for the computer and telecom electronics manufacturing industry.
Mr. Jonas has also held positions in Industrial Engineering, and
Manufacturing Engineering during his 15 years in the electronics industry.
Mr. Jonas earned a Bachelor of Engineering degree from Stevens Institute of
Technology in 1984, and his MBA in 1994.

NORMAN R. DOBIESZ has served as a Director of the Company since October
25, 1991 and is the Company's Vice President, Mergers and Acquisitions.
Effective January 1, 1995 Mr. Dobiesz entered into a five (5) year employment
agreement with the Company. 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.

CARL S. LEVINE has served as a Director of the Company since July 27,
1988. Mr. Levine is an attorney who has been engaged in private practice in
New York, New York from 1977 to 1981, and in Garden City, New York from 1981
to June 1985. Mr. Levine is presently the senior partner in the law firm of
Carl S. Levine & Associates, Roslyn, New York. He specializes primarily in
the practice of energy, environmental and tax law. Prior to entering private
practice, Mr. Levine was employed as counsel for New York Regional Office of
the United States Department of Energy.

CRAIG MACNAB has served as a Director of the Company since February 13,
1997. Mr. Macnab was appointed Director as nominee of Sirrom Capital
Corporation ("Sirrom") in connection with the issuance of an aggregate
$4,250,000 of 11% Subordinated Convertible Debentures Due February 13, 2002
to Sirrom pursuant to a Debenture Purchase Agreement. The Debenture Purchase
Agreement requires that the Company's Board of Directors be expanded to five
members, including a nominee to be selected by Sirrom. Since January 1997,
Mr. Macnab has been the President of Tandem Capital, Inc. which invests in
micro-cap public companies. From 1993 to 1996, Mr. Macnab served as the
general partner of MacNiel Advisors, Inc., the general partner of three
private funds that invested in the publicly traded securities of small public
companies. From 1987 to 1993, Mr. Macnab was a partner of J.C. Bradford &
Co., a regional brokerage firm, jointly responsible for the merger and
acquisition department and a private mezzanine capital fund. Mr. Macnab is
also a director of JDN Realty.

<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth certain information relating to the
compensation received and to be received by certain persons who are
presently, or were executive officers of the Company during the fiscal year
ended December 31, 1996. As indicated below, no executive officers of the
Company other than Ewen Cameron, Gregory L. Deringer, and Norman R. Dobiesz,
received total salary and bonus in excess of $100,000 during the fiscal year
ended December 31, 1996.

<TABLE>
SUMMARY COMPENSATION
<CAPTION>
ANNUAL COMPENSATION

Other
Annual
Name and Compen-
Principal Position Year Salary Bonus sation
================================================================
<S> <C> <C> <C> <C>
Ewen R. Cameron 1996 $248,272 $ --- ---
President & CEO 1995 226,551 --- ---
1994 178,340 37,530 <F1>

Gregory L. Deringer 1996 $162,585 $ --- ---
Senior Vice President 1995 161,271 --- ---
Sales & Marketing 1994 143,000 --- <F1>

Norman R. Dobiesz 1996 $248,434 $ --- ---
Vice President 1995 232,674 --- ---
Mergers & Acquisitions 1994 160,299 --- <F1>

<CAPTION>
LONG TERM COMPENSATION

AWARDS PAYOUTS
------------------------ -------
Securities
Restricted Underlying
Name and Stock Options/ LTIP All Other
Principal Position Year Awards SARs(#) Payouts Compensation
============================================================================
<S> <C> <C> <C> <C> <C>
Ewen R. Cameron 1996 --- 500,000 --- ---
President & CEO 1995 --- 30,000 --- ---
1994 --- --- --- ---

Gregory L. Deringer 1996 --- --- --- ---
Senior Vice President 1995 --- 20,000 --- ---
Sales & Marketing 1994 --- --- --- ---

Norman R. Dobiesz 1996 --- --- --- ---
Vice President 1995 --- 30,000 --- ---
Mergers & Acquisitions 1994 --- --- --- ---

- ------------------------------
<FN>
<F1> Certain personal benefits that aggregate less than the lesser of
$50,000 or ten percent (10%) of the total cash compensation of any of the
executive officers or which cannot be readily ascertained are not included.
</FN>
</TABLE>

EMPLOYMENT AGREEMENTS

The Company entered into five (5) year employment agreements with Ewen
Cameron, President, Chief Executive Officer and Assistant Secretary, and
Norman R. Dobiesz, Vice President Mergers and Acquisitions commencing January
1, 1995. Mr. Cameron's agreement was an amendment and restatement of a prior
agreement which he entered into with the Company in July 1993. Each
employment agreement provides for a base annual salary of $225,000 subject to
annual increases of $25,000 per year. Either of the Company or the employee
may terminate the employment agreements upon the occurrence of certain
events. Mr. Cameron's employment agreement contains a covenant restricting
him from competing for a period of two years after termination. If the
Company terminates the employment of Mr. Cameron or Mr. Dobiesz, the
terminated employee will be entitled to severance equal to one year's base
salary.

On October 14, 1996, the Company entered into a three (3) year
employment agreement with William L. Hutchison, the Company's Executive Vice
President, Chief Operating Officer and Assistant Secretary. The employment
agreement provides for an annual salary of $180,000 and is terminable prior
to expiration of its stated term upon the occurrence of certain events. If
Mr. Hutchison's employment agreement is terminated prior to its scheduled
expiration without cause or for failure to adequately perform, in the
Company's judgment, the services, duties and responsibilities assigned by the
Company, whether or not such failure is intentional, Mr. Hutchison will be
entitled to severance equal to six (6) month's salary.

1995 INCENTIVE STOCK OPTION PLAN

The Company has adopted an Incentive Stock Option Plan, as amended
("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 Plan authorizes 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. At
the date of this Form 10-KSB there are approximately 20 employees eligible to
participate in the Plan. The Plan is administered by the Board of Directors
which has full power and authority to designate Participants, to determine
the terms and provisions of respective option agreements (which need not be
identical) and to interpret the provisions of the Plan. The Plan became
effective May 16, 1995, was amended July 30, 1996 and will terminate August
8, 2005 unless earlier terminated by the Board of Directors or extended by
the Board with approval of the stockholders.

An aggregate of 1,250,000 shares of the Company's Common Stock may be
issued or transferred to grantees under the 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 in
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.

Options may be exercised solely by the Participant or his or her legal
representative during his or her employment with the Company, or any
subsidiary, 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 or any Subsidiary.

During 1996 and January of 1997 the Company issued options to purchase
320,000 shares to executive officers and options to purchase 31,000 shares to
non-executive employees and canceled options previously granted to executive
officers to purchase 36,000 shares of Common Stock. In each case, unless the
recipient of a grant was the holder of more than 10% of the Company's issued
and outstanding Common Stock, the fair market value of the Common Stock on
the date of grant determined the exercise price.

<PAGE>

<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS

Number of % of Total
securities Options/SARs Exercise
Underlying Granted to Or Base
Options/SARs Employees in Price Expiration
Name Granted(#)<F1> Fiscal Year <F1> ($/Sh) Date
- --------------- -------------- ---------------- -------- ----------
<S> <C> <C> <C> <C>
Ewen R. Cameron 500,000 77.64% $5.50 July 30, 2001

<FN>
<F1> Represents options only. No SARs have been granted.
</FN>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
at FY-Ended(#) at FY-End($)
--------------- ------------

Shares
Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- -------------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Ewen R. Cameron 0 0 5,000/25,000 $9,375/$46,875
0/500,000 $0/$0 <F1>
Gregory L. Deringer <F2> 4,000 $16,000 0/16,000 $0/$30,000
Norman R. Dobiesz 0 0 5,000/25,000 $8,575/$42,875

<FN>
<F1> None of the options granted to Mr. Cameron in 1996 to purchase 500,000
shares were in-the-money at December 31, 1996 because they are exercisable at
$5.50 per share.

<F2> Mr. Deringer served as Senior Vice President Sales and Marketing until
January 6, 1997 on which date the Company canceled Mr. Deringer's remaining
options to purchase 16,000 shares.
</FN>
</TABLE>

DIRECTOR COMPENSATION

On August 12, 1996 the Company adopted a policy to compensate members of
its Board of Directors in the amount of $2,500 for each meeting and reimburse
expenses for attending meetings of the Board or committees of the Board of
Directors.

<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information with respect to the
beneficial ownership of all of the Company's outstanding Common Stock 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-KSB, and
by all directors and officers as a group as of March 21, 1997. 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 AMOUNT AND NATURE OF PERCENTAGE
AND ADDRESS (1) BENEFICIAL OWNERSHIP (2) OF CLASS (2)

<S> <C> <C>
Norman R. Dobiesz (3)(4)(5) 1,432,097 42.6%
2150 Whitfield Industrial Way
Sarasota, Florida 34243

Carl S. Levine (3) 2,240 (6)(7)
1800 Northern Blvd.
Roslyn, New York 11576

Ewen Cameron (3)(5) 3,360 (6)(8)
2150 Whitfield Industrial Way
Sarasota, Florida 34243

Craig Macnab (3) 0 0
500 Church Street, Suite 200
Nashville, Tennessee 37219

Shared Resource Exchange (9) 650,000 19.3%
3480 Lotus Drive
Plano, Texas 75075

All Directors and Officers 1,437,817 42.7%
as a Group (9 persons)
</TABLE>
________________________________

(1) Gregory L. Deringer, an executive officer named in Item 10 of this
Report on Form 10-KSB served as Senior Vice President Sales and Marketing
until January 6, 1997 but was not an officer of the Company as of the date of
this Report on Form 10-KSB.

(2) Does not include (i) an aggregate of 795,000 shares of Common Stock
which may be issued upon exercise of incentive stock options granted under
the Company's 1995 Incentive Stock Option Plan and 4,000 shares of Common
Stock which may be issued upon exercise of stock options granted to the
Company's former President; (ii) possible issuance of up to 1,000,000 shares
of Common Stock in connection with the transfer to ISI of certain technology
(See BUSINESS - GENERAL); or (iii) possible issuance of up to 1,062,500
shares of Common Stock subject to adjustment, which may be issued upon
conversion of the 11% Subordinated Convertible Debentures Due February 13,
2002. See BUSINESS - GENERAL.

(3) Director of the Company.

(4) Includes 56,000 shares owned by virtue of 100% ownership of H & N
Management Co., Inc. ("H&N"), 1,295,000 shares owned by virtue of 100%
ownership of W&D Consultants, Inc., and 4,455 shares owned by virtue of 67%
ownership of Whitfield Capital of Sarasota, Inc. Excludes: (i) 100,000
shares of Series A Preferred Stock owned by Mr. Dobiesz, and (ii) 30,000
shares which may be issued upon exercise of incentive stock options by Mr.
Dobiesz.

(5) Executive Officer of the Company named in Item 10 of this Report on Form
10-KSB.

(6) Beneficially owns less than 1% of the Company's outstanding Common
Stock.

(7) Does not include up to 50,000 shares which may be issued upon exercise
of incentive stock options by Mr. Levine.

(8) Does not include up to 530,000 shares which may be issued upon exercise
of incentive stock options by Mr. Cameron.

(9) 120,000 of the 650,000 shares are held in escrow to cover certain
reimbursement and/or indemnity claims owed to the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 1993, Ewen Cameron, the Company's President and CEO, loaned
the Company an aggregate of $113,228 pursuant to two promissory notes. Each
note is payable upon demand with interest accruing at 8% per annum. The
remaining principal and accrued interest due on the notes at December 31,
1996 was $37,302.

Effective January 1, 1995 the Company entered into five (5) year
employment agreements with Ewen Cameron, President & CEO, and Norman R.
Dobiesz, Vice President Mergers and Acquisitions. See EXECUTIVE COMPENSATION
- - Employment Agreements.

On May 11, 1995, W&D Consultants, Inc. ("W&D"), a financial consulting
company owned and controlled by Norman R. Dobiesz, a director and principal
stockholder of the Company, acquired 1,400,000 restricted shares of Common
Stock from the Company upon exercise by W&D of a conditional right to convert
a $140,000 advance made by W&D in order for the Company to close its
$3,500,000 line of credit with CIT in October, 1994. The shares were issued
to W&D after performance by W&D of certain conditions including: (a)
cancellation of the $140,000 advance; (b) payment of $14,000 to the Company;
(c) delivery of a termination by H&N of management consulting and
acquisition consulting agreements between the Company and H&N; (d) delivery
by W&D of a guarantee of H&N's obligations under the H&N termination; and (e)
other conditions necessary for conversion. See FINANCIAL STATEMENTS - Page
F-18, Note 10(A).

<PAGE>

ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K

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

Page

(1) Financial Statements:

(b) Reports on Form 8-K: Two Reports on Form 8-K were filed during the
fourth quarter of fiscal year ended December 31, 1996 as follows:

Form 8-K filed October 7, 1996
Form 8-K/A-1 filed December 4, 1996

3.1 Restated Certificate of Incorporation of
the Registrant, as amended....................................(a)
3.2 By-Laws of the Registrant, as amended.........................(b)
3.3 Certificate of Designations of Preference of Series A
Preferred Stock of Teltronics, Inc. filed with the
Delaware Secretary of State on August 19, 1996................(m)
10.127 Amended and Restated Employment Agreement between the
Company and Ewen Cameron dated January 1, 1995................(c)
10.128 Employment Agreement between the Company and Norman R.
Dobiesz dated January 1, 1995.................................(c)
10.132 Teltronics Employee Stock Payment Plan, as amended
dated November 12, 1993.......................................(c)
10.135 Subscription Agreement between the Company and
W&D Consultants, Inc. dated May 11, 1995......................(c)
10.136 Specimen of Stock Option Agreement............................(d)
10.137 Teltronics, Inc. 1995 Incentive Stock Option Plan.............(e)
10.138 Promissory Note between Barnett Bank of Manatee County,
N.A. and Teltronics, Inc. dated July 7, 1995..................(f)
10.139 Purchase Agreement between SR Comms Management Ltd.,
and Teltronics, Inc. dated October 2, 1995....................(f)
10.142 Memorandum of Agreement covering Technology Transfer
dated March 11, 1996..........................................(g)
10.143 Line Note #1 dated November 7, 1995 payable in the
maximum aggregate amount of $100,000 by AT Supply,
Inc. to TTG Acquisition Corp..................................(g)
10.144 Line Note #2 dated November 29, 1995 payable in
the maximum aggregate amount of $100,000 by
AT Supply, Inc. to TTG Acquisition Corp.......................(g)
10.145 Amended Loan and Security Agreement dated December 29,
1995 by and among The CIT Group/Credit Finance,
the Company and AT Supply, Inc................................(g)
10.146 Agreement of Sale dated as of March 27, 1996 among
ISL, Inc., Interactive Solutions, LLC, Bruce W. Hanks,
Kevin Rogers and Michael Jonas................................(k)
10.147 Amendment to Agreement of Sale dated April 18, 1996
among ISL, Inc., Interactive Solutions, LLC,
Bruce W. Hanks, Kevin Rogers and Michael Jonas................(j)
10.148 Amendment to Loan and Security Agreement dated
December 29, 1995 between The CIT Group/Credit
Finance, AT Supply, Inc. and Teltronics, Inc.
dated May 14, 1996............................................(K)
10.149 Promissory Note between Barnett Bank of Manatee
County, N.A. and Teltronics, Inc. dated April 22, 1996........(k)
10.150 Stock Option Agreement dated as of October 15, 1996
among Teltronics, Inc. and certain parties....................(l)
10.151 Term Note dated September 20, 1996 in the principal
amount of $490,423 delivered to Solectron Texas, L.P..........(l)
10.152 Secured Promissory Note dated October 18, 1996 in
the principal amount of $616,300 delivered to The
CIT Group/Credit Finance, Inc.................................(l)
10.153 Agreement of Sale dated September 19, 1996 by and
among Shared Resource Exchange, Inc., Teltronics/SRX,
Inc. and Teltronics, Inc......................................(m)
10.154 Escrow Agreement made and entered into September 19,
1996 by and among Shared Resource Exchange, Inc.,
Teltronics/SRX, Inc., Teltronics, Inc. and Sevin
Rosen Bayless Management Company..............................(m)
10.155 Registration Rights Agreement among Shared Resource
Exchange, Inc., Teltronics, Inc. and certain parties
dated as of September 19, 1996................................(m)
16.1 Letter regarding change in certifying accountant
from James Moore & Company to the SEC dated
January 3, 1995...............................................(c)
16.2 Letter regarding change in certifying accountant
from KPMG Peat Marwick LLP to the SEC dated
February 28, 1995.............................................(c)
21.1 List of Subsidiaries..........................................(b)
23.1 Consent and Report of Independent Public Accountants..........(h)
27 Financial Date Schedule (for SEC use only)....................(b)
____________________

(a) Filed as an Exhibit to Teltronics' Definitive Proxy Statement
filed June 24, 1996.
(b) Filed as an Exhibit to this Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996.
(c) Filed as an Exhibit to Teltronics' Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994.
(d) Filed as an Exhibit to Teltronics' Report on Form 10-QSB for
the three month period ended June 30, 1995.
(e) Filed as an Exhibit to Teltronics' Definitive Proxy Statement
filed July 12, 1995.
(f) Filed as an Exhibit to Teltronics' Report on Form 10-QSB for
the three month period ended September 30, 1995.
(g) Filed as an Exhibit to Teltronics' Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995.
(h) Filed at Page F-2 of the Financial Statements filed pursuant to
Item 7 of this Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996.
(i) Filed as an Exhibit to Teltronics' Form 8-K filed April 5, 1996.
(j) Filed as an Exhibit to Teltronics' Form 8-K/A-1 filed April 25, 1996.
(k) Filed as an Exhibit to Teltronics' Report on Form 10-QSB for the
three month period ended June 30, 1996.
(l) Filed as an Exhibit to Teltronics' Report on Form 10-QSB for the
three month period ended September 30, 1996.
(m) Filed as an exhibit to Teltronics' Form 8-K filed October 4, 1996
(n) Form 8-K filed February 27, 1997.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly cause this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.

TELTRONICS, INC.

By: /s/ Ewen Cameron March 31, 1997
------------------------
Ewen Cameron
President and Chief Executive 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 Cameron Director, President and March 31, 1997
Ewen Cameron Chief Executive Officer

/s/ Michael A. Freid Vice President Finance, March 31, 1997
Michael A. Freid Secretary & Treasurer

/s/ Norman R. Dobiesz Director March 31, 1997
Norman R. Dobiesz

/s/ Carl S. Levine Director March 31, 1997
Carl S. Levine

- --------------------- Director March , 1997
Craig Macnab

<PAGE>

TELTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

For the Year Ended December 31, 1996

<PAGE>

To the Board of Directors and Shareholders of Teltronics, Inc.

INDEPENDENT AUDITORS' REPORT

We have audited the accompanying consolidated balance sheet of Teltronics,
Inc. and Subsidiaries as of December 31, 1996 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated 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, 1996, and the results
of its consolidated operations and its consolidated cash flows for each of
the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

Millward & Co., CPAs
Fort Lauderdale, Florida
March 13, 1997

F-2

TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996

ASSETS

<TABLE>
<S> <C>
CURRENT ASSETS:
Accounts receivable, net of allowance for
doubtful accounts of $125,250 $ 5,732,356
Subscription receivable 24,125
Inventories 7,642,205
Prepaid expenses and other current assets 494,051
-----------
Total current assets 13,892,737
-----------

PROPERTY AND EQUIPMENT, NET 2,723,825
-----------

OTHER ASSETS:
Prepaid lease guarantee, net 242,688
Software development costs, net 83,280
Other 70,555
-----------
Total other assets 396,523
-----------

Total Assets $17,013,085
===========
</TABLE>

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

F-3

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<S> <C>
CURRENT LIABILITIES:
Cash overdraft $ 25,180
Current portion of long-term debt 4,225,407
Current portion of capital lease obligations 129,574
Accounts payable 8,321,876
Accrued expenses 1,377,700
Deferred income 252,356
Other current liabilities 42,218
-----------
Total current liabilities 14,374,311
-----------

LONG-TERM LIABILITIES:
Long-term debt, Net of current portion 799,986
Capital lease obligations, Net of current portion 121,754
-----------
Total long-term liabilities 921,740
</TABLE>

COMMITMENTS AND CONTINGENCIES (Notes 6, 9 and 10)

<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY:

<C> <C>
Common stock, $.001 par, 40,000,000 shares authorized,
3,366,013 issued and outstanding 3,367
Non-voting common stock, $.001 par, 5,000,000 shares
authorized,0 shares issued and outstanding 0
Preferred stock, $.001 par value, 5,000,000 shares
authorized, 100,000 shares issued and outstanding 100
Additional paid-in-capital 13,185,272
Accumulated deficit (11,471,705)
-----------
Total shareholders' equity 1,717,034
-----------

Total liabilities and shareholders' equity $17,013,085
===========
</TABLE>

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

F-4

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31,

<TABLE>
<CAPTION>
1996 1995
=========== ===========
<S> <C> <C>
NET SALES $28,878,016 $21,603,491
----------- -----------
COSTS AND EXPENSES:
Cost of goods sold 19,518,540 13,224,984
General and administrative 5,138,491 2,901,816
Selling 4,872,353 3,261,037
Research and development 1,390,919 1,448,664
----------- -----------
30,920,303 20,836,501
----------- -----------
Income (loss) from operations (2,042,287) 766,990
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (547,743) (390,884)
Financing expenses (42,250) (287,275)
Gain on sale of software rights 0 165,000
Litigation costs (323,094) 0
Miscellaneous 9,703 6,773
----------- -----------
(903,384) (506,386)
----------- -----------
Income (loss) before provision
for income taxes (2,945,671) 260,604

Provision for income taxes 0 37,725
----------- -----------

NET INCOME (LOSS) $(2,945,671) $ 222,879
=========== ===========

NET INCOME (LOSS) PER SHARE $ (1.05) $ 0.09
=========== ===========

Average number of common shares outstanding 2,817,586 2,528,018
=========== ===========
</TABLE>

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

F-5

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
---------------- ----------------- PAID-IN (ACCUMULATED
ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT) TOTAL
------- ------ ------ ------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>

Balance, December 31, 1994 982,440 $ 983 0 $ 0 $10,293,223 $ (8,748,913) $1,545,293

Stock issued for conversion
of notes 167,728 168 0 0 344,955 0 345,123

Stock issued pursuant to
exercise of note conver-
sion rights to
Mr. Dobiesz 1,400,000 1,400 0 0 152,600 0 154,000

Shares issued for services
pursuant to an inter-
national marketing agree-
ment At $1.18 per share 60,000 60 0 0 70,815 0 70,875

Net profit 0 0 0 0 0 222,879 222,879
--------- ------ ------ ---- ----------- ------------ ----------

Balance, December 31, 1995 2,610,168 $2,611 0 0 10,861,593 (8,526,034) 2,338,170

Shares issued for
acquisition of net
assets of Shared
Resource Exchange, Inc. 750,000 750 0 0 2,286,750 0 2,287,500

Issuance of stock
on exercise of options 4,000 4 0 0 6,496 0 6,500

Issuance of stock on
exercise of warrants 1,845 2 0 0 5,533 0 5,535

Issuance of Series A
Preferred Stock 0 0 100,000 100 24,900 0 25,000

Net loss 0 0 0 0 0 (2,945,671) (2,945,671)
--------- ------ ------- ---- ----------- ----------- ----------

Balance, December 31, 1996 3,366,013 $3,367 100,000 $100 $13,185,272 $(11,471,705) $1,717,034
========= ====== ======= ==== =========== ============ ==========
</TABLE>

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

F-6

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(2,945,671) $ 222,879
Adjustments to reconcile net (loss)
income to net cash flows from
(used in) operating activities:
Bad debt expense (reversal) 60,011 (17,073)
Depreciation 789,981 462,831
Amortization of intangibles 161,528 178,872
Issuance of common stock for
consulting services rendered 0 70,875

Changes in operating assets and liabilities:
Accounts receivable (2,316,761) (852,509)
Inventories (1,755,165) (1,485,810)
Income tax receivable 0 668,780
Prepaid expenses and other current assets (335,821) 240,620
Accounts payable and accrued expenses 4,733,607 1,397,648
Deferred income 165,187 (64,216)
Other current liabilities (26,655) 0
----------- -----------
Net cash flows from (used in)
operating activities (1,469,759) 822,897
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software costs (83,280) 0
Acquisition of fixed assets (442,829) (279,289)
----------- -----------
Net cash flows used in investing activities (526,109) (279,289)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 21,531,765 20,871,470
Repayments on line of credit (19,622,698) (20,562,286)
Principle repayments of loans,
notes and leases (411,585) (608,237)
Net proceeds from sale of common
stock warrants and options 12,035 0
Proceeds from issuance of Preferred Stock 875 0
----------- -----------
Net cash flows from (used in)
financing activities 1,510,392 (299,053)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (485,476) 244,555

Cash received in acquisition of
Shared Resource Exchange, Inc. net assets 195,917 0

Cash and cash equivalents -
beginning of period 264,379 19,824
----------- ----------
Cash and cash equivalents (overdraft) -
end of period $(25,180) $ 264,379
=========== ===========
</TABLE>

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

F-7

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the Years Ended December 31,

<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
SUPPLEMENTAL NONCASH FINANCING
AND INVESTING ACTIVITIES:

Issuance of common stock for Purchase of net
assets of Shared Resource Exchange, Inc. $2,287,500 $ 0
========== =========
Purchase of equipment under capital lease $ 305,382 $ 595,046
========== =========
Issuance of common stock for conversion of notes $ 0 $ 345,123
========== =========
Issuance of common stock pursuant to exercise
of conversion rights $ 0 $ 154,000
========== =========
Issuance of common stock for consulting
services rendered $ 0 $ 70,875
========== =========
Subscription receivable for issuance
of Preferred Stock $ 24,125 $ 0
========== =========
</TABLE>

SUPPLEMENTAL DISCLOSURES:

<TABLE>
<S> <C> <C>
Interest paid - cash basis $ 583,802 $ 346,245
========== =========
</TABLE>

As discussed in Note 3, on September 23, 1996 the Company purchased the net
assets of Shared Resource Exchange, Inc. for 750,000 shares of restricted
common stock with a recorded value of $2,287,500. The following summarizes
the net assets acquired:

<TABLE>
<S> <C>
Cash $ 195,917
Accounts receivable 216,818
Inventory 2,647,382
Fixed assets 1,075,000
Accounts payable and other liabilities (1,847,617)
----------
$2,287,500
==========
</TABLE>

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

F-8

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
December 31, 1996 and 1995

NOTE 1 - BASIS OF PRESENTATION

Teltronics, Inc. (the "Company") was incorporated in Delaware in February
1989. The Company is engaged in product research, design and manufacturing
of electrical components, equipment and software, primarily relating to the
telecommunications industry.

The accompanying consolidated financial statements include the accounts of
the Company and is comprised of its wholly-owned subsidiaries TTG Acquisition
Corp. and TELTRONICS/SRX, Inc., and its 80% owned subsidiary AT Supply, Inc.,
and its 85% owned subsidiary Interactive Solutions, Inc. All significant
intercompany transactions and balances have been eliminated in consolidation.

AT Supply, Inc. ("AT Supply") is engaged in the distribution of various
products relating to the telecommunications industry.

On September 23, 1996, the Company, through its newly formed wholly-owned
subsidiary, Teltronics/SRX, Inc. ("Teltronics/SRX"), acquired substantially
all the assets of Shared Resource Exchange, Inc., which designs, markets,
sells, manufactures and supports digital voice and data transmission systems.
The Company's revenues are derived primarily from sales to customers
throughout the United States.

On April 18, 1996, Interactive Solutions, Inc. ("ISI"), a Delaware
corporation formed by the Company and an 85% owned subsidiary of the
Company, acquired certain assets and technology from Interactive Solutions,
LLC, a Kentucky limited liability company and its three members (the
"Members") pursuant to an Agreement of Sale dated March 27, 1996. Pursuant
to the Agreement, ISI acquired all of Interactive's and its Members' rights
to and in certain technology for a small, self-contained, voice activated,
portable, Pentium (Registered TM) processor driven, multimedia computer
("Technology") and other Purchased Assets described in the Agreement in
exchange for the assumption of certain indebtedness of Interactive and its
Members and possible future issuance of up to 1,000,000 shares of the Company's
Non-Voting Common Stock (the "NCV Shares"), upon the satisfaction of certain
conditions, including the award of significant contracts ("Contract") to ISI
utilizing the Technology. The NVC Shares, if issued, would be convertible at
the option of the holders on a one to one basis into shares of the Voting
Common Stock of the Company and would be subject to several conditions,
including an escrow to secure certain indemnification obligations of
Interactive and its Members. There can be no assurance that a Contract will
be awarded or, if awarded, that the Contract will contain the terms and
conditions required to obligate ISI to deliver any or all of the NVC Shares.
The remaining 15% ownership of ISI is held by 2 officers of the Company. At
December 31, 1996, ISI had negative book value.

For the year ended December 31, 1996 losses applicable to the 20% minority
interest of AT Supply and the 15% minority interest of ISI exceeded the
minority interest in the equity capital of such companies and the losses
accordingly, are included in the determination of net income. However, if
future earnings do materialize, the Company shall be credited to the extent
of such losses that were previously absorbed. No value has been attributed
to the intangible assets.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined principally on the weighted average method.

F-9

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the respective
assets using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. Maintenance, repairs and minor
renewals are charged to expense as incurred while expenditures that
materially increase values, change capacities, or extend useful lives are
capitalized. Upon sale or retirement of property and equipment, the cost and
the related accumulated depreciation are eliminated from the respective
accounts and the resulting gain or loss is included in operations.

INCOME TAXES - Income taxes are accounted for under the asset and liability
method of Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" ("SFAS 109"). 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 respecitve tax bases and operatiang loss and tax credit
carryforwards. Defered 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. Under SFAS
109, the effect on deferred tax assets and liabilities or 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.

The principal types of temporary differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation
resulting from use of accelerated methods for tax purposes, the timing of
recognition of accrued compensated absences and capitalization of software
development costs and certain inventory costs.

CASH AND CASH EQUIVALENTS - For the purpose of the consolidatd Statements of
Cash Flows, the Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents. As
of December 31, 1996 the Company did not have any cash equivalents.

CONCENTRATION OF CREDIT RISK - The Company extends credit to its customers
resulting in a significant concentration of credit risk from groups of
counter-parties engaged in similar activities or having similar economic
characteristics. The Company's principal customers include regional Bell
operatiang companies, independent telephone companies and alternate operator
service providers located throughout the U.S. The Company has no policy
requiring collateral or other security to support accounts receivable from
these customers which are subject to credit risk.

INCOME (LOSS) PER SHARE - Net income (loss) per share is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
during each period presented. Common stock equivalents outstanding
during each period presented were either anti-dilutive or not materially
dilutive to ge included in the computation of income (loss) per share.

REVENUE RECOGNITION - Revenues from product sales are recognized when the
product is shipped. Revenue from software development contracts are
recognized upon delivery of software product to customer. Revenue from
software maintenance contracts is deferred and recognized ratably over the
contract period and other service revenues are recognized upon performance.

F-10

<PAGE>

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 2 - SUMMARAY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could
differ from those estimates.

SOFTWARE DEVELOPMENT COSTS - The Company may, from time to time, capitalize
internal software development costs in accordance with Statement of Financial
Accounting Standards No. 86 ("SFAS 86"). As of December 31, 1996 and 1995,
capitalized software costs, net of amortization, were $83,280 and $66,822,
respectively. The capitalization of these costs begins when a product's
technological feasibility has been established and ends when the product is
available for general release to customers.

Amortization is computed on a product-by-product basis once the product is
available for general release to customers, using the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear
to the total current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated economic life of
the product which ranges from 18 months to 7 years.

The amount of software development costs capitalized in fiscal 1996 and 1995
was $83,280 and $0, respectively. The related amortization expense was
$66,822 and $90,000 for 1996 and 1995, respectively.

At December 31, 1996 and 1995, the Company reviewed the unamortized
capitalized costs of each computer software product in order to assess the
net realizable value of that product. The amount of capitalized software
costs reduced to net realizable value aggregated $0 and $0, respectively, at
such dates.

SOFTWARE LICENSING RIGHTS - On October 2, 1995, the Company entered into an
agreement to sell its exclusive right to market, use and otherwise
commercialize the ORBi-TEL Unix System software (the "system software") in
North and South America (the "territory") with the entity from which the
Company originally acquired such exclusive rights. In consideration, the
Company received $165,000 and is to receive an amount equal to 20% of all
revenues of the system software generated in the territory, exclusive of
maintenance, warranty, installation and any other ongoing service or support
charges, as adjusted in accordance with the agreement, from specific
customers as detailed in the agreement for a period of 12 months and an
amount equal to 5% of all revenues of the system software in the territory,
exclusive of maintenance, warranty, installation and any other ongoing
service or support charges, as adjusted in accordance with the agreement,
from customers not specified in the agreement for a period of 18 months.

The Company recorded a gain on sale of software licensing rights of $165,000
as part of other income in the December 31, 1995 consolidated statements of
operations. No additional income was earned for the year ended December 31,
1996.

STOCK BASED COMPENSATION - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS No. 123") "Accounting for Stock-Based Compensation", which is
effective for the Company's financial statements for fiscal years beginning
after December 15, 1995. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under
the provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees", but requires pro forma disclosure
in the footnotes to the financial statements as if the measurement provisions
of SFAS No. 123 had been adopted. The Company accounts for its stock based
compensation in accordance with the provisions of APB No. 25 and presents
disclosures required by SFAS No. 123.

F-11

<PAGE>

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

WARRANTY EXPENSE - The Company provides currently for the estimated cost
which may be incurred under product warranties. The Company provides a
limited warranty on its products, for a period of from 3 to 36 months
(depending on the product), under which the Company agrees to repair or
replace, in the Company's sole discretion, units defective in material or
workmanship, provided the equipment has not been subjected to alteration or
abuse.

RECENT PRONOUNCEMENTS - In June 1996, the FASB issued Statement of Financial
Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers of
Servicing of Financial Assets and Extinguishment of Liabilities. SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on a financial-
components approach that focuses on control. SFAS 125 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be prospectively
applied. The Company believes that the adoption of SFAS 125 will have no
impact on its financial statements.

NOTE 3 - ACQUISITION

On September 20, 1996, the Company's wholly-owned subsidiary, Teltronics/SRX
acquired substantially all of the assets and certain liabilities of Shared
Resource Exchange, Inc. (the "Seller"), a Delaware corporation located in
Dallas, Texas. This transaction has been accounted for as a purchase.

The Company delivered an aggregate of 750,000 restricted shares (including
100,000 shares to discharge certain debt) of its voting common stock for
substantially all of the assets of the Seller. The holders of these
restricted shares have been granted certain registration rights under a
Registration Rights Agreement which allows them to elect to have their shares
registered if the Company proposes to register any of its securities under
the Act in an offering for cash.

The following are the net assets acquired:

<TABLE>
<S> <C>
Current assets primarily inventory $3,060,117
Fixed assets 1,075,000
Accounts payable and other liabilities (1,847,617)
----------
$2,287,500
==========
</TABLE>

The following unaudited pro forma information for the years ended December
31, 1996 and December 31, 1995 have been prepared to reflect the acquisition
of Shared Resource Exchange, Inc. as if it had occurred on January 1, 1995.
The pro forma financial information set forth below is unaudited and not
necessarily indicative of the results that would actually have occurred if
the transactions had been consummated as of that date or the results which
may be obtained in the future.

1996 1995
------------ -----------
<S> <C> <C>
Net revenues $34,500,042 $36,734,202
Net loss $(4,538,642) $(5,384,225)
Net loss per common share $ (1.61) $ (1.60)
</TABLE>
F-12

<PAGE>

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 3 - ACQUISITION (Continued)

The Company entered into an Escrow Agreement whereby under which 120,000 of
the shares issued to the seller have been placed in escrow until the first
full year of results are completed and reported on (approximately March 1998)
to cover certain reimbursement and/or indemnification rights of the Company.

NOTE 4 - PROPERTY AND EQUIPMENT

The major classifications of property and equipment at December 31, 1996, are
as follows:

<TABLE>
<S> <C>
Machinery and equipment $ 1,855,424
Furniture and fixtures 1,791,213
Equipment under capital lease 1,643,601
Leasehold improvements 139,992
-----------
5,430,230
Accumulated depreciation 2,706,405
-----------
$ 2,723,825
===========
</TABLE>

Depreciation expense was approximately $789,981 and $463,000 for the years
ended December 31, 1996 and 1995, respectively.

NOTE 5 - INVENTORIES

The major classes of inventories at December 31, 1996, are as follows:

<TABLE>
<S> <C>
Raw materials $ 3,929,573
Work-in-progress 855,350
Finished goods 2,857,282
-----------
$ 7,642,205
===========
</TABLE>

NOTE 6 - DEBT

Debt at December 31, 1996 consists of the following:

Bank line of credit - In October 1994 and September 1996, the Company entered
into a credit line facility with a lender which provides for aggregate cash
borrowings of $4,950,000 including an initial term loan of $296,700 increased
to $612,000 in 1996, with an interest rate equal to the prime rate plus 2.5
percent per annum. The facility, except the term loan portion, continues
until October 28, 1998 and is renewable for successive terms of two years.
At December 31, 1996, the prime interest rate was 8 1/4%.

F-13

<PAGE>

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 6 - DEBT (Continued)
<TABLE>
<S> <C>
Substantially all of the Company's present and future
assets are pledged as collateral with borrowings
limited to certain gross availability formulas on
accounts receivable and inventory as defined in the
agreement. The facility provides for minimum loan fees,
unused line fees and renewal term fees. The
outstanding borrowings are classified as a current
liability. During 1996, the Company incurred minimum
loan fees of $35,000. A director of the Company has
personally guaranteed a portion of the facility.
At December 31, 1996, the Company had $452,030 of
unused credit available pursuant to this facility. $ 3,906,370

Term loan agreement, as described above, payable
in monthly principal installments of $10,200 through
October 1, 1999 with a final payment equal to the
unpaid principal balance. Interest is payable monthly
at 2.5% above the prime rate; collateralized by
substantially all the assets of the Company. 591,600

Notes payable officer, payable upon demand with
interest accruing at 8% per annum. (See Notes 9(a)
and 11 for additional related party transactions.) 37,302

Note payable - bank, due in monthly installments of
$6,760 including interest at 14% per annum to
July 1998. Collateralized by production equipment with
a book value of $208,365 at December 31, 1996. 113,899

Note payable - bank, due in monthly installments of
$7,323 including interest at 10.5% per annum to
October, 1998. Collateralized by production equipment
with a book value of $179,359 at December 31, 1996. 145,369

Note payable - bank, due in monthly installments
of $3,816 of principal only through April 1999, with
a final payment of $128,834 equal to the unpaid
principal balance plus accrued interest. Collateralized
by production equipment with a book value of $177,654
at December 31, 1996. 230,853
-----------
5,025,393

Less current portion 4,225,407
-----------
Long-term portion $ 799,986
===========
</TABLE>

Future maturities of note principal are as follows:

Year Ending December 31,
<TABLE>
<C> <C>

1997 $ 4,225,407
1998 313,923
1999 486,063
-----------
$ 5,025,393
===========
</TABLE>
F-14

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 6 - DEBT (Continued)

On December 12, 1994, the Company had paid a $150,000 deposit towards the
aggregate $350,000 non-accountable expense allowance of an underwriter
engaged to obtain financing for the Company. At December 31, 1995, due to the
fact that the proposed financing had not materialized, the Company wrote off
the $150,000 deposit which is included as part of financing expenses in the
consolidated statements of operations.

NOTE 7 - CAPITAL LEASE OBLIGATIONS

Leased assets include office equipment and machinery and equipment. The
present value of future minimum lease payments pursuant to the leases and the
corresponding liability have been recorded in the financial statements as
property and equipment under capital lease obligations. Interest on these
obligations range from 2.36% to 11.23%.

At December 31, 1996, leased property under capital leases consists of the
following:

<TABLE>
<S> <C>
Machinery and equipment $ 115,650
Furniture and fixtures 1,527,951
----------
1,643,601
Less: Accumulated Depreciation (866,838)
----------
$ 776,763
==========
</TABLE>

The future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 31, 1996 are as
follows:

<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ---------
<S> <C>

1997 $ 132,736
1998 122,472
1999 11,762
2000 0
---------
Total Minimum Lease Payments 266,970
Less: Amount Representing Interest 15,642
---------
Present Value of Minimum Lease Payments 251,328
Less: Current Portion (129,574)
---------
Long-Term Capital Lease Obligations $ 121,754
=========
</TABLE>

F-15

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 8 - FINANCIAL INSTRUMENTS

The estimated fair values of the Company's financial instruments at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>

Cash (overdraft) $ (25,180) $ (25,180)
=========== ===========
Receivables $ 5,732,356 $ 5,732,356
=========== ===========
Subscription receivable $ 24,125 $ 24,125
=========== ===========
Long term debt (including current
maturities of $4,354,981) $ 5,276,721 $ 5,276,721
=========== ===========
Accounts payable and other
current liabilities $ 9,994,150 $ 9,994,150
=========== ===========
</TABLE>

The following methods and assumptions were used to estimate the fair value of
financial instruments:

Cash - Fair value was considered to be the same as the carrying amount.

Receivables - The Company believes that in the aggregate, the carrying value
of the receivables was not materially different from the fair value.

Long-term debt - The carrying amount of floating-rate long-term debt was
assumed to approximate its fair value.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT AGREEMENTS - The Company entered into five year employment
agreements with the Company's President and CEO and its Vice President/Mergers
and Acquisitions commencing January 1, 1995. The President's agreement was
an amendment and restatement of a prior agreement which he entered into with the
Company in July 1993. Each employment agreement established a base annual
salary of $225,000 subject to annual increases of $25,000 per year. Either
the Company or the employee may terminate the employment agreements upon the
occurrence of certain events. The President's employment agreement contains
covenants restricting the employee from competing for a period of two years
after termination of the agreement. If the Company terminated either of the
President or Vice President, the terminated employee would be entitled to
severance equal to one year's base salary. In addition, the employees are
eligible to participate in any stock option plan that may be adopted by the
Company.

The Company's 80% owned subsidiary entered into two employment agreements
with the subsidiary's President and Vice President of Sales and Marketing
commencing October 23, 1995. Each employment agreement established a base
annual salary of $80,000 and issuance of the subsidiary's voting common stock
which at the time represents ten percent (10%) of the outstanding common stock
of the subsidiary. Either the subsidiary or the employee may terminate the
employment agreement upon the occurrence of certain events. In addition, the
employees are eligible to participate in any incentive compensation plan
established for key salaried employees of the subsidiary based upon net profits
of the subsidiary.

The Company entered into a three year employment agreement with its Executive
Vice President and Chief Operating Officer commencing October 14, 1996. The
agreement provides for an annual salary of $180,000 and it terminable prior
to expiration upon the occurrence of certain events.

F-16

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)

(B) OPERATING LEASES - The Company leases its manufacturing facilities
including land and building under the terms of a 15 year operating lease
expiring August 31, 2005.

The terms of the operating lease for manufacturing facilities provide the
Company with an option at any time during the lease term to purchase the
property at the greater of its fair market value or $4,320,000. The Company
also has the option at the end of the lease to renew the lease for up to two
additional five-year periods. In addition, the Company is responsible for
paying all taxes, insurance and maintenance cost relating to the leased
property. The lease also provides for an adjustment in the annual rent
beginning in 1993 based on changes in the Consumer Price Index. However, the
lease provides that, in no event shall the annual rents payable during the
adjustment period be less than the previous year's rent or increase annually
by more than 6%.

The Company also leases various equipment under operating leases expiring in
one to two years.

Future minimum lease payments for all noncancellable operating leases are as
follows:

Year Ending December 31,
<TABLE>
<S> <C>
1997 $ 772,045
1998 693,615
1999 670,377
2000 673,795
2001 666,159
Thereafter 2,910,811
----------
$6,386,802
==========
</TABLE>

Rental expense for operating leases totaled approximately $637,000 and
$561,000 for the years ended December 31, 1996 and 1995, respectively.

(C) LEGAL PROCEEDINGS - On or about September 12, 1995, Commstar, Ltd. a
Canadian corporation, commenced an action in the Circuit Court of the
Thirteenth Judicial District, Hillsborough County, Florida, alleging that the
Company, a director of the Company, and ComCentral Corp., a former majority
owned subsidiary of the Company, seeking damages in connection with a sale of
the securities of ComCentral Corp., in 1993. The complaint, which seeks
recission, damages in excess of $15,000, as well as costs and attorney fees,
was dismissed on February 9, 1996 without prejudice. The complaint was
subsequently refiled and discovery in the action has commenced. Although the
complaint does not set forth precisely the damages sought by Commstar, the
complaint alleges that Commstar agreed to pay $600,000 for shares of the former
subsidiary and that Commstar owed the Company approximately $98,700. The
Company believes that it has meritorious defenses to the allegations and will
vigorously defend any refiled complaint.

F-17

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)

In November, a majority owned subsidiary along with 2 officers of the
subsidiary and a former employee were named as defendants in a suit brought by
their former employer. The claims against the subsidiary are for
misappropriation/conversion of trade secrets, conspiracy, and acceptance of the
benefits of an alleged breach of fiduciary duty by the individual defendants.
The Complain seeks damages equal to profits allegedly lost as a result of
disclosure of the confidential information allegedly diverted to the Defendants
and for exemplary damages. All Defendants have denied liability and are
vigorously defending the allegations. Trial is scheduled for June, 1997.
For the year ended December 31, 1996, the Company has incurred $323,094 in
litigation costs in defense of this action.

NOTE 10 - STOCKHOLDERS EQUITY

On August 6, 1996, the stockholders of the Company adopted an amendment to
and restatement of the Company's Restated Certificate of Incorporation. Such
amendment provides that the total number of shares of all classes of capital
stock which the Company shall have 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) SHARES FOR CONVERSION - In October, 1994, the holders of an aggregate
$350,000 of the Company's convertible promissory notes delivered in 1993
converted the principal and interest due under the notes for cash and an
aggregate of 77,780 restricted shares of the Company's common stock. The
former noteholders were also granted the right to receive an additional 65,497
restricted shares of the Company's common stock if the original shares were
not registered on April 1, 1995. On May 23, 1995 such note holders were issued
65,497 shares of the Company's common stock pursuant the terms of the
Conversion Agreement dated October 25, 1994 which provided for registration
rights. Accordingly, $65,500 representing the fair market value of the shares
was charged to financing costs for the year ended December 31, 1995. An
aggregate of 102,228 shares were issued in 1995 pursuant to the promissory note
agreement.

During 1994 a related party advanced the Company $140,000 in return for a
conditional conversion right under which the advance could be converted into
1,400,000 shares of the Company's common stock at $.11 per share. In May
1995 the conversion right was exercised and the shares were issued after
certain conditions were met including cancellation of the debt, receipt of
$14,000 and the performance of other conditions necessary for conversion.
A value of $1.58 per share, which represents a 60% discount from the quoted
market price on November 16, 1994 which had been determined by the Company
based upon consideration given for the large number of shares (1,400,000),
compared to the shares outstanding prior to the conversion feature in the
$140,000 loan, (approximately 980,000 shares), and the dilutive effect this has
had upon conversion. The Company also considered the trading restrictions on
the shares, the public float, the financial condition of the Company during the
period the conversion was negotiated and the extreme need on that date for the
infusion of the $140,000. The Company charged 1994 operations in the amount of
$2,058,000 (1,400,000 shares at $1.58 less the conversion price of $.11 or
$1.47 per share).

At May 1, 1995 the Company accounted for the issuance of the 1,400,000 shares
of common stock as a credit to equity in the amount of $154,000 which includes
the $140,000 advance and the receipt of the remaining $14,000.

F-18

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 10 - STOCKHOLDERS EQUITY (Continued)

(B) INCENTIVE STOCK OPTION PLAN - The Company has adopted an Incentive Stock
Option Plan ("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 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 Plan became effective
May 16, 1995 and will terminate August 8, 2005 unless earlier terminated by the
Board of Directors or extended by the Board with approval of the stockholders.

On July 30, 1996, the Company amended its 1995 Incentive Stock Option Plan so
that the securities authorized for options on sale pursuant to the plan shall
consist of 1,250,000 shares of the Company's common stock. The stock options
the Plan authorizes the Board to grant are intended to qualify as incentive
stock options under the Internal Revenue Code of 1986, as amended. 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.

The activity from options granted pursuant to this program are as follows:

<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
---------------- ---------------

<S> <C> <C>
Outstanding - May 16, 1995 210,000 (a) $1.63
Granted 0 0
---------
Outstanding - December 31, 1995 210,000
Granted - 1996 644,000 (b) $5.50
Exercised - 1996 (4,000) $1.63
Canceled - 1996 (50,000) $1.63
---------
Outstanding - December 31, 1996 800,000
=========
</TABLE>

All options were granted at not less than the fair market value at date of
grant. 4,000 options have been exercised during the two years ended December
31, 1996.

(a) All grants outstanding May 16, 1995 expire May 15, 2000.
(b) All other options are usually exercisable over a five-year period from
the date of grant unless employment is terminated.
(c) 450,000 options were available for grant at December 31, 1996.

The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the 1995 Plan. Had compensation costs for the 1995 Plan
been determined based on the fair value at the grant dates for the awards
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would have been adjusted to the pro forma
amounts indicated below:

F-19

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 10 - STOCKHOLDERS' EQUITY (Continued)

Information regarding the Company's Stock Option Plan is summarized below:

<TABLE>
<S> <C> <C>
1996 1995
----------- ----------
Net income (loss):
As reported $(2,945,671) $ 222,879
Pro forma $(4,350,671) $ 101,879

Net income (loss) per share:
As reported $ (1.05) $ .09
Pro forma $ (1.54) $ .04
</TABLE>

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:

Exercise price $ 5.50 $ 1.63
Expected life of option 5 years 5 years
Risk free interest rate 6.66% 6.36%
Expected volatility 94% 60%
</TABLE>

The pro forma information is based on options granted which varies from
year-to-year and is not necessarily indicative of pro forma information of
future periods.

(C) EMPLOYEE STOCK PAYMENT PLAN - The Employee Stock Payment Plan was
established for the purpose of issuance of shares to participants in full
satisfaacation of wages and/or benefits for services rendered or to be
rendered as employees of the Company. Such Employee Stock Payment Plan has
been registered on Form S-8. In 1994 110,900 shares were issued pursuant to
the Employee Plan in an aggregate amount of $631,999. At Decmeber 31, 1996,
211,100 shares were reserved for possible future issuance under the Employee
Plan.

(D) CONSULTANT STOCK PAYMENT PLAN - During 1994 and 1993, the Company
reserved an aggregate of 440,000 shares of its common stock for possible
issuance under a Consultant Stock Payment Plan ("Consultant Plan") established
for the purpose of issuance of shares to consultants in full satisfaction of
compensation and/or expenses for servcies rendered or to be rendered as
consultants to the Company. Such Plan has registered its shares pursuant to a
Form S-8. In 1994 and 1993, 235,000 shares with proceeds received in the
amount of $291,400 and 12,000 shares with proceeds received in the amount of
$252,479, respectively, were issued. The aggregate proceeds of the issuance of
the shares in 1994 $291,400 were placed in escrow pending the receipt of
services from the international marketing consultant engaged by the Company.
As services are performed or sales commissions are earned, the funds received
from the sale of the shares are to be released from escrow to the consultant.
On May 17, 1995, 60,000 additional shares were issued by the escrow agent to
the international marketing consultant as compensation for services rendered to
the Company. During the year ended December 31, 1996, the Company canceled the
remaining 105,000 reserved shares remaining for possible future issuance to
the international marketing consultant. In 1996 and 1995, $0 and $78,750,
respectively, were charged to operations for consulting services rendered.
The escrow agent is a company controlled by a director and Vice President of
the Company.

F-20

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 10 - STOCKHOLDER' EQUITY (Continued)

(E) PREFERRED STOCK - During the year ended December 31, 1996, the Company
sold 100,000 shares of its $.001 par value Series A Preferred Stock to its
Director and Vice President of Mergers and Acquisition for $.25 per share for
an aggregate consideration of $25,000. Such shares are restricted securities
and subject to resale restrictions including the right of the Company to
approve or disapprove any sale, transfer or disposition to any third party not
controlled by the Director. Additionally, each share is entitled to 400 votes
and is not entitled to any dividends, accordingly, this would give the Vice
President voting control of all of the authorized Common Shares. At December
31, 1996, the Company recorded a subscription receivable of $24,125, which was
subsequently collected.

NOTE 11 - RELATED PARTY TRANSACTIONS

The following is a summary of transactions with related parties:

PREPAID LEASE GUARANTEE - In connection with the lease of its manufacturing
facilities discussed in Note 7, two of the Company's shareholders (including
a director) personally guaranteed the Company's obligations to the lessor over
the term of the lease. The Company agreed to pay each of the two shareholders
3% of the total future value of the lease payments, excluding executory costs,
as consideration for the personal guarantee. This amount was paid during 1991.
The cost of the guarantee to the Company, 6% of $7,000,000 or $420,000 has
been deferred as a financing cost (prepaid lease guarantee) in the accompanying
financial statements and is amortized on a straight line basis over the term
of the lease. Accumulated amortization of this amount at December 31, 1996,
was $177,312.

SUBLEASE AGREEMENT - The Company had entered into a sublease agreement for
its Clearwater office facility with a company owned by a director and principal
shareholder of the Company. Such agreement expired as of December 31, 1995.
Rental expense aggregated $0 and $108,319 for the years ended December 31,
1996 and 1995, respectively.

See Note 6, 9A, 10A, 10D and 10E regarding additional related party
transactions.

F-21

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 12 - INCOME TAXES

At December 31, 1996, the Company has net operating loss carryforwards of
approximately $7,000,000 that will expire in the years 2008 through 2011.
Such net operating losses are available to offset future table income, if any.
As the utilization of such operating losses for tax purposes is not assured,
the deferred tax asset has been fully reserved through the recording of a 100%
valuation allowance. Should a cumulative change in the ownership of more
than 50% occur within a three-year period, there could be an annual limitation
of the use of the net operating loss carryforward.

The provision for income taxes consists of the following:
<TABLE>
<S> <C> <C>

1996 1995
---------- ----------

Current federal tax expense $ 0 $ 37,725
Deferred federal tax expense 0 0
---------- ----------

Total federal income tax expense $ 0 $ 37,725
========== ==========

Deferred income tax components at
December 31, 1996, are as follows:

Deferred Tax Liabilities:
Depreciation $ (119,330)
Software Costs (29,148)
----------
Total Deferred Tax Liabilities (148,478)
----------
Deferred Tax Assets:
Net Operating Loss Carryforwards $2,470,362
Accrued vacation 120,689
Inventory 225,469
Deferred Revenue 88,325
Bad Debt Reserve 43,837
----------
Total Deferred Tax Assets 2,948,682
----------
Net Deferred Tax Asset 2,800,204

Valuation Allowance for Deferred Tax Assets (2,800,204)
----------
Deferred Income Taxes, Net $ 0
==========
</TABLE>

F-22

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 12 - INCOME TAXES Continued

A reconciliation of the provision for income taxes to the amount calculated
using the statutory federal rate (35%) in 1996 and 1995, respectively, is as
follows:

Income Tax Provision (Benefit) at
Federal Statutory Rates $(1,030,985) $ 88,018
State Taxes 0 5,453
Operating Losses with no Current Benefit 1,030,895 0
Over (Under) accrual of NOL Carryback Claims 0 26,365
Utilization of Net Operating Loss Carryforward 0 (88,018)
Other, Net 0 5,907
---------- ---------
Income Tax Provision $ 0 $ 37,725
=========== =========
</TABLE>

NOTE 13 - ACCRUED LIABILITIES

At December 31, 1996, the balance in accrued expenses of $1,377,700 is
comprised of the following:

<TABLE>
<S> <C>
Accrued Payroll $ 471,185
Accrued Compensated Absences 344,825
Due to Creditors 263,900
Accrued Legal Fees 125,000
Accrued Commissions 93,116
Accrued Warranty Expenses 55,350
Other 24,324
==========
$1,377,700
</TABLE>

F-23

<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
December 31, 1996 and 1995

NOTE 14 - SUBSEQUENT EVENT

On February 13, 1997, the Company entered into a Debenture Purchase Agreement
(the Agreement) whereby the Company sold $4,250,000 aggregate principal
amount of its 11% Subordinated Convertible Debentures Due on February 13, 2002.
Such Debentures bear interest at the rate of 11% per annum, payable quarterly
commencing May 1, 1997. Fees in connection with the Debentures aggregated to
$106,250.

The Debentures are subordinated to certain other indebtedness of the Company.
Subject to and upon compliance with certain provisions of the Agreement, the
holder of the Debentures shall have the right, at its option, at anytime, to
convert the principal amount of the Debenture, or any portion thereof, into
shares of the Company's Voting Common Stock, par value $.001 per share at a
conversion price (subject to adjustment under certain conditions) of $4.00
per share.

F-24

Exhibit No. 21.1

TELTRONICS, INC.

SUBSIDIARIES

TTG ACQUISITION CORP.
2150 Whitfield Industrial Way
Sarasota, Florida 34243

(100%)

AT SUPPLY, INC.
4703 Shavano Oak Drive, Suite 104
San Antonio, Texas 78249

(80%)

INTERACTIVE SOLUTIONS, INC.
2150 Whitfield Industrial Way
Sarasota, Florida 34243

(85%)

TELTRONICS/SRX, INC.
2150 Whitfield Industrial Way
Sarasota, Florida 34243

(100%)

EXHIBIT 3.2

TELTRONICS, INC.

INDEX TO BY-LAWS

ARTICLE I - MEETINGS OF STOCKHOLDERS PAGE

Section 1. Annual Meeting 3
Section 2. Special Meetings 3
Section 3. Notice and Purpose of Meetings 3
Section 4. Procedure 4
Section 5. List of Stockholders 4
Section 6. Quorum 4
Section 7. Adjournments 4
Section 8. Voting; Proxies 5
Section 9. Consent of Stockholders in Lieu of Meeting 5
Section 10. Waiver of Notice 6
Section 11. Inspectors of Election 6
Section 12. Duties of Inspectors of Election 6

ARTICLE II - DIRECTORS

Section 1. General Powers 7
Section 2. Number and Qualifications 7
Section 3. Election and Term of Office 7
Section 4. Resignation 7
Section 5. Removal of Directors 8
Section 6. Vacancies 8
Section 7. First Meeting of Newly Elected Directors 8
Section 8. Regular Meetings of Directors 8
Section 9. Special Meetings of Directors 9
Section 10. Notice of Special Meetings 9
Section 11. Quorum and Action by the Board 9
Section 12. Procedure 10
Section 13. Committees of Directors 10
Section 14. Compensation of Directors 11
Section 15. Action Without a Meeting 11
Section 16. Presence at Meeting by Telephone 11
Section 17. Waiver of Notice 11
Section 18. Reliance 11

ARTICLE III - OFFICERS

Section 1. Officers; Term of Office 12
Section 2. Removal 12
Section 3. Resignation 12
Section 4. Vacancies 12
Section 5. The Chief Executive Officer 12
Section 6. The President 12
Section 7. The Vice Presidents 13
Section 8. The Secretary and Assistant Secretaries 13
Section 9. The Treasurer and Assistant Treasurers 13
Section 10. Other Officers and Agents 14
Section 11. Officers Holding Two or More Offices 14
Section 12. Duties of Officers May be Delegated 14
Section 13. Compensation 14
Section 14. Security 14

ARTICLE IV- INDEMNIFICATION OF OFFICERS AND DIRECTORS

Section 1. Right of Indemnification 15
Section 2. Expenses 15
Section 3. Other Rights of Indemnification 15

ARTICLE V - SHARES AND THEIR TRANSFER

Section 1. Certificates 16
Section 2. Issuance of Certificates 16
Section 3. More Than One Class of Stock 16
Section 4. Stock Ledger 17
Section 5. Transfer of Shares 17
Section 6. Registered Stockholders 17
Section 7. Regulations 17
Section 8. Lost, Stolen and Destroyed Certificates 17
Section 9. Fixing of Record Date 18

ARTICLE VI - FINANCES

Section 1. Corporate Funds 19
Section 2. Fiscal Year 19
Section 3. Dividends; Reserves 19
Section 4. Loans to Employees and Officers 20

ARTICLE VII - CORPORATE SEAL

Section 1. Form of Seal 20
Section 2. Use of Seal 20

ARTICLE VIII - AMENDMENTS

Section 1. Procedure for Amending By-Laws 20

ARTICLE IX. - CONSTRUCTION OF THE BY-LAWS WITH REFERENCE TO
PROVISIONS OF LAW; MISCELLANEOUS

Section 1. Definitions 21
Section 2. By-Law Provisions Additional and
Supplemental to Provisions of Law 21
Section 3. By-Law Provisions Contrary to or
Inconsistent with Provisions of Law 21
Section 4. Variation of Pronouns 21

<PAGE>
BY-LAWS
of
TELTRONICS, INC.

ARTICLE I

MEETINGS OF STOCKHOLDERS

SECTION 1. - ANNUAL MEETING. The annual meeting of stockholders of
the corporation for the election of directors and for the transaction of
other business shall be held at such time and such place within or without
the State of Delaware as shall be determined by the Board of Directors, the
Chief Executive Officer or the President and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.

SECTION 2. - SPECIAL MEETINGS. A special meeting of the
stockholders may be called by the Board of Directors, Chief Executive Officer
or President, and shall be called by the Chief Executive Officer, President,
Secretary or an Assistant Secretary at the request in writing of a majority
of the Board of Directors, or at the request in writing of the holders of
record of a majority of the outstanding votes then entitled to be voted at
the meeting. Each special meeting of stockholders shall be held at such time
and place within or without the State of Delaware as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Business transacted at any special meeting of stockholders shall be limited
to the purpose or purposes stated in the notice of the meeting.

SECTION 3. - NOTICE AND PURPOSE OF MEETINGS. Except as otherwise
provided by law or in these by-laws, written notice of each meeting of
stockholders stating the place, date and hour of the meeting and, in the case
of a special meeting, in general terms, the purpose or purposes for which the
meeting is called shall be given not less than ten (10) nor more than sixty
(60) days before the meeting to each stockholder of record entitled to vote
at the meeting at his address as it appears on the records of the
corporation. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, with first-class postage thereon
prepaid, directed to each stockholder at his address as it appears on the
records of the corporation.

SECTION 4. - PROCEDURE. At each meeting of stockholders the order
of business and all other matters of procedure may be determined by the
person presiding over the meeting.

SECTION 5. - LIST OF STOCKHOLDERS. The officer who has charge of
the stock ledger of the corporation shall prepare and make, at least ten (10)
days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
of the stock of the corporation registered in the name of each stockholder.
Such list shall be open to examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice
of the meeting, or, if not so specified, at the place where the meeting is to
be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.

SECTION 6. - QUORUM. Except as otherwise required by law or the
certificate of incorporation, the presence in person or by proxy of the
stockholders of record entitled to vote not less than a majority of the
outstanding votes entitled to be voted at any meeting shall constitute a
quorum for the transaction of business, except when the stockholders are
required to vote by class, in which event the holders of record of not less
than a majority of the votes of the outstanding shares of the appropriate
class shall be present in person or represented by proxy.

SECTION 7. - ADJOURNMENTS. The stockholders of record entitled to
vote who are present in person or represented by proxy at any meeting of
stockholders, whether or not a quorum shall be present at the meeting, shall
have power by a majority of the votes cast to adjourn the meeting from time
to time without notice other than announcement at the meeting of the time and
place to which the meeting is adjourned. At any adjourned meeting held
without notice at which a quorum shall be present any business may be
transacted that might have been transacted on the original date of the
meeting. If the adjournment is for more than thirty (30) days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the adjourned meeting.

SECTION 8. - VOTING; PROXIES. Unless otherwise provided in the
certificate of incorporation, as amended from time to time, each stockholder
of record shall be entitled at every meeting of stockholders to one vote for
each share of the stock of the corporation standing in his name on the record
of stockholders on the record date fixed for the meeting or, if no record
date for the meeting was fixed, on the date of the meeting. If the
certificate of incorporation provides for more or less than one vote for any
share, on any matter, every reference in these by-laws to a majority or other
proportion of stock shall refer to such majority or other proportion of the
votes of such stock. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may act in person or may authorize another person or
persons to act for him by proxy, but no proxy shall be voted or acted upon
after three (3) years from its date unless it provides for a longer period.

Directors elected at any meeting of stockholders shall, except as
otherwise required by law, be elected by a plurality of the votes cast. All
other corporate action to be taken by vote of stockholders shall, except as
otherwise required by law or the certificate of incorporation, be authorized
by a majority of the votes cast. Unless otherwise provided in the
certificate of incorporation, the vote for directors shall be by ballot, but
the vote upon any other question before a meeting of stockholders shall not
be by ballot unless required by law or unless the person presiding at such
meeting shall so direct or unless any stockholder present in person or by
proxy and entitled to vote thereon shall so demand.

SECTION 9. - CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless
otherwise provided in the certificate of incorporation, any action required
to be taken at any annual or special meeting of the stockholders, or any
action (including, without limitation, adoption, amendment or repeal of the
by-laws) which may be taken at any annual or special meeting of the
stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the stockholders of record of the outstanding voting
shares of the stock of the corporation having not less than a minimum number
of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
The consent or consents hereunder shall be delivered to the corporation by
delivery to its registered office in Delaware, its principal place of
business or an officer or agent of the corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. Delivery made
to the corporation's registered office shall be by hand or by certified or
registered mail, returned receipt requested. Prompt notice of the taking of
corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders of record who have not consented in
writing.

SECTION 10. WAIVER OF NOTICE. Whenever notice is required by law
or these by-laws to be given to any stockholder, a written waiver thereof,
signed by such stockholder in person or by proxy, whether before or after the
time stated therein, shall be deemed equivalent to notice. The attendance of
any stockholder at a meeting in person or by proxy shall constitute a waiver
of notice of such meeting, except when the person attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders need be specified in any
written waiver of notice.

SECTION 11. INSPECTORS OF ELECTION. The Board of Directors shall,
in advance of any meeting of stockholders, appoint one or more inspectors to
act at the meeting or any adjournment thereof and make written report
thereof. The Board of Directors may designate one or more persons as
alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act
at the meeting. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best
of his ability. No person who is a candidate for the office of director of
the corporation shall act as an inspector at any meeting of the stockholders
at which directors are elected.

SECTION 12. DUTIES OF INSPECTORS OF ELECTION. Whenever one or
more inspectors of election is appointed as provided in these by-laws the
inspector(s) shall:

1. ascertain the number of shares outstanding and the voting power
of each;

2. determine the shares represented at a meeting and the validity
of proxies and ballots;

3. count all votes and ballots;

4. determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors;
and

5. certify their determination of the number of shares represented
at the meeting and his or their count of all votes and ballots.

The inspectors may appoint or retain other persons or entities to
assist them in the performance of the duties of the inspectors. The date
and time of the opening and the closing of polls for each matter upon which
the stockholders will vote at a meeting shall be announced at the meeting.
No ballot, proxies or votes, nor any revocations thereof or changes thereto,
shall be accepted by the inspectors after the closing of the polls unless the
Court of Chancery upon application by a stockholder shall determine
otherwise.

ARTICLE II

DIRECTORS

SECTION 1. - GENERAL POWERS. The property, business and affairs of
the corporation shall be managed by or under the direction of its Board of
Directors.

SECTION 2. - NUMBER AND QUALIFICATIONS. The Board of Directors
shall consist of one (1) or more members. The exact number of directors
shall be fixed from time to time by vote of the majority of the entire Board
of Directors.

SECTION 3. - ELECTION AND TERM OF OFFICE. Except as otherwise
required by law or these by-laws, each director shall be elected at the
annual meeting of stockholders of the corporation and shall hold office until
the next annual meeting of stockholders and until his successor has been
elected and qualified, or until his earlier death, resignation or removal.

SECTION 4. - RESIGNATION. Any director may resign at any time by
giving written notice to the corporation. Such resignation shall take effect
at the time specified in the written notice. Unless otherwise specified in
the written notice, the acceptance of such resignation shall not be necessary
to make it effective.

SECTION 5. - REMOVAL OF DIRECTORS. Any director or the entire
Board of Directors may be removed, with or without cause, by the affirmative
vote of the stockholders of record of a majority of the outstanding votes
then entitled to be cast at an election of directors.

SECTION 6. - VACANCIES. Newly created directorships and vacancies
in the Board of Directors, including vacancies resulting from the resignation
of directors effective immediately or at a future date or from the removal of
directors, with or without cause, may be filled by the affirmative vote of
the stockholders of record of a majority of the outstanding votes then
entitled to be cast at the election of directors, by vote of a majority of
directors then in office (including directors whose resignations are
effective at a future date), although less than a quorum, or by the sole
remaining director. Each director so chosen shall hold office until the next
annual meeting of the stockholders and until his successor has been elected
and qualified, or until his earlier death, resignation or removal. A vote to
fill a vacancy or vacancies created by the resignation or resignations of a
director or directors effective at a future date shall take effect when the
resignation or resignations become effective.

SECTION 7. - FIRST MEETING OF NEWLY ELECTED DIRECTORS. The first
meeting of the newly elected Board of Directors may be held immediately after
the annual meeting of stockholders and at the same place as the annual
meeting of stockholders, provided a quorum be present, and no notice of the
meeting shall be necessary. In the event the first meeting of the newly
elected Board of Directors is not held at said time and place, it shall be
held as provided in Section 8 or Section 9 of this Article II.

SECTION 8. - REGULAR MEETINGS OF DIRECTORS. Regular meetings of
the Board of Directors may be held without notice at such time and place
within or without the State of Delaware as may be fixed from time to time by
resolution of the Board of Directors, provided, that whenever the time or
place of regular meetings shall be fixed or changed, notice of such action
shall be mailed promptly to each director who shall not have been present at
the meeting at which such action was taken, addressed to him at his residence
or usual place of business. If any day fixed for a regular meeting shall be
a legal holiday at a place where the meeting is to be held, then the meeting
which would otherwise be held on that day shall be held at the same hour on
the next succeeding business day.

SECTION 9. - SPECIAL MEETINGS OF DIRECTORS. A special meeting of
the Board of Directors may be called by the Chief Executive Officer, or, in
the absence or disability of the Chief Executive Officer, the President, or,
in the absence or disability of the President, any Vice President, or by any
three directors or if there are only two or fewer directors by all of the
remaining directors. Each special meeting of the Board of Directors may be
held at such time and such place within or without the State of Delaware as
shall be stated in the notice of the meeting or in a duly executed waiver of
notice thereof.

SECTION 10. - NOTICE OF SPECIAL MEETINGS. Notice of each special
meeting of the Board of Directors, stating the time and place thereof, shall
be given by the Chief Executive Officer, President, any Vice President,
Secretary, any Assistant Secretary or any member of the Board of Directors,
to each member of the Board of Directors (a) not less than three (3) days
before the meeting by depositing the notice in the United States mail, with
first-class postage thereon prepaid, directed to each member of the Board of
Directors at the address designated by him for such purpose (or, if none is
designated, at his last known address), or (b) not less than twenty-four
hours before the meeting by either (i) delivering the same to each member of
the Board of Directors personally, (ii) sending the same by telephone,
facsimile, telegraph, cable or wireless to the address designated by him for
such purposes (or, if none is designated, to his last known address) or (iii)
delivering the notice to the address designated by him for such purpose (or,
if none is designated, to his last known address).

SECTION 11. - QUORUM AND ACTION BY THE BOARD. At all meetings of
the Board of Directors, except as otherwise required by law or these by-laws,
a quorum shall be required for the transaction of business and shall consist
not less than a majority of the entire Board of Directors, and the vote of a
majority of the directors present shall decide any question that may come
before the meeting. A majority of the directors present, whether or not a
quorum is present, may adjourn any meeting to another time or place without
notice other than announcement at the meeting of the time and place to which
the meeting is adjourned.

SECTION 12. - PROCEDURE. The order of business and all other
matters of procedure at every meeting of directors may be determined by the
person presiding at the meeting.

SECTION 13. - COMMITTEES OF DIRECTORS. The Board of Directors may,
by resolution adopted by vote of a majority of the entire Board of Directors,
designate one or more committees, each committee to consist of one or more of
the directors of the corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of any member or alternate member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place
of any such absent or disqualified member or alternate member. Any such
committee, to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the property, business and affairs of
the corporation, and may authorize the seal of the corporation to be affixed
to all papers which may require it; but no such committee shall have the
power or authority of the Board of Directors in reference to amending the
certificate of incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange
of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, amending the by-laws of the corporation,
declaring a dividend or authorizing the issuance of stock. Each such
committee shall keep regular minutes of its proceedings and report the same
to the Board of Directors when required. A majority vote of all the members
of any such committee may fix its rules or procedure, determine its actions
and fix the time and place within or without the State of Delaware for its
meetings and specify the number of members required to constitute a quorum
and what notice thereof, if any, shall be given, unless the Board of
Directors shall otherwise provide. The Board of Directors may at any time
fill vacancies in, change the membership of or discharge any such committee.

SECTION 14. - COMPENSATION OF DIRECTORS. The Board of Directors
shall have the authority to fix the compensation of directors. The directors
may be paid their expenses, if any, of attendance at each meeting of the
Board of Directors and may be paid a fixed sum for attendance at each meeting
of the Board of Directors or a stated salary as director. No such payment
shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of committees of the
Board of Directors may be allowed like compensation for attending committee
meetings.

SECTION 15. - ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Board of Directors or any committee thereof may
be taken without a meeting if all members of the Board of Directors or the
committee consent in writing to the adoption of a resolution authorizing the
action. The resolution and the written consents thereto by the members of
the Board of Directors or committee shall be filed with the minutes of the
proceedings of the Board of Directors or committee.

SECTION 16. - PRESENCE AT MEETING BY TELEPHONE. Members of the
Board of Directors or any committee thereof may participate in a meeting of
the Board of Directors or committee by means of a conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other. Participation in a meeting by such means
shall constitute presence in person at the meeting.

SECTION 17. - WAIVER OF NOTICE. Whenever notice is required by law
or these by-laws to be given to any director, a written waiver thereof,
signed by such director, whether before or after the time stated therein,
shall be deemed equivalent to notice.

SECTION 18. - RELIANCE. Members of the Board of Directors or any
committee thereof shall in the performance of their duties, be fully
protected in relying in good faith upon the records of the corporation and
upon such information, opinions, reports or statements presented to the
corporation by any of the corporation's officers or employees, or committees
of the Board of Directors, or by any other person as to matters the members
reasonably believe are within such other persons professional or expert
competence and who has been selected with reasonable care by or on behalf of
the corporation.

ARTICLE III

OFFICERS

SECTION 1. - OFFICERS; TERM OF OFFICE. The Board of Directors
shall annually, at the first meeting of the Board of Directors after the
annual meeting of stockholders, elect a Chief Executive Officer and/or a
President, one or more Vice Presidents, a Secretary, and a Treasurer. The
Board of Directors may from time to time elect or appoint such additional
officers as it may determine. Such additional officers shall have such
authority and perform such duties as the Board of Directors may from time to
time prescribe.

The Chief Executive Officer, the President, each Vice President,
the Secretary and the Treasurer shall each, unless otherwise determined by
the Board of Directors, hold office until the first meeting of the Board of
Directors following the next annual meeting of stockholders and until his
successor has been elected and qualified, or until his earlier death,
resignation or removal. Each additional officer appointed or elected by the
Board of Directors shall hold office for such term as shall be determined
from time to time by the Board of Directors and until his successor has been
elected or appointed and qualified, or until his earlier death, resignation
or removal.

SECTION 2. - REMOVAL. Any officer may be removed or have his
authority suspended by the Board of Directors at any time, with or without
cause.

SECTION 3. - RESIGNATION. Any officer may resign at any time by
giving written notice to the corporation. Such resignation shall take effect
at the time specified therein; unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.

SECTION 4. - VACANCIES. A vacancy in any office arising for any
reason may be filled by the Board of Directors.

SECTION 5. - THE CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer of the corporation shall be the chief officer of the corporation.
He shall preside at all meetings of stockholders and of the Board of
Directors. He shall have the general powers and duties of supervision and
management of the corporation which usually pertain to his office, and shall
perform all such other duties as are properly required of him by the Board of
Directors.

SECTION 6. - THE PRESIDENT. In the absence of the Chief Executive
Officer, the President shall preside at all meetings of the stockholders and
the Board of Directors. The President shall, in the absence or disability of
the Chief Executive Officer, or at his request, perform the duties and
exercise the powers of the Chief Executive Officer. The President shall also
have such powers and perform such duties as usually pertain to his office or
as are properly required of him by the Board of Directors.

SECTION 7. - THE VICE PRESIDENTS. The Vice Presidents may be
designated by such title or titles as the Board of Directors may determine,
and each Vice President in such order of seniority as may be determined by
the Board of Directors shall, in the absence or disability of the Chief
Executive Officer and the President, or at the request of the Chief Executive
Officer and the President, perform the duties and exercise the powers of the
President. The Vice Presidents also shall have such powers and perform such
duties as usually pertain to their office or as are properly required of them
by the Board of Directors.

SECTION 8. - THE SECRETARY AND ASSISTANT SECRETARIES. The
Secretary shall issue notices of all meetings of stockholders and of the
Board of Directors where notices of such meetings are required by law or
these by-laws. He shall attend meetings of stockholders and of the Board of
Directors and keep the minutes thereof in a book or books to be provided for
that purpose. He shall affix the corporate seal to and sign such instruments
as require the seal and his signature and shall perform such other duties as
usually pertain to his office or as are properly required of him by the Board
of Directors.

The Assistant Secretaries may, in the absence or disability of the
Secretary, or at his request or the request of the President, perform the
duties and exercise the powers of the Secretary, and shall perform such other
duties as the Board of Directors shall prescribe.

SECTION 9. - THE TREASURER AND ASSISTANT TREASURERS. The Treasurer
shall have the care and custody of all the moneys and securities of the
corporation. He shall cause to be entered in books of the corporation to be
kept for that purpose full and accurate accounts of all moneys received by
him and paid by him on account of the corporation. He shall make and sign
such reports, statements and instruments as may be required of him by the
Board of Directors or by the laws of the United States or of any state,
country or other jurisdiction in which the corporation transacts business,
and shall perform such other duties as usually pertain to his office or as
are properly required of him by the Board of Directors.

The Assistant Treasurers may, in the absence or disability of the
Treasurer, or at his request or the request of the President, perform the
duties and exercise the powers of the Treasurer, and shall perform such other
duties as the Board of Directors shall prescribe.

SECTION 10. - OTHER OFFICERS AND AGENTS. The Board of Directors
may appoint such other officers and agents as it may deem advisable, who
shall hold their office for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors.

SECTION 11. - OFFICERS HOLDING TWO OR MORE OFFICES. Any two or
more offices may be held by the same person but no officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument be required by law or otherwise to be executed or verified by two
or more officers.

SECTION 12. - DUTIES OF OFFICERS MAY BE DELEGATED. In case of the
absence or disability of any officer of the corporation, or in case of a
vacancy in any office or for any other reason that the Board of Directors may
deem sufficient, the Board of Directors, except as otherwise provided by law,
may temporarily delegate the powers or duties of any officer to any other
officer or to any director.

SECTION 13. - COMPENSATION. The compensation of all officers shall
be determined by the Board of Directors. The compensation of all other
employees shall be fixed by the Chief Executive Officer within such limits
as may be prescribed by the Board of Directors.
SECTION 14. - SECURITY. The corporation may secure the fidelity of
any or all of its officers or agents by bond or otherwise, as may be required
from time to time by the Board of Directors.

ARTICLE IV

INDEMNIFICATION OF OFFICERS AND DIRECTORS

SECTION 1. - RIGHT OF INDEMNIFICATION. Every person now or
hereafter serving as a director or officer of the corporation and every such
director or officer serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall be indemnified by the corporation
in accordance with and to the fullest extent permitted by law for the defense
of, or in connection with, any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative.

SECTION 2. - EXPENSES. Expenses incurred by an officer or director
in defending a civil or criminal action, suit or proceeding may be paid by
the corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors in the specific case upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the corporation as authorized in this Article
IV.

SECTION 3. - OTHER RIGHTS OF INDEMNIFICATION. The right of
indemnification herein provided shall not be deemed exclusive of any other
rights to which any such director or officer may now or hereafter be entitled
under any by-law, agreement, vote of stockholders, or disinterested directors
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director or officer and shall inure to the benefit of
the heirs, executors and administrators of such person.

ARTICLE V

SHARES AND THEIR TRANSFER

SECTION 1. - CERTIFICATES. Every stockholder of the corporation
shall be entitled to a certificate or certificates, to be in such form as the
Board of Directors shall prescribe, certifying the number of shares of the
stock of the corporation owned by him.

SECTION 2. - ISSUANCE OF CERTIFICATES. Certificates representing
shares of stock of the corporation shall be numbered in the order in which
they are issued and shall be signed by the Chief Executive Officer, the
President or any Vice President and the Treasurer or an Assistant Treasurer
or the Secretary or an Assistant Secretary of the corporation. Any of or all
the signatures on the certificate may be a facsimile. In case any officer of
the corporation who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer before such
certificate is issued, such certificate may nevertheless be issued by the
corporation with the same effect as if he were such officer at the date of
issue.

SECTION 3. - MORE THAN ONE CLASS OF STOCK. If the corporation
shall be authorized to issue more than one class of stock or more than one
series of any class, the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the
face or back of the certificate which the corporation shall issue to
represent such class or series of stock, provided that, except for
restrictions on transfer of stock (as provided in section 202 of the General
Corporation Law of Delaware), in lieu of the foregoing requirements, there
may be set forth on the face or back of the certificate which the corporation
shall issue to represent such class or series of stock, a statement that the
corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional
or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or
rights.

SECTION 4. - STOCK LEDGER. A record shall be kept by the
Secretary, by the transfer agent, or by any other officer, employee or agent
designated by the Board of Directors, of the name of the individual, firm or
corporation holding the shares of the stock of the corporation represented by
each certificate, the number of shares represented by such certificate, the
date of issue thereof and, in case of cancellation, the date of cancellation
thereof.

SECTION 5. - TRANSFER OF SHARES. Upon surrender to the corporation
or the transfer agent of the corporation of a certificate representing shares
of the stock of the corporation duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its
books. Whenever any transfer of shares shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer if, when the certificates are presented to the corporation for
transfer, both the transferor and transferee request the corporation to do
so.

SECTION 6. - REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares of the stock of the corporation to receive dividends,
and to vote as such owner, and to hold liable for call and assessments a
person registered on its books as the owner of such shares, and shall not be
bound to recognize any equitable or other claim to or interest in such shares
on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State
of Delaware.

SECTION 7. - REGULATIONS. The Board of Directors may make such
rules and regulations as it may deem expedient, not inconsistent with law,
the certificate of incorporation or these by-laws, concerning the issue,
transfer and registration of certificates representing shares of the stock of
the corporation. It may appoint, or authorize any officer or officers to
appoint, one or more transfer clerks or one or more transfer agents or one or
more registrars, and may require all such certificates to bear the signature
or signatures of any of them.

SECTION 8. - LOST, STOLEN AND DESTROYED CERTIFICATES. The Board of
Directors may in its discretion cause a new certificate representing shares
of the stock of the corporation to be issued in place of any certificate
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon satisfactory proof of that fact by the person claiming the
certificate to have been lost, stolen or destroyed; but the Board of
Directors may in its discretion refuse to issue a new certificate except upon
the order of a court having jurisdiction in such matters. When authorizing
such issue of a new certificate, the Board of Directors may, in its
discretion, and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.

SECTION 9. - FIXING OF RECORD DATE. In order that the corporation
may determine the stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or exchange of
shares of the stock of the corporation, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) or less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other
action. Only such stockholders as shall be stockholders of record on the
date so fixed shall be entitled to notice of and to vote at such meeting of
stockholders and any adjournment thereof, or to receive payment of such
dividend or such other distribution or such allotment of rights, or to
exercise such rights in respect of any such change, conversion or exchange of
shares of the stock of the corporation, or to participate in such other
action, or to give such consent, as the case may be, notwithstanding any
transfer of any shares of the stock of the corporation on the books of the
corporation after any such record date so fixed. A determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
adjourned meeting.

If no record date is fixed by the Board of Directors, (a) the
record date for determining stockholders entitled to notice of or to vote at
any meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held, (b) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed, and (c) the record date for determining
stockholders for any other purpose shall be at the close of business on the
day on which the Board of Directors adopts the resolution relating thereto.

ARTICLE VI

FINANCES

SECTION 1. - CORPORATE FUNDS. The funds of the corporation shall
be deposited in its name with such banks, trust companies or other
depositories as the Board of Directors may from time to time designate. All
checks, notes, drafts and other negotiable instruments of the corporation
shall be signed by such officer or officers, employee or employees, agent or
agents as the Board of Directors may from time to time designate. No
officers, employees or agents of the corporation, alone or with others, shall
have power to make any checks, notes, drafts or other negotiable instruments
in the name of the corporation or to bind the corporation thereby, except as
provided in this Section 1.

SECTION 2. - FISCAL YEAR. The fiscal year of the corporation shall
be the calendar year unless otherwise provided by the Board of Directors.

SECTION 3. - DIVIDENDS; RESERVES. Dividends upon the stock of the
corporation, payable out of funds legally available therefor, may be declared
by the Board of Directors at any regular or special meeting. Dividends may
be paid in cash, in property, or in shares of the stock of the corporation.
Before declaring any dividend, the Board of Directors may set aside out of
any funds of the corporation legally available for dividends such sum or sums
as the Board of Directors from time to time in its discretion shall deem
proper as a reserve for working capital, for contingencies, for equalizing
dividends or for such other purpose or purposes as the Board of Directors
shall deem conducive to the interests of the corporation, and the Board of
Directors may modify or abolish any such reserve in the manner in which it
was created.

SECTION 4. - LOANS TO EMPLOYEES AND OFFICERS. The corporation may
lend money to, or guarantee any obligation of, or otherwise assist any
officer or other employees of the corporation, including any officer or
employee who is also a director of the corporation, whenever in the judgment
of the directors, such loan, guaranty or assistance may reasonably be
expected to benefit the corporation. The loan, guaranty or other assistance
may be with or without interest, and may be unsecured, or secured in such
manner as the Board of Directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation.

ARTICLE VII

CORPORATE SEAL

SECTION 1. - FORM OF SEAL. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its incorporation and the
words "Corporate Seal" and "Delaware," and shall otherwise be in such form as
shall be prescribed from time to time by the Board of Directors.

SECTION 2. - USE OF SEAL. The corporate seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced in
any manner.

ARTICLE VIII

AMENDMENTS

SECTION 1. - PROCEDURE FOR AMENDING BY-LAWS. By-laws of the
Corporation may be adopted, amended or repealed (a) at any meeting of the
stockholders, notice of which shall have referred to the proposed action, by
the affirmative vote by the stockholders of record of a majority of the
outstanding votes entitled to be voted in respect thereof, or (b) at any
meeting of the Board of Directors, notice of which shall have referred to the
proposed action, by a vote of a majority of the entire Board of Directors.

ARTICLE IX

CONSTRUCTION OF THE BY-LAWS WITH REFERENCE TO PROVISIONS OF LAW

SECTION 1. - DEFINITIONS. Unless otherwise defined in these by-
laws, or unless the context otherwise requires, the terms used herein shall
have the same meaning, if any described to them in the Delaware General
Corporation Law, as amended from time to time.

SECTION 2. - BY-LAWS PROVISIONS ADDITIONAL AND SUPPLEMENTAL TO
PROVISIONS OF LAW. All restrictions, limitations, requirements and other
provisions of these by-laws shall be construed, insofar as possible, as
supplemental and additional to all provisions of law applicable to the
subject matter thereof and shall be fully complied with in addition to the
said provisions of law unless such compliance shall be illegal.

SECTION 3. - BY-LAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH
PROVISIONS OF LAW. Any article, section, subsection, subdivision, sentence,
clause, or phrase of these by-laws which upon being construed in the manner
provided in section 2 of this Article IX, shall be contrary to or
inconsistent with any applicable provision of law, shall not apply so long as
said provisions of law shall remain in effect, but such result shall not
affect the validity or applicability of any other portions of these by-laws,
it being hereby declared that these by-laws would have been adopted and each
article, section, subsection, subdivision, sentence, clause or phrase
thereof, irrespective of the fact that any one or more articles, sections,
subsections, subdivisions, sentences, clauses or phrases is or are illegal.

SECTION 4. - VARIATION OF PRONOUNS. All pronouns and any
variations thereof shall be deemed to refer to masculine, feminine or neuter
as the identity of the person or persons may require.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE 12 MONTH PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1996.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> (25,180)
<SECURITIES> 0
<RECEIVABLES> 5,857,606
<ALLOWANCES> 125,250
<INVENTORY> 7,642,205
<CURRENT-ASSETS> 13,892,737
<PP&E> 5,430,230
<DEPRECIATION> 2,706,405
<TOTAL-ASSETS> 17,013,085
<CURRENT-LIABILITIES> 14,374,311
<BONDS> 0
0
100
<COMMON> 3,367
<OTHER-SE> 1,713,567
<TOTAL-LIABILITY-AND-EQUITY> 17,013,085
<SALES> 28,878,016
<TOTAL-REVENUES> 28,878,016
<CGS> 19,518,540
<TOTAL-COSTS> 30,920,303
<OTHER-EXPENSES> 230,391
<LOSS-PROVISION> 125,250
<INTEREST-EXPENSE> 547,743
<INCOME-PRETAX> (2,945,671)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,945,671)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,945,671)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)

</TABLE>