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Article by DailyStocks_admin    (01-06-09 09:36 AM)

Filed with the SEC from Dec 26 to Dec 31:

Telular (WRLS)
Simcoe Partners has filed proxy materials to elect two directors, who would urge Telular to "aggressively" repurchase shares and to consider paying an ongoing cash dividend. Simcoe favors "an extremely cautious approach to acquisition activity" and wants the company to explore strategic alternatives. Simcoe reported ownership of 950,000 shares (5.1%).

BUSINESS OVERVIEW

OVERVIEW
Telular Corporation (Telular or the Company) designs, develops and distributes products and services that utilize wireless networks to provide data and voice connectivity among people and machines. Telular’s product and service offerings take advantage of the pervasiveness and data transport capabilities of wireless networks in order to facilitate communications among people and machines. Oftentimes, the Company’s products and services replace the wireline network while providing the added flexibility of wireless connectivity.
Telular was established in 1986 when it acquired the intellectual property rights for its cellular interface concept and methodology. Historically, Telular provided Fixed Cellular Terminals (FCTs) and Fixed Cellular Phones (FCPs) to markets in North America and in developing countries around the world. Today, while Telular continues to develop FCTs, it is emphasizing the development of FCTs that work in conjunction with software systems to provide integrated event monitoring and reporting services for machine-to-machine (M2M) applications. M2M applications take advantage of wireless networks to improve process efficiency in areas such as supply chain management, security monitoring, meter reading, vehicle tracking and many other commercial and industrial situations.
COMPANY STRATEGY
Strategically, Telular is focused on M2M market segments in which the Company can provide a differentiated product and service offering using wireless networks to facilitate supply chain efficiencies. Telular invests in solutions that uniquely meet a customer’s need to utilize remote telemetry using technology similar to its market-leading TELGUARD security solution. In addition, Telular continues to sell FCT products that function on a standalone basis and enable end users to transmit voice, data and fax information over commercial wireless networks.
The most recent M2M application currently offered by the Company is tank level monitoring. Through its October 2008 acquisition of SupplyNet Communications, Inc., Telular added approximately 13,000 tanks to its subscription base for monitoring services. The Telular tank monitoring solution, TankLink, combines a specially designed cellular communicator, wireless data services and a web-based application into a single offering which allows end-users to remotely monitor the level of product contained in each tank vessel. This information commonly feeds a vendor managed inventory (VMI) program that improves the efficiency and timeliness of product delivery while optimizing the amount of product held by customers at any given time. Most of the Company’s existing tank monitoring systems are installed in the fuels and lubricants space. Additional market segments served include industrial chemicals, food additives, and waste water treatment.
The Company’s TELGUARD products and service generate a majority of Telular’s revenue. TELGUARD service combines a specialized terminal unit with Telular’s message center to provide real-time transport of alarm signals from residential and commercial locations to an alarm company’s central monitoring station. Alarm monitoring companies purchase the products and cellular service from Telular and resell them to end users in order to provide a wireless backup for the conveyance of alarm signals, which are typically sent over traditional wireline phone networks. Increasingly, the Company’s TELGUARD solution is being used as the primary means for the transmission of alarm signals as end users eliminate traditional phone lines in favor of voice-over-IP (VoIP) over broadband and cellular telephones.
Telular’s standalone FCT business targets both commercial and residential consumers, who use FCTs for voice, fax, and Internet access over the wireless networks. Distribution outside the United States is typically through direct sales to large wireless carriers who certify the FCT equipment for use on their networks and then sell and distribute FCT products directly to end users through their existing distribution channels for wireless handsets. At its most basic level, an FCT allows users to simultaneously plug in a standard telephone, fax machine and a computer data line, which the FCT then makes functional over the wireless phone network. In the United States, FCTs are most often used for remote or mobile applications in which cellular service is available but broadband Internet connectivity is not. For example, FCTs are used by public safety agencies to provide connectivity for mobile command centers. In Latin America, Telular FCTs are used more extensively due to the fact that traditional wireline telephone and broadband networks were not built as extensively as in the United States, but cellular systems have been widely implemented. One key application for FCTs in Latin America is for Least Cost Routing (LCR). LCR is the process of routing calls according to the most favorable tariff rates. An FCT enables a private branch exchange (PBX) to consider cellular rates while computing the lowest possible tariff for an outbound phone call.

Telular operates as a single-segment enterprise for financial reporting purposes. For financial information about geographic areas, see “Note 14. Major Customers” and “Note 15. Export Sales” to the consolidated financial statements of Telular set forth in Item 8 of this Form 10-K.
GEOGRAPHICAL MARKETS
Currently, the vast majority of M2M tank applications served by Telular are located within the United States. These installations span the entire country and the Company expects to expand over time into other countries, particularly in Latin America where it has strong relationships with the leading wireless carriers.
TELGUARD products and service are currently sold only in the United States, although the Company plans to expand service to other North American countries during fiscal 2009.
The Company currently focuses its FCT sales efforts in North and South America, but also has sales in Africa, Asia and the Middle East.
TECHNOLOGY
Integral to our success in the FCT space is our experience in creating intelligent interfaces enabling ordinary telecommunications equipment to operate on wireless phone networks. Bridging the gap between wireline customer premises equipment and cellular networks, the intelligent interface provides Telular’s products with the “look and feel” of the wireline network, providing critical communications and security needs in a variety of environments. The lack of dial tone on the cellular network is a key difference from the wireline network. The generation of a standard dial tone, along with off-hook signal detection and other common wireline signals, are key benefits provided by our products.
RESEARCH AND DEVELOPMENT AND PRODUCT LINES
Telular has built a core competency in developing products which enable devices such as standard telephones, fax machines and computers to utilize both GSM-based and CDMA-based wireless phone networks. In addition, our M2M and TELGUARD solutions operate in conjunction with real-time, transaction processing servers which receive data, transform the data, and immediately forward the result to our customers. The M2M tank level monitoring and TELGUARD security solutions are a combination of hardware product design along with software system design. In both cases, the software system is capable of high-volume, real-time transaction processing of mission critical data (security alarms and tank fill levels). Such integrated hardware and software system solutions will be the focus of our research and development activities going forward and will be further applied to the event monitoring space.
Because our products operate on a coordinated basis with wireless phone networks, Telular works closely with major carriers to certify our products on their networks. In many cases, the carriers themselves are our customers and they sell and distribute our products to end users upon certification. Based on this need to work closely with the major wireless phone carriers, Telular has developed strong working relationships with these carriers as customers and solution partners.
Research and development activities sponsored by the Company for the years ended September 30, 2008, 2007, and 2006, were $4,448, $6,076, and $2,636, respectively, and are included in engineering and development expense. There are no customer sponsored research and development activities included in any of those years.

The following details areas of product delivery and research during fiscal 2008 and anticipated in fiscal 2009.
M2M SOLUTIONS — During 2008, Telular developed an integrated, M2M event monitoring system consisting of two new hardware products as well as a message processing engine, database and customer portal. Pending market development activities in early 2009, the Company expects to further refine this base-level M2M system solution for additional vertical markets. The October 1, 2008, acquisition of SupplyNet Communications, Inc. brought the Company a successful wireless communicator product line for tank level monitoring. Enhancements to this hardware and its supporting message center will be made during 2009.
TELGUARD — Telular’s engineering team continues to update the TELGUARD digital product portfolio by addressing the growing demand and technology changes in the electronics security market. In fiscal 2008, Telular re-engineered its message processing system, including the upgrade of all hardware servers on which the system operates. In addition, the Company introduced TELGUARD DIGITAL TG-11 which integrates more directly with key security panels and should improve the Company’s competitive position with regard to these panels from both a price and functionality perspective. In fiscal 2009, Telular will further enhance its Telguard services by improving the Telguard online portal and introducing other system enhancements.
TERMINALS — In fiscal 2008, we launched a new FCT called SX7T, which include 3G radio technologies (HSDPA and EVDO). These radio technologies take advantage of the cellular network’s evolution to those standards that offer high speed data for improved data networking and faster Internet access. In addition, the new SX6T GSM terminal for 2G networks was introduced in late 2008 and is undergoing certification testing at numerous potential carrier customers. The Company currently expects to focus its 2009 Terminals development activity on further enhancements to its 2G terminal product line.
SALES, MARKETING SERVICE AND SUPPORT
Domestic Sales
In the United States, Telular markets both its TELGUARD and other FCT products through an Atlanta-based sales group. TELGUARD customers are security system distributors and security service dealers that the Company sells to on a direct basis. The Company utilizes a significant number of manufacturer’s representatives to manage approximately 3,500 customer relationships for the Telguard products. Other FCT customers are the large cellular carriers and dealers and Value Added Resellers (VARs) dedicated to niche market applications that the Company sells to on a direct basis. In fiscal 2008, the Company’s domestic revenues were $56,786, or 86% of total revenues.
International Sales
Our international sales team is based in Miami and covers key markets such as Latin America. These markets include significant cellular carrier customers in countries such as Mexico and Venezuela. In addition, Telular has built strong relationships with distributors and VARs in a number of these and other markets. In fiscal 2008, the Company’s international revenues were $9,368, or 14% of total revenues.
Service and Support
Telular believes that providing customers with comprehensive product service and support is critical to maintaining a competitive position in the mobile telecommunications equipment industry. Telular offers warranty and repair service for its products through three primary methods: (1) advance replacement kits shipped with orders, (2) in-house service and technical support, and (3) authorized third-party service centers in various regions of the world.
MAJOR CUSTOMERS
In fiscal 2008, the Company derived 31% of its total revenues from ADT, a major U.S. securities systems provider, and 13% of its total revenue from ADI, a large U.S. distributor of security systems and related products.
MANUFACTURING
Telular’s products are manufactured by contract manufacturers in China and the United States who make our products and test them with proprietary testing equipment that Telular provides. We also write manufacturing procedures and conduct comprehensive quality control and quality assurance surveillance during the manufacturing process. Quality programs are a high priority at Telular and our contract manufacturers are ISO 9001:2000 certified. Telular also contracts with a variety of suppliers to buy several critical components of its products, including certain cellular transceivers.

CEO BACKGROUND

John E. Berndt, Chairman of the Board, age 68, has served as a director of the Company since December 1996. Mr. Berndt served as interim President and CEO of the Company during the period February 21, 2005 to July 31, 2005. Mr. Berndt retired from Sprint Corporation on September 30, 2000. From 1998 to September 2000, Mr. Berndt was President of Sprint International, an operating unit of Sprint Corporation. From 1997 to 1998, Mr. Berndt was President of Fluor Daniel Telecom, an operating company of the Fluor Corporation. Mr. Berndt was President of AT&T New Business Development/Multimedia Ventures from 1993 until the spin-off of Lucent Technologies from AT&T occurred in 1996. Mr. Berndt was employed by AT&T beginning in 1963. Mr. Berndt is a trustee of the Thunderbird School of Global Management and a director of the University of Wisconsin Foundation.
Lawrence S. Barker, age 56, has served as a director of the Company since November 2004. Mr. Barker is President and CEO of Aptela Corporation. From July 2006 until January 2007, Mr. Barker was President and CEO of Argent Networks Limited. Prior to that, Mr. Barker was President and CEO of Visual Networks, Inc. from 2003 to 2006. From 1997 to 2003, Mr. Barker was President, Software Systems Division for ADC Telecommunications. From 1996 to 1997, Mr. Barker was President for Stanford Associates Inc. From 1994 to 1996, Mr. Barker was President and CEO, Intelicom Division of Computer Sciences Corporation. Prior to that, Mr. Barker held a variety of positions with Computer Sciences Corporation and for other companies in the telecommunications industry. Mr. Barker is also a director of Interlink Electronics Corporation.
Joseph A. Beatty, age 45, has served as President and CEO of the Company since January 1, 2008. Prior to that, he was Executive Vice President since April 2007 and Chief Financial Officer and Secretary since May 2007. From June 2003 until June 2006 he was President and Chief Executive Officer of Concourse Communications Group, a privately-held developer and operator of distributed antenna systems and airport Wi-Fi networks. From March 2001 until May 2003, Mr. Beatty worked with Cardinal Growth L.P. on various acquisition projects and also acted as an Interim CFO for Novaxess B.V. From November 1996 until February 2001, Mr. Beatty was a co-founder and the CFO of Focal Communications Corporation, a competitive local exchange carrier. Earlier in his career, Mr. Beatty was a securities analyst and also held numerous technical management positions for a local exchange carrier.
Betsy Bernard, age 53, has served as director of the Company since July 30, 2007. Ms. Bernard retired from AT&T Corporation in 2004 and since then has served on the boards of URS, UTC, and is currently serving on the board of Principal Financial Group and BearingPoint. From October 2002 to January 2004, Ms. Bernard served as the President of AT&T Corporation. From April 2001 to October 2002, Ms. Bernard led the 12,000 employees of AT&T Consumer. Prior to joining AT&T, Ms. Bernard held senior executive positions with Qwest Communications, US WEST and Avirnex Communications Group.
Brian J. Clucas, age 50, has served as director since October 2003. Mr. Clucas is Vice President, Audit Services for Illinois Tool Works Inc., a position he has held since 2002. From 1994 to 2002, Mr. Clucas was an Audit & Business Advisory Partner for Arthur Andersen LLP. Prior to that, Mr. Clucas held a variety of positions with Arthur Andersen LLP for the preceding 14 years.
Larry J. Ford, age 67, has served as a director of the Company since March 1994. Mr. Ford retired from ADC Telecommunications Inc. in July 2002. From October 1999 to July 2002, Mr. Ford was Senior Vice President and President of ADC’s Integrated Solutions Group. Mr. Ford was previously President and Chief Executive Officer of Information Advantage from April 1995 to August 1999. Prior to that time, Mr. Ford was employed by Systems Software Associates, Inc. as a Vice-Chairman from November 1994 to March 1995, and as the Chairman, Chief Executive Officer and President from August 1991 to October 1994. Prior to his service with Systems Software Associates, Inc., Mr. Ford worked for IBM for 28 years, his most recent position being Vice President of Information and Telecommunications Systems.

M. Brian McCarthy, age 56, has served as a director since July 30, 2007. He is presently the CEO of Trax Technologies, Inc. From March 2006 to July 2008, Mr. McCarthy was Executive Chairman of 180 Connect Inc. Before that, he served as Executive Vice President of Technology and Business Strategy at General Electric and as President Enterprise Systems Division of GE. Mr. McCarthy also served as Chief Executive Officer, Americas at Interlogix until the company was acquired by General Electric in 2002. Prior to Interlogix, Mr. McCarthy was Senior Executive Vice President for ADT Security Systems, the world leader in commercial and residential security monitoring, where for over 15 years he held progressively senior positions including Senior Vice President of Marketing and Chief Strategy Officer. Mr. McCarthy is also a director of Trax Tech and uControl.

MANAGEMENT DISCUSSION FROM LATEST 10K

INTRODUCTION
Telular Corporation (Telular or the Company) designs, develops, and distributes products and services that utilize wireless networks to provide data and voice connectivity among people and machines. Telular’s product and service offerings take advantage of the pervasiveness and data transport capabilities of wireless phone networks in order to replace functionality historically provided by wireline communications networks. Bridging the gap between traditional, wireline equipment and wireless phone networks, the Company’s products and services replace the wireline network while providing the added flexibility and security of wireless connectivity.

The Company generates most of its revenue by designing, producing and selling products and through the delivery of machine-to-machine (M2M) and event monitoring services, such as its TELGUARD service, which can be included with certain of the Company’s terminal products. In addition, the Company distributes its standalone Fixed Cellular Terminal (FCT) products in Latin America and the United States. Telular recognizes revenue when its products ship from various manufacturing locations to customers and when services are performed. Although the Company has a wide base of customers in the Western Hemisphere, much of its revenue is generated from a small number of major customers and via large contracts, the timing of which is often unpredictable.
The Company’s operating expense levels are based in large part on expectations of future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and the Company’s operating results for that quarter, and potentially for future quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in Cautionary Statements that are set forth in Exhibit 99.
The market for the Company’s products is primarily in North and South America and consists of a number of vertical applications ranging from wireless residential and commercial alarm systems addressed by TELGUARD to Internet access provided by PHONECELL FCTs. The FCT market is addressed primarily through indirect channels consisting of distributors, representatives and agents along with in-house sales and customer support teams. A direct sales model is utilized for certain large customers.
During June 2008, Telular abandoned its Fixed Cellular Phone (FCP) segment after unsuccessfully marketing this unit for sale. Many of the segment’s assets were parts and finished goods inventory which were sold prior to abandonment of the segment on June 30, 2008. Currently, Telular is collecting certain receivables owed as a result of FCP product sales during 2008.
The Company believes that its future success depends on its ability to continue to meet customers’ needs through product innovation, including the creation of event monitoring services that can be sold with products. Research and development activities sponsored by the Company for the years ended September 30, 2008, 2007 and 2006 were $4,448, $6,076 and $2,636, respectively.
Telular’s engineering team continues to develop M2M hardware products and software systems and to expand the TELGUARD digital product portfolio by addressing the growing demand and technology changes in the electronics security market. In fiscal 2008, the Company has designed and developed the TELGUARD DIGITAL TG-11 model for certain vendor panels in the security industry. In addition, Telular completed development of the SX7T terminal, which will carry voice, data, and fax services over 3G wireless networks. The Company is also devoting resources in marketing and engineering to research, specify and develop products and services for additional event monitoring applications outside of the security industry.
Fabrication of Telular’s products is accomplished through contract manufacturing. Contract manufacturers in China and the United States make and test all hardware products.
The Fixed Cellular industry consists of domestic and international equipment companies, including Ericsson Radio Systems AB, Huawei Technologies Co., Ltd., LG Electronics, ZTE Corporation, Axesstel, Inc., Honeywell International Inc., Tyco International Ltd. and Numerex Corporation.
Telular has granted a license for its patents to Ericsson Radio Systems AB and currently faces competition for FCT sales from Ericsson.
With respect to its interface technology, the Company currently has 25 issued patents and 1 pending patent applications in the United States, as well as 4 issued foreign patents. The Company has successfully defended some of its patents in court.

RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
Fiscal Year 2008 Compared to Fiscal Year 2007
Revenues and Costs of Sales

Revenues
Total product revenues decreased 20% in fiscal 2008 due to decreased sales of our Telguard products. Our dealers and distributors increased their inventory during the fourth quarter of fiscal 2007 and the first two quarters of fiscal year 2008 anticipating a stronger demand to convert from analog to digital. As that demand waned and the housing market continued to weaken, our customers reduced their purchases during the last half of fiscal 2008. Terminal product sales increased primarily due to sales increases in the domestic market.
The increase in service revenues is a result of the increase in the activation of monitoring services related to additional Telguard unit sales in the fourth quarter of fiscal 2007 and the first six months of fiscal 2008. Activations, which are dependent on Telguard unit installations, will lag behind the sales of those units.
Cost of Sales
Total cost of sales decreased 16% in fiscal 2008. This was due to both a decrease in the volume of sales and to decreased cost of manufacturing products and delivering services.
Product cost of sales as a percentage of revenues was 69% for fiscal 2008 as compared to 71% for fiscal 2007. This 2% decrease was attributed to decreased manufacturing costs.
Service cost of sales as a percentage of revenue decreased from 53% in fiscal 2007 to 49% in fiscal 2008. This was primarily due to the lower cost of providing digital services as a result of the transition from analog services.

Engineering and Development
The decrease of 25% in engineering and development costs was primarily due to a reduction in payroll related expenses of $1,578, a reduction of $144 in facility costs as a result of moving the engineering function from New York to Atlanta, and a reduction in prototype and supplies costs of $261, partially offset by an increase of $224 in recruiting cost to replace engineers who did not move to Atlanta. Payroll related costs decreased in fiscal 2008 because of the elimination of one-time expenses in fiscal 2007 related to costs associated with a reduction in workforce of $661 and savings from reduced engineering staff of $917.
Selling and Marketing
Selling and marketing costs increased 2% in fiscal 2008 primarily due to increased payroll related expenses of $780 from increased staff in marketing, sales and product support, a $158 increase in facility costs as a result of moving to a new location in Atlanta and an increase of $172 in targeted co-op marketing expenses related to the Telguard products, partially offset by a decrease in external commissions of $980 related to reduced sales volumes.
General and Administrative (G&A)
G&A costs increased 19% in fiscal 2008 primarily due to increased legal and professional fees of $538, increased payroll related costs of $450 as a result of severance paid to terminated officers and non-cash compensation related to stock option modifications, an $89 increase in bank fees and insurance costs, partially offset by a decrease in facility costs as a result of moving the corporate headquarters to Chicago.
Other Income
Other income for fiscal 2008 increased by $283 compared to fiscal 2007. This increase was primarily due to a $139 increase in interest income as a result of increased cash balances throughout the year, a decrease in interest expense of $105 as a result of reducing the Company’s borrowings to $0 and a $39 decrease in various other miscellaneous expense items during the year.
Income Taxes
The Company recorded no income tax benefit for both fiscal years 2008 and 2007 due to the uncertainty of the realizability of its deferred tax assets.
Discontinued Operations
The loss from discontinued operations of $7,480 for the fiscal 2008 decreased $91 from a loss of $7,571 for fiscal 2007. Sales decreased significantly as the Company exited the FCP market and sold its remaining inventory. During the third quarter of fiscal 2008, the Company determined that it would be unable to find a buyer for the FCP business unit. As a result, the Company made a strategic decision to abandon the FCP business unit effective June 30, 2008. The majority of the assets of the business have been disposed of. The remaining assets consist of trade accounts receivable of $4,583, inventory held for warranty purposes, which has been fully reserved for, and $126 of test equipment which the Company intends to sell at auction. The following table summarizes the activity of the discontinued operations for the fiscal years 2008 and 2007. Also, see Note 3 of the Notes to Consolidated Financial Statements.

Net Loss
The Company recorded a net loss of $1,379 or $0.07 per share for fiscal 2008 compared to a net loss of $1,946 or $0.11 per share for fiscal 2007. The decrease in net loss was primarily due to the result of increased margins due to improved product mix and a reduction of manufacturing cost and containment of operational costs.
Fiscal Year 2007 Compared to Fiscal Year 2006
Revenues and Costs of Sales

Revenues
Total product revenues increased 65% in fiscal year 2007 as compared to fiscal year 2006, reflecting increases in sales of both Telguard and terminal products. The increase in sales of Telguard products is due to increased market penetration and an increase in the number of customers switching from analog security devices to digital. The increase in terminal product sales reflects increased sales volume in the Central American/Latin American (CALA) and United States markets.
The increase in service revenue is a result of the increase in the activation of monitoring services related to additional Telguard unit sales.
Cost of Sales
The increase in cost of sales in fiscal year 2007 as compared fiscal year 2006 represents a combination of increased sales volume and a better product mix. As a percentage of revenues, cost of sales declined to 67% in fiscal 2007 from 70% in fiscal 2006, reflecting the increase in sales of the lower cost Telguard digital products.

Engineering and Development
The increase of 76% in engineering and development costs reflects increased expenditures related to the development of new products in both the Telguard and terminal product lines and to improvements in the technologies incorporated in existing product. Engineering and development expenses were 9% of total revenues in each fiscal year.
Selling and Marketing
Selling and marketing expenses increased 35% primarily due to increased salary expenses of $690 related to technical support and internal marketing personnel, increased commission expenses of $320, both for internal sales representatives and independent agents, as a result of increased product sales, increased co-op marketing expenses of $350, related specifically to products, increased professional fees related to product repairs of $205 and a $17 increase in various expenses. As a percentage of revenues, selling and marketing expenses declined to 8% in fiscal 2007 from 10% in fiscal 2006.
General and Administrative (G&A)
G&A expenses increased slightly in fiscal year 2007 as compared to fiscal year 2006. In 2007, the Company increased expenditures related to professional fees and realized savings from the elimination of manufacturing overhead, which was charged to G&A in fiscal 2006, as a result of cessation of manufacturing operations at the Company’s headquarters during fiscal 2006. Additionally, facility and phone expenses declined, year over year, following the move to the new corporate headquarters in February 2007. G&A expenses also declined as a percentage of revenue from 13% to 8%.
Other Income
Other income for fiscal year 2007 is comprised of interest income of $279 offset by interest expense of $107 and franchise taxes of $145. Other income decreased by $346 over fiscal year 2006 primarily due to a settlement of a 2001 insurance claim in fiscal year 2006.
Income Taxes
The Company recorded no income tax benefit for both fiscal years 2007 and 2006 due to the uncertainty of the realizability of its deferred tax assets.
Discontinued Operations
In fiscal 2007, the Company formulated a plan to sell the net assets of its FCP segment and exit the fixed cellular phone market. The loss from discontinued operations decreased in fiscal 2007 by $3,603, or 32%, primarily due to the reduction of operating expenses from $15,256 in fiscal year 2006 to $8,145 in fiscal year 2007. These reductions were offset by a reduction in sales margin of $3,508, as a result of reduced selling prices. Operating expenses decreased as a result of a decrease in engineering and development expenses of $2,899, a reduction in selling and marketing expenses of $2,670, and a reduction in amortization expense and goodwill impairment charges of $1,939, offset by an increase in other expenses of $397. The following table summarizes the activity of the discontinued operations for the fiscal years 2007 and 2006.

Net Loss
The Company recorded a net loss of $1,946 or $0.11 per share for fiscal 2007 compared to a net loss of $11,818 or $0.70 per share for fiscal 2006. The decrease in net loss is due primarily to the Company re-aligning its focus in fiscal 2007 on its terminals and Telguard products and services, which have a higher margin contribution than the discontinued phone products.
LIQUIDITY AND CAPITAL RESOURCES
Management regularly reviews the Company’s net working capital and available borrowings in addition to its cash and cash equivalent balance to determine if it has enough cash to operate the business. On September 30, 2008, the Company had cash and cash equivalents of $21,168 and net working capital of $36,009, compared to cash and cash equivalents of $10,254 and net working capital of $34,642 a year earlier. The Company can draw upon a Loan and Security Agreement with SVB Silicon Valley Bank (SVB) that provides an aggregate working capital line of credit up to $10,000. Management expects trade accounts receivable and inventory to turn into cash in short periods of time. As such, given the level of cash and cash equivalents, trade accounts receivable, inventory and available borrowings, management believes the Company has adequate resources to fund current and planned operations. The tables below discuss the liquidity components of continuing operations for fiscal years 2008 and 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Introduction
Telular Corporation (Telular or the Company) designs, develops, and distributes products and services that utilize wireless phone networks to provide data and voice connectivity among people and machines. Telular’s product and service offerings take advantage of the pervasiveness and data transport capabilities of wireless phone networks in order to replace functionality historically provided by wireline communications networks. Bridging the gap between traditional, wireline equipment and wireless phone networks, the Company’s products and services replace the wireline network while providing the added flexibility and security of wireless connectivity.
The Company generates most of its revenue by designing, producing and selling products and through the delivery of event monitoring services which can be included with certain of the Company’s terminal products. It recognizes revenue when its products ship from various manufacturing locations to customers and when services are performed. Although the Company has a broad base of customers worldwide, the majority of its revenue is generated from a small number of major customers and via large contracts, the timing of which is often unpredictable.
The Company’s operating expense levels are based in large part on expectations of future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and the Company’s operating results for that quarter, and potentially for future quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in Cautionary Statements that are set forth in Exhibit 99 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 which is hereby incorporated by reference.
The Fixed Cellular Terminal (FCT) market is primarily in North and South America and consists of a number of vertical applications ranging from wireless residential and commercial alarm systems addressed by TELGUARD to Internet access provided by PHONECELL FCTs. The FCT market is addressed primarily through indirect channels consisting of distributors, representatives and agents along with in house sales and customer support teams. A direct sales model is utilized for certain large customers.
During 2007, Telular discontinued its Fixed Cellular Phone (FCP) segment. The Company was unable to find a buyer for this business unit and has therefore, effective June 30, 2008, made the strategic decision to abandon operations in this segment. For financial information relating to Telular’s discontinued FCP segment, see “Note 3, Discontinued Operations” to the consolidated financial statements set forth in Item 1 of this Form 10-Q.
The Company believes that its future success depends on its ability to continue to meet customers’ needs through product innovation, including the creation of event monitoring services that can be sold with products. Telular’s engineering team continues to expand the TELGUARD digital product portfolio by addressing the growing demand and technology changes in the electronics security market. In the next several months, the Company will release the TELGUARD TG-11 model for specialized applications in the event monitoring industry. In addition, we are completing development of the SX6T terminal, which will carry voice, data, and fax services over wireless networks and represents an update to our SX5 model. The Company is also devoting resources in marketing and engineering to research, specify, and develop products and services for additional event monitoring applications outside of the security industry.
Fabrication of Telular’s products is accomplished through contract manufacturing. Contract manufacturers in China and the United States make and test all terminal products.

Results of Operations
Third quarter fiscal year 2008 compared to third quarter fiscal year 2007
Revenues and Cost of Sales

Revenues
Product revenues decreased 10% due to the decreased sales of our Telguard products. The Telguard products revenue decreased primarily as a result of lower customer demand. Our dealers and distributors increased their inventory during the fourth quarter of fiscal 2007 and the first two quarters of fiscal 2008 anticipating a stronger demand to convert from analog to digital. As that demand waned and the housing market continued to weaken, our customers reduced their purchases during the third quarter to bring their levels of inventory down. Terminal product revenues increased primarily from customers in the Central American/Latin American (CALA) region placing new orders and taking delivery on orders that were delayed in the first and second quarters of fiscal 2008.
Service revenues were flat, despite a higher number of active Telguard units, reflecting the reduction in average revenue per unit resulting from the deactivation of all analog units in February 2008. Activations, which are dependent on Telguard unit installations, will lag behind the sales of those units.
Cost of Sales
The decrease in cost of sales of 8% in the third quarter of fiscal 2008 when compared to the same period of fiscal 2007 reflects the lower sales volumes. Gross margin, as a percentage of sales, was 34% for the third quarters of both fiscal years.

Engineering and Development
The decrease of 14% was primarily due to decreased payroll expenses of $326, decreased facility expenses of $16 offset by increased expenses of $118 relating to consultants and project related and other expenses. The decreased payroll expenses resulted from a decrease in engineering personnel. The reduction of personnel was a result of a Company- wide personnel reduction and as a result of relocating the Engineering and Development function to Atlanta from New York. The increased consulting expenses were a result of retaining selected key engineering personnel to complete projects that were in progress.
Selling and Marketing
The increase in selling and marketing of 18% was primarily due to increases in salaries and related benefits of $200, mainly due to an expanded marketing department and increased stock based compensation, an increase in facility expenses of $96, primarily due to moving the Atlanta office to a larger space, offset by a reduction of $49 related to decreased external agent commission and trade show expenses.
General and Administrative (G&A)
The increase of 38% was primarily due to a $255 increase in bad debt expense, year over year, as a result of reducing the allowance for doubtful accounts in the third quarter of fiscal 2007, reflecting the stability of the Company’s customer payments, an increase in professional fees of $146, primarily legal fees and consulting expenses, increased payroll expenses related to stock option compensation resulting from stock options of $48, an increase of $47 for insurance and an increase of $29 related to bank and credit card processing fees, offset by decreased facility and telephone charges of $17 and other expenses of $20.
Other Income
Other income for the three months ended June 30, 2008 increased $120 to $168 from $48 for the same period of fiscal 2007. The increase was primarily due to an increase of $39 of interest income, a reduction of miscellaneous business taxes of $27, and the $54 of loss on the disposition of fixed assets in the third quarter of fiscal 2007, there was no such loss in the third quarter of fiscal 2008.

Income Taxes
The Company recorded no income tax provision for the three months ended June 30, 2008 because the Company expects to have a taxable loss for fiscal 2008. There was no tax benefit recorded for the three months ended June, 2007 due to the uncertainty of the realizability of its deferred taxes.
Discontinued Operations
The loss from discontinued operations of $4,737 for the three months ended June 30, 2008, increased $3,761 from a loss of $976 for the same period of fiscal 2007. The increase was due to the liquidation of existing inventory, at a negative gross margin, an impairment loss for equipment and intangible assets, and increased expenses as a result of finalizing the exit from the FCP segment.

Revenues
The 10% increase in product revenues for the first nine months of fiscal 2008 was due to strong sales of our terminal products, primarily in the CALA region. Telguard products had a slight increase over the same period of the prior year, bolstered primarily from strong sales in the first six months of fiscal 2008 resulting from the conversion of cellular networks to digital from analog. Telguard sales declined in the last quarter due to weakness in the housing market, as indicated above.
Service revenues reflect the increased activations resulting from increased Telguard sales, primarily during the first six months of fiscal 2008.
Cost of Sales
The cost of sales related to products increase of 6% reflects the strong sales volumes in the first six months of fiscal 2008 and reduced product costs. Product cost of sales as a percentage of product revenue was 69% for the first nine months of fiscal 2008, compared to 71% for the same period of fiscal 2007.
The cost to provide services increased 13%. Service cost of sales as a percentage of service revenue was 49% for the first nine months of fiscal 2008 compared to 54% for the same period of fiscal 2007. The factors contributing to the increased gross margin of services are an increased number of subscribers for the digital service, reduced costs to provide the digital service and a mix of lower average selling prices for services.

Engineering and Development
The decrease of $1,000, or 20%, was due to decreased payroll related expenses of $964, a decrease in facility expenses of $100 and an increase of other project related expenses of $64. The decreased payroll expenses resulted from a decrease in engineering personnel resulting from a Company-wide personnel reduction plan and the relocation of the Engineering and Development function to Atlanta from New York.
Selling and Marketing
The increase in selling and marketing of 8% was primarily due to increased salaries and benefits of $619 as a result of an expanded marketing department, increased commissions related to increased sales volumes and the reduced allocation of selling and marketing expenses to discontinued operations, $200 increase in facility expenses as a result of moving the Atlanta office to a larger space, offset by a reduction of $426 related to decreased external agent commission and trade show expenses.

General and Administrative (G&A)
The increase of 30% was primarily due to increased payroll expenses related to termination pay and stock option compensation expenses of $708, an increase in professional fees of $500, primarily legal and consulting fees, a $244 increase in bad debt expense, year over year, as a result of reducing the allowance for doubtful accounts in the third quarter of fiscal 2007, reflecting the stability of the Company’s customer payments, offset by decreased facility, telephone and other expenses of $172.
Other Income
Other income for the first nine months of fiscal 2008 increased $139 over the same period of fiscal 2007. The increase was due to an increase in interest income of $123, as a result of increased invested cash balances, a loss of $54 on the disposition of fixed assets in fiscal 2007, and a decrease of miscellaneous income of $38.
Income Taxes
The Company recorded no income tax provision for the nine months ended June 30, 2008 because the Company expects to have a taxable loss for fiscal 2008. There was no tax benefit recorded for the nine months ended June 30, 2007 due to the uncertainty of the realizability of its deferred taxes.
Discontinued Operations
The loss from discontinued operations of $7,480 for the nine months ended June 30, 2008, increased $2,069 from a loss of $5,411 for the same period of fiscal 2007. The increase was due to the liquidation of existing inventory, at a negative gross margin, an impairment loss for equipment and intangible assets, loss on the disposal of equipment and increased expenses as a result of finalizing the exit from the FCP segment.

Liquidity
Management regularly reviews net working capital in addition to cash to determine if it has enough cash to operate the business. On June 30, 2008, the Company had $19,209 of unrestricted cash and cash equivalents and a working capital surplus of $36,021.

Investing activities used $671 of cash for the first nine months of fiscal 2008 primarily from the purchase of equipment of $1,011 offset by a $340 decrease in restricted cash. This compares to cash used in investing activities of $396, from the purchase of property and equipment, for the same period of fiscal 2007.
The increase in cash provided from financing activities of $2,600 in the first nine months of fiscal 2008 is due to the proceeds from the exercise of stock options and warrants. Cash of $3,313 was used in financing activities in the first nine months of fiscal year 2007 primarily to pay down the working line of credit with Silicon Valley Bank offset by the proceeds from the exercise if stock options of $210.
Based upon its current operating plan, the Company believes its existing capital resources will enable it to maintain its current and planned operations. Cash requirements may vary and are difficult to predict given the volatility of demand in certain of the developing markets targeted by the Company. The Company is currently negotiating a new line of credit and expects to have one in place in the fourth quarter of fiscal 2008. The Company expects to maintain levels of cash reserves which are required to undertake major product development initiatives and to qualify for large sales opportunities.

Critical Accounting Policies
The Company’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following represent the critical accounting policies that currently affect the presentation of the Company’s financial condition and results of operations.
Reserve for Obsolescence
Significant management judgment is required to determine the reserve for obsolete or excess inventory. The Company currently considers inventory quantities greater than a one-year supply based on current year activity as well as any additional specifically identified inventory to be excess. The Company also provides for the total value of inventories that are determined to be obsolete based on criteria such as customer demand and changing technologies. At June 30, 2008, and September 30, 2007, the inventory reserves for continuing operations were $70 and $551, respectively. All remaining FCP inventory, $802, has been fully reserved for. Changes in strategic direction, such as discontinuance or expansion of product lines, changes in technology or changes in market conditions, could result in significant changes in required reserves.
Goodwill
The Company evaluates the fair value and recoverability of the goodwill whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable or at least annually. In determining fair value and recoverability, the Company makes projections regarding future cash flows. These projections are based on assumptions and estimates of growth rates for the related business segment, anticipated future economic conditions, and the assignment of discount rates relative to risk associated with companies in similar industries and estimates of terminal values. An impairment loss is assessed and recognized in operating earnings when the fair value of the asset is less than its carrying amount.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Currently, the Company has significant deferred tax assets principally related to the carryforward of net operating losses. Deferred tax assets are reviewed regularly for recoverability, and when necessary, valuation allowances are established based on historical tax losses, projected future taxable income, and expected timing of reversals of existing temporary differences. Valuation allowances have been provided for all deferred tax assets, as management makes assessments about the realizability of such deferred tax assets. Changes in the Company’s expectations could result in significant adjustments to the valuation allowances, which would significantly impact the Company’s results of operations.
Forward Looking Information
The Company includes certain estimates, projections and other forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934 in its reports and in other publicly available material. Statements regarding expectations, including performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forwarding-looking statements.
These statements reflect management’s judgments based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, management has made assumptions regarding, among other things, customer growth and retention, pricing, operating costs and the economic environment.

The words “estimate”, “project”, “intend”, “expect”, “believe”, “target” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout Management’s Discussion and Analysis. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. The Company is not obligated to and expressly disclaims any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. Other risks and uncertainties are discussed in Exhibit 99 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 which is hereby incorporated by reference.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes regarding the Company’s market risk position from the information provided in its Annual Report on From 10-K for the fiscal year ended September 30, 2007.
The Company frequently invests available cash and cash equivalents in short term instruments such as certificates of deposit, commercial paper and money market accounts. Although the rate of interest paid on such investments may fluctuate over time, each of the Company’s investments is made at a fixed interest rate over the duration of the investment. All of these investments have maturities of less than 90 days. The Company believes its exposure to market risk fluctuations for these investments is not material as of June 30, 2008.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable. To reduce its exposure to the credit risks of international customers, with the exception of customers with ownership interests by credit-worthy, primarily US-based companies, the Company generally receives payment prior to shipment, receives irrevocable letters of credit that are confirmed by U.S. banks, or purchases commercial credit insurance. In rare instances, the Company extends credit to foreign customers without the protection of prepayments, letters of credits or credit insurance. The Company performs ongoing credit evaluations and charges amounts to operations when they are determined to be uncollectible. Because of the steps taken above to mitigate credit risks of international customers, the Company believes that its exposure to credit risk is not material.
To mitigate the effects of currency fluctuations on the Company’s results of operations, the Company conducts all of its international transactions in U.S. dollars.
Item 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. As of the end of the period covered by this report an evaluation of the effectiveness of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective.
During the quarter ended June 30, 2008, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15, each promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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