United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2006.

OR

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

For the Transition Period from                      to                     .

Commission File Number 0-23212

Telular Corporation

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		36-3885440 (I.R.S. Employer Identification No.)

647 North Lakeview Parkway, Vernon Hills, Illinois 60061
(Address of principal executive offices and zip code)

(847) 247-9400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ                    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                    No þ

The number of shares outstanding of the Registrant’s common stock, par value $.01, as of January 20, 2006, the latest practicable date, was 18,085,817 shares.

 

 

TELULAR CORPORATION
Index

				Page No.
Part I — Financial Information
Item 1. Financial Statements:
		Consolidated Balance Sheets December 31, 2006 (unaudited) and September 30, 2006			3
		Consolidated Statements of Operations (unaudited) Three Months Ended December 31, 2006 and December 31, 2005			4
		Consolidated Statement of Stockholders’ Equity (unaudited) Three Months Ended December 31, 2006			5
		Consolidated Statements of Cash Flows (unaudited) Three Months Ended December 31, 2006 and December 31, 2005			6
		Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations					14
Item 3. Quantitative and Qualitative Disclosures about Market Risk					18
Item 4. Controls and Procedures					18
Part II — Other Information
Item 1. Legal Proceedings					18
Item 4. Submission of Matters to a Vote of Security Holders					19
Item 6. Exhibits					19
Signatures					20
Exhibit Index					21
Exhibit 31.1
Exhibit 31.2
Exhibit 32

TELULAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

		December 31,				September 30,
		2006				2006
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	7,834			$	6,799
Restricted cash			950				—
Trade accounts receivable, less allowance for doubtful			26,989				25,495
Inventories, net			10,563				12,405
Prepaid expenses and other current assets			628				1,887
Total current assets			46,964				46,586
Property and equipment, net			4,305				4,625
Other assets:
Goodwill			2,043				2,043
Other intangible assets,net			2,693				4,247
Other			427				436
Total other assets			5,163				6,726
Total assets		$	56,432			$	57,937
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	9,617			$	9,488
Accrued liabilities			6,395				6,324
Working capital line of credit			3,503				3,313
Total current liabilities			19,515				19,125
Stockholders’ equity:
Common stock; $.01 par value; 75,000,000 shares authorized; 18,085,817 and 18,066,411 outstanding at December 31, 2006 and September 30, 2006, respectively			181				181
Additional paid-in capital			169,103				168,852
Deficit			(132,367	)			(130,221	)
Total stockholders’ equity			36,917				38,812
Total liabilities and stockholders’ equity		$	56,432			$	57,937

See accompanying notes

TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)

		Three Months Ended December 31,
		2006				2005
Revenue
Net product sales		$	18,881			$	21,230
Service revenue			3,761				2,533
Total revenue			22,642				23,763
Cost of sales
Net product cost of sales			14,229				17,721
Service cost of sales			2,216				1,381
Total cost of sales			16,445				19,102
Gross margin			6,197				4,661
Engineering and development expenses			1,988				1,718
Selling and marketing expenses			2,852				2,986
General and administrative expenses			1,350				1,214
Amortization			1,554				150
Goodwill impairment			563				—
Total operating expenses			8,307				6,068
Loss from operations			(2,110	)			(1,407	)
Other income (expense), net			(36	)			149
Net loss		$	(2,146	)		$	(1,258	)
Net loss per common share:
Basic		$	(0.12	)		$	(0.08	)
Diluted		$	(0.12	)		$	(0.08	)
Weighted average number of common shares outstanding
Basic			18,069,472				16,120,406
Diluted			18,069,472				16,120,406

See accompanying notes

TELULAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)

						Additional								Total
		Common				Paid-In								Stockholders'
		Stock				Capital				Deficit				Equity
Balance at September 30, 2006		$	181			$	168,852			$	(130,221	)		$	38,812
Comprehensive income:
Net loss for period from October 1, 2006 to December 31, 2006			—				—				(2,146	)			(2,146	)
Stock based compensation expense			—				203				—				203
Stock options exercised			—				3				—				3
Stock awarded for directors’ compensation			—				45				—				45
Balance at December 31, 2006		$	181			$	169,103			$	(132,367	)		$	36,917

See accompanying notes

TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

		Three Months Ended December 31,
		2006				2005
Operating Activities:
Net loss		$	(2,146	)		$	(1,258	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			450				404
Amortization			1,554				150
Stock based compensation expense			210				212
Goodwill impairment			563				—
Common stock issued for services and compensation			—				9
Changes in assets and liabilities, net of the effects of acquisition:
Trade accounts receivable			(1,494	)			(9,930	)
Inventories			1,842				230
Prepaid expenses and other assets			1,306				(312	)
Trade accounts payable			129				2,787
Accrued liabilities			(492	)			1,540
Net cash provided by (used in) operating activities			1,922				(6,168	)
Investing Activities:
Acquisition of property and equipment			(130	)			(897	)
Proceeds from sale of marketable securities			—				7,425
Increase in restricted cash			(950	)			(2,000	)
Net cash provided by (used in) investing activities			(1,080	)			4,528
Financing Activities:
Proceeds from working capital line of credit			5,737				—
Payments on working capital line of credit			(5,547	)			—
Expenditures related to the issuance of common stock			—				(21	)
Proceeds from the exercise of stock options			3				41
Net cash provided by financing activities			193				20
Net increase (decrease) in cash and cash equivalents			1,035				(1,620	)
Cash and cash equivalents, beginning of period		$	6,799			$	10,023
Cash and cash equivalents, end of period		$	7,834			$	8,403

See accompanying notes

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(Unaudited, dollars in thousands, except share data)

1.		Basis of Presentation
		The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, the accompanying financial statements include all adjustments considered necessary for a fair presentation. Operating results for the three months ended December 31, 2006, are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2007. For additional information, please refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2006.
2.		Earnings Per Share
		Basic earnings per share of common stock is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is computed by dividing net earnings by the weighted average number of shares of common stock and common stock equivalents, which relate entirely to the assumed exercise of stock options and warrants. In the event of a net loss for the period, both basic and diluted earnings per share of common stock are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares of common stock outstanding for computation of basic and diluted earnings per share was 18,069,472 and 16,120,406, for the three months ended December 31, 2006 and 2005, respectively.
		The shares outstanding used to compute diluted earnings per share for the three months ended December 31, 2006 and 2005 excluded the following stock options and warrants because their inclusion in the computation would have been antidilutive:

		Three Months Ended December 31,
		2006				2005
Stock options			1,834,396				1,610,743
Warrants			3,020,848				2,699,992
			4,855,244				4,310,735

3.		Stock Based Compensation
		The Company has an officer and employee stock incentive plan and a non-employee director stock incentive plan. The costs of stock options granted is calculated based on their grant date fair value and recognized over the vesting period. The fair value of stock options granted and warrants issued is estimated at the grant date or issuance date using a Black-Scholes stock option valuation model. Key factors in determining the valuation of a grant under the Black-Scholes model are: a volatility factor of the expected market price of the Company’s common stock, a risk-free interest rate, a dividend yield on the Company’s common stock and the expected term of the option.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(Unaudited, dollars in thousands, except share data)

		During the three month periods ended December 31, 2006 and 2005, the Company recognized $203 and $212 of stock-based compensation expense, respectively.
		On October 31, 2006, the Company issued restricted stock awards to all outside directors. This restricted stock has trading limitations which will be removed on October 31, 2007. The total value of these awards were $45 based on the price of the Company’s common stock on the date of issuance. The cost will be taken as a charge to operating expenses on a pro-rata basis over the twelve month period. For the three months ended December 31, 2006, $7 of compensation expense was recognized. There was no similar grant made or expense recognized for the first three months of fiscal year 2006.
4.		Restricted Cash
		Beginning in February 2003, the Venezuelan government imposed restrictions on the acquisition and payment of foreign currencies. On December 14, 2006, the Company entered a Guaranty Agreement (the “Agreement”) with one of its customers located in Venezuela, Compania Anonima Nacional Telefonos De Venezuela (“CANTV”). Under the Agreement, CANTV recognized its debt to the Company of $950 related to an unpaid invoice and deposited this amount with the Company. The Agreement stipulates that the funds shall not be applied or used by the Company as total or partial payment of any unpaid invoices unless, within 365 days of the date of the Agreement, payment is not approved and made by the Venezuelan government. If such a payment on the unpaid invoice is made before December 14, 2007, the Company will return the funds. If payment is not made by December 14, 2007, the Company has the right to offset the unpaid invoice with the $950. These funds have been recorded as restricted cash by the Company
5.		Trade Accounts Receivable and Allowance for Doubtful Accounts
		Trade accounts receivable represents sales made to customers on credit. An allowance for doubtful accounts is maintained based upon estimated losses resulting from the inability of customers to make payments for goods and services. Trade accounts receivable, net of the allowance for doubtful accounts, as of December 31, 2006 and September 30, 2006 are as follows:

		December 31,				September 30,
		2006				2006
		(unaudited)
Trade receivables		$	27,282			$	25,839
Less: allowance for doubtful accounts			293				344
		$	26,989			$	25,495

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(Unaudited, dollars in thousands, except share data)

6.		Inventories
		The components of inventories consist of the following:

		December 31,				September 30,
		2006				2006
		(Unaudited)
Raw materials		$	4,636			$	6,335
Finished goods			7,545				7,845
			12,181				14,180
Less: reserve for obsolescence			(1,618	)			(1,775	)
		$	10,563			$	12,405

7.		Goodwill and Other Intangibles
		Goodwill as of December 31, 2006 and September 30, 2006 is as follows:

		Fixed Cellular				Fixed Cellular
		Terminals				Phones				Total
Balance at September 30, 2006		$	2,043			$	—			$	2,043
First quarter fiscal year 2007 activity:
Additional goodwill			—				563				563
Impairment of goodwill			—				(563	)			(563	)
Balance at December 31, 2006 (unaudited)		$	2,043			$	—			$	2,043

On May 8, 2006, the Company acquired substantially all of the assets and assumed certain liabilities relating to the fixed wireless division of CSI Wireless Inc. and CSI Wireless LLC (together, the “Sellers” or “CSI”). Pursuant to earn-out provisions in the Asset Purchase Agreement (the “Purchase Agreement”) the Company is required to issue 150,990 additional shares of common stock to the Sellers. The value of these shares of common stock, $563, was recorded as additional goodwill to the Fixed Cellular Phones (FCP) segment. In fiscal year 2006, it was determined that all of the goodwill attributed to the FCP segment was impaired and a charge was taken to operations. Accordingly, this additional goodwill was also determined to be impaired and the charge of $563 was taken in the first quarter of fiscal year 2007.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(Unaudited, dollars in thousands, except share data)

Other intangible assets as of December 31, 2006 and September 30, 2006 are as follows:

		December 31, 2006												September 30, 2006
						Accumulated												Accumulated
		Cost				Amortization				Net				Cost				Amortization				Net
Other Intangible Assets:
Capitalized technology		$	3,840			$	(2,580	)		$	1,260			$	3,840			$	(2,250	)		$	1,590
Customer relationships			3,070				(1,819	)			1,251				3,070				(637	)			2,433
Other			293				(111	)			182				293				(69	)			224
Total other intangible assets (unaudited)		$	7,203			$	(4,510	)		$	2,693			$	7,203			$	(2,956	)		$	4,247

		As of December 31, 2006, the Company reviewed the estimated lives of the intangible assets it purchased from CSI on May 8, 2006. It was determined that a portion of one customer relationship is no longer realizable. The estimated life of the intangible asset has been adjusted resulting in an additional amortization charge of $800 for the three months ended December 31, 2006. The effect of this change was to reduce earnings per share by $.04.
8		Line of Credit
		On June 27, 2006, the Company entered into a two year Loan and Security Agreement (the “Line of Credit Agreement”) and a Non-Recourse Receivable Purchase Agreement (the “Receivable Purchase Agreement”) with Silicon Valley Bank (SVB). The Line of Credit Agreement provides for a working capital line of credit secured by accounts receivable with borrowings based upon eligible accounts receivable at 80% of their face value. The Receivable Purchase Agreement provides for the sale of accounts receivable to SVB. Each agreement has a credit limit of $10,000 and there is an aggregate credit limit of $15,000 covering borrowings under both agreements. At December 31, 2006, the Company had outstanding borrowings of $3,503 under the Line of Credit Agreement. The Company will repay the loan as receivables are collected. Interest charged under the agreements can vary from SVB’s prime rate to SVB’s prime rate plus 2%.
		In connection with the agreements, the Company issued 320,856 warrants to purchase or convert into the Company’s Common Stock. The warrants are exercisable immediately at $1.87 per share and were valued at $356 using the Black-Scholes pricing model. The value of the warrants has been recorded as a loan origination fee and is being amortized over the term of the agreements.
9.		Commitments
		On April 28, 2006, the Company entered into an agreement with ACT Electronics, Inc. (“ACT”) under which ACT will provide fulfillment services and manufacture final assemblies of the Company’s products. Either party may terminate the agreement upon 90 days prior written notice to the other party. Under the agreement, the Company has the right to offset amounts due to the Company from ACT against amounts owed to ACT by the Company. As of December 31, 2006, the Company had $10,802 in open purchase commitments pursuant to this agreement.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(Unaudited, dollars in thousands, except share data)

		On September 11, 2006, the Company entered into an agreement with Speedy-Tech Electronics Ltd. (“Speedy”) relating to the manufacturing of final assemblies of the Company’s products. Either party may terminate the agreement upon 90 days prior written notice to the other party. Under the agreement, the Company has the right to offset amounts due to the Company from Speedy against amounts owed to Speedy by the Company. As of December 31, 2006, the Company had $587 in open purchase commitments pursuant to this agreement.
10.		Segment and Major Customer Disclosures
		The Company has two reportable business segments: Fixed Cellular Terminals (FCT) and Fixed Cellular Phones (FCP). The FCT segment consists of feature-rich, high end fixed cellular terminals, including the Telguard family of products and services. The FCP consists of high-volume, low cost fixed cellular phones.
		The FCT market is mostly in North America and consists of vertical applications ranging from wireless residential and commercial alarm systems to machine-to-machine and portable dial tone applications. The FCP market is prevalent in countries outside of North America with low fixed line penetration.
		Summarized below are the Company’s revenues and net income (loss) by reportable segment.

		Three Months Ended December 31,
		2006				2005
Revenue:
Fixed Cellular Terminals		$	14,570			$	7,139
Fixed Cellular Phones			8,072				16,624
		$	22,642			$	23,763
Net Income (Loss):
Fixed Cellular Terminals		$	790			$	606
Fixed Cellular Phones			(2,899	)			(2,013	)
Non-segment other income (expense)			(37	)			149
		$	(2,146	)		$	(1,258	)

		For the three months ended December 31, 2006, the Company had two customers that accounted for 43% of the FCT revenues. These customers were located in the United States.
		For the three months ended December 31, 2006, the Company had three customers that accounted for 74% of the FCP revenues. These customers are located in Mexico (43%), Guatemala (16%) and Venezuela (15%).
		Total export sales for the three months ended December 31, 2006 were 40% of total revenues. FCT export sales for the three months ended December 31, 2006 were 5% of total revenues and FCP export sales for the three months ended December 31, 2006 were 35% of total revenues.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(Unaudited, dollars in thousands, except share data

11.

Supplemental Disclosures of Cash Flow Information

		Three Months Ended
		December 31,
		2006				2005
Supplemental disclosure of cash flow information:
Interest paid		$	72			$	—
Supplemental disclosure of non-cash investing and financing activities:
Restricted common stock awarded as director compensation - 18,072 shares		$	45			$	—

		12. Business Combination
		On May 8, 2006, the Company acquired substantially all of the assets and assumed certain liabilities relating to the fixed wireless division of CSI Wireless Inc. and CSI Wireless LLC (together, the “Sellers”). The Company believes that this acquisition provides important strategic benefits. As a result of the acquisition, the Company established a greater presence with key customers in India and Latin America and obtained advanced technology for wireless public telephony. Pursuant to the Asset Purchase Agreement (the “Purchase Agreement”), the Company paid $3,044 in cash and issued 1,931,745 shares of its common stock with a fair value of $5,505 as consideration in the acquisition. In addition the Company incurred $851 in direct costs related to the acquisition and recorded $197 of liabilities in connection with the purchase. Depending on future performance, the Company may be required to issue up to 1,159,047 additional shares of common stock to the Sellers pursuant to two earn-out provisions contained in the Purchase Agreement. The purchase was accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. The Company’s Statements of Operations include the results of operations for the purchased assets and liabilities since May 8, 2006.
		The initial preliminary aggregate purchase price was $9,400, consisting of $3,044 of cash, 1,931,745 shares of the Company’s Common Stock valued at $5,505 and direct costs of the acquisition of $851. The fair value of the common stock was determined based on the average market price of the Company’s Common Stock over the five day period ended two days after the terms of the Purchase Agreement were finalized. In the first quarter of fiscal year 2007, an additional $563 of increased purchase price was recorded as goodwill and as a liability to be paid to the Sellers pursuant to one of the earn-out provisions of the Purchase Agreement. Accordingly, 150,990 shares of the Company’s common stock will be issued to the Sellers. The fair value of the common stock was determined based on the average market price of the Company’s common stock over the five day period ended two days after December 31, 2006. The additional goodwill was determined to be impaired and a charge of $563 was recorded to operations in the first quarter of fiscal year 2007. See financial statement footnote 7. The following table summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition, including the additional value of the earn-out:

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(Unaudited, dollars in thousands, except share data)

		May 8, 2006
Inventory		$	69
Prepaid expenses and deposits			112
Property and equipment			2,349
Acquired technology			840
Customer relationships			3,070
Other intangible assets			293
Goodwill			4,097
Total assets acquired			10,830
Reserve on purchase orders commitments			517
Accrued warranty reserve			40
Capital lease obligations			113
Liabilities in connection with the purchase			197
Total liabilities assumed			867
Net assets acquired		$	9,963

The following summarized unaudited pro forma financial information for the three months ended December, 2005, assumes the acquisition occurred as of October 1, 2005:

Net revenues		$	33,995
Net loss			(1,586	)
Basic and diluted net loss per common share		$	(0.09	)

The pro forma results include depreciation of property and equipment acquired and the amortization of intangibles acquired and excludes revenues and cost of sales associated with a product and customer relationship not purchased and interest income as a result of the cash paid for the acquisition. The pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had actually been completed on October 1, 2005, nor are they necessarily indicative of future consolidated results of operations.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Telular Corporation (Telular or the Company) is focused on global markets that have mature cellular and PCS networks (collectively cellular) that can be utilized for new applications and services that extend the cellular network’s capability. Specifically, Telular designs, develops, distributes and supports products and services that provide expanded connectivity and functionality to cellular networks. These product and service offerings add value to the cellular networks and take advantage of their economics, pervasiveness, convenience and architecture. These products provide the capability to connect alarm panels, telephones, fax machines and data modems directly to cellular networks. Bridging the gap between wireline customer premises equipment and cellular networks, these technologies provide the Company’s products with the “look and feel” of the wireline network, providing critical communications and security needs in a variety of environments. We refer to this concept as “Fixed Cellular.”

The growth of Fixed Cellular in any given market is dependent to a considerable extent upon the growth of cellular telephone service in that market as a cost-effective alternative to or substitute for landline telephone systems. Consequently, in managing the business and making decisions about where to invest resources, the Company’s management collects data and follows trends in the following areas of the cellular industry:

•		The cost of cellular airtime rates to consumers
•		The cost of cellular equipment technology and components
•		The capabilities of deployed cellular systems
•		Consumer attitudes toward cellular technology
•		Competitive and substitute products in the market place
•		Global economic conditions and economic conditions in key markets for Fixed Wireless
•		Telephony regulation in key markets for Fixed Wireless

Based upon trends noted from data collected in the above areas, such as improved economic conditions in Latin America and substantial growth in the adoption of Fixed Wireless in Asia and the United States, the Company believes that the market for Fixed Cellular will experience substantial growth over the next five years.

The Company operates two businesses organized into separate reporting segments: Fixed Cellular Terminals (FCT) and Fixed Cellular Phones (FCP). The Company is focusing additional resources on the FCT business where the introduction of TELGUARD^® digital products continues to drive FCT sales above FCP sales. We have been in the process of transitioning the Company to focus on our TELGUARD^® higher value business and are transforming the FCP business into a cash-generating segment.

The 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 PHONCELL^® FCT’s. The FCT market is addressed primarily through indirect channels consisting of distributors, representatives and agents along with in house sales and customer support teams.

The FCP market is prevalent in countries outside of North America with low fixed line penetration. Cellular carriers offering services in this market are price driven as they target residential and small business markets where equipment subsidies are often used to reach the requisite end user price points. The FCP market is extremely competitive and we are taking actions in the market, including differentiating our products. We pursue the FCP market through direct sales and localized distribution support to a tightly focused set of wireless network operators with high volume potential.

The Company generates most of its revenue by making and selling products. It recognizes revenue when its products ship from various manufacturing locations to customers. Although the Company has a broad base of customers worldwide, much of its revenue is generated from 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 Form 10-K for the fiscal year end September 30, 2006.

Results of Operations

First quarter fiscal year 2007 compared to first quarter fiscal year 2006

Net product sales. Net product sales of $18.9 million for the three months ended December 31, 2006, decreased 11% compared to the same period last year.

TELGUARD^® Terminal Products. Sales of TELGUARD^® products increased 334%, or $6.4 million, to $8.4 million during the first quarter of fiscal year 2007 compared to the same period of fiscal year 2006. This increase is due primarily increased market penetration resulting from lower cost digital products.
Terminal Products (exclusive of TELGUARD^® products). Sales of terminal products decreased 8%, or $0.2 million, to $2.5 million during the first quarter of fiscal year 2007 compared to the same period of fiscal year 2006. This decrease was primarily the result of decreased sales volume for export sales.
Phone Products. Sales of FCP products during the first quarter of fiscal year 2007 of $8.1 million decreased 51%, or $8.6 million, over the same period last year primarily as a result of decreased volumes to Latin America and the Asia markets.

Service revenue. Service revenue increased 48% to $3.8 million during the first quarter of fiscal year 2007 from $2.5 million during the same period last year. The increase is primarily the result of the increased services related to TELGUARD^® products sold during the first quarter of fiscal year 2007.

Gross margin. Gross margin for the three months ended December 31, 2006 of $6.2 million, or 27% of total revenue, compares to $4.7 million, or 20% of total revenue, for the same period last year. The increase in gross margin as a percentage of total revenue is the result of an increased mix of TELGUARD^® product sales and services.

Engineering and development expenses. Engineering and development expenses of $2.0 million for the three months ended December 31, 2006, increased 16%, or $0.2 million compared to the same period of fiscal year 2006. The increase is due to an increase in outside contract engineering that was used to augment engineering resources and an increase in compensation expense as a result of the addition of former CSI employees.

Selling and marketing expenses. Selling and marketing expenses of $2.9 million for the three months ended December 31, 2006, decreased 5% compared to the same period of fiscal year 2006. This decrease reflects a reduction in co-op marketing expenses and reduced agent and employee commissions.

General and administrative expenses. General and administrative expenses of $1.4 million for the three months ended December 31, 2006, increased 11% compared to the same period of fiscal year 2006. This increase was primarily due to increased outside professional fees of $0.1 million, the allocation of idle plant capacity to general and administrative expenses of $0.1 million and the decrease in travel and general office expenses of $0.1 million.

Amortization. Amortization expense of $1.6 million for the three months ended December 31, 2006, increased 936% compared to the same period of fiscal year 2006. This increase was the result of additional amortization associated with the intangible assets purchased in the May 8, 2006 acquisition of the fixed wireless division business of CSI Wireless Inc.

Goodwill impairment. Goodwill impairment loss of $0.6 million for the three months ended December 31, 2006, compares to no loss in the same period of fiscal year 2006. This loss in the current period resulted from the allocation of $0.6 million to goodwill relating to an earn-out provision contained in the Purchase Agreement with CSI (see financial statement footnote 7). This additional goodwill was related to the FCP segment, all of which was determined to be impaired in fiscal 2006. Accordingly, this goodwill was taken as an impairment charge in the first quarter of fiscal year 2007.

Net loss. The Company recorded a net loss of $2.1 million for the first quarter of fiscal year 2007 compared to a net loss of $1.3 million for the first quarter of fiscal year 2006. The increase in net loss this year is the result of increased operating expenses, including increased amortization and the goodwill impairment loss, partially offset by increased gross margin. Net income in the first quarter from the FCT segment of $0.8 million compares to net income of $1.0 million last year. Net loss in the first quarter from the FCP segment was $2.9 million compared to net loss of $2.3 million last year.

Net loss per Common Share. Net loss per share of $0.12 for the first quarter of fiscal year 2007 compares to net loss per share of $0.08 for the third quarter of fiscal year 2006.

Financial Position

Management regularly reviews net working capital in addition to cash to determine if it has enough cash to operate the business. On December 31, 2006, the Company had $7.8 million of unrestricted cash and cash equivalents and a working capital surplus of $27.4 million.

The Company generated $1.9 million of cash from operations during the first three months of fiscal year 2007 compared to cash used of $6.2 million during the same period of fiscal year 2006. Cash provided by operations during the first three months of fiscal year 2007 includes $2.1 million of the net loss, offset by $2.8 million of non-cash charges and $1.3 million due to net favorable changes in working capital, primarily from decreases in inventories and prepaid expenses and other assets. The decrease in inventories resulted from favorable timing of customer orders to factory orders and the ongoing Company strategy to limit inventory growth.

The FCT segment generated $2.1 million of cash from operations during the first three months of fiscal year 2007 compared to $1.0 million for the same period of fiscal year 2006. The FCP segment used $0.2 million of cash from operations during the first three months of fiscal year 2007 compared to $6.8 million of cash used in operations for the same period of fiscal year 2006.

Cash of $1.1 million was used in investing activities during the first three months of fiscal year 2007 compared to cash generated from investing activities of $4.5 million during the same period of the prior year, a net decrease of $5.6 million. This decrease was due to (1) the sale of $7.4 million of marketable securities which generated cash in the first quarter of fiscal year 2006 compared to the sale of $0.0 million in the same period of fiscal year 2007, (2) a $1.0 million decrease in restricted cash period over period, and (3) $0.8 million less expended for the acquisition of property and equipment. The $0.9 million of purchased property and equipment in the first three months of fiscal year 2006 was primarily due to the acquisition of manufacturing equipment at the Company’s contract manufacturers.

The increase in cash provided by financing activities of $0.2 million in the first three months of fiscal year 2007 when compared to the same period of the prior year resulted from borrowings under the line of credit with Silicon Valley Bank (see financial statement footnote 8).

Based upon its current operating plan, the Company believes its existing capital resources, including the line of credit with Silicon Valley Bank, will enable it to maintain its current and planned operations. Cash requirements may vary and are difficult to predict given the nature of the developing markets targeted by the Company. 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 December 31, 2006 and September 30, 2006, the inventory reserves were $1.6 million and $1.8 million, respectively. 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 of each of its business segments 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, 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 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, 2006 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, 2006.

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 December 31, 2006.

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 December 31, 2006, there were no changes in the Company’s internal controls 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.

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings that arose in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of all pending legal proceedings will not have a material adverse effect on the Company’s consolidated results of operation or financial position. However, because of the nature and inherent uncertainties of litigation, should the outcome of any legal actions be unfavorable, the Company may be required to pay damages and other expenses, which could have a material adverse effect on the Company’s financial position and results of operations.

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

At the Company’s Annual Meeting of Shareholders on January 30, 2007, the Shareholders of the Company entitled to vote thereon elected the following individuals as Directors of the Company (total shares eligible to vote were 18,067,745; total shares voted were 15,741,351):

Name		For				Withheld
John E. Berndt			15,541,926				199,425
Larry J. Ford			15,603,895				137,456
Michael J. Boyle			15,604,913				136,438
Daniel D. Giacopelli			15,591,090				150,261
Brian J. Clucas			15,546,201				195,150
Lawrence S. Barker			15,606,285				135,066
Kevin J. Wiley			15,607,235				134,116

Item 6. EXHIBITS

The following documents are filed as Exhibits to this report:

Number		Description		Reference
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
32		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

		Telular Corporation
Date February 6, 2007		By:		/s/ Michael J. Boyle
				Michael J. Boyle
				President & Chief Executive Officer
Date February 6, 2007				/s/ Jeffrey L. Herrmann
				Jeffrey L. Herrmann
				Executive Vice President, Chief Operating Officer
				& Chief Financial Officer
Date February 6, 2007				/s/ Robert Deering
				Robert Deering
				Controller & Chief Accounting Officer

Exhibit Index

Number		Description		Reference
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
32		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Furnished herewith