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 June 30, 2006.

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

For the Transition Period from                      to                      .

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 July 31, 2006, the latest practicable date, was 18,066,411 shares.

 

 

TELULAR CORPORATION
Index

		Page No.
Part I — Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets June 30, 2006 (unaudited) and September 30, 2005			3
Consolidated Statements of Operations (unaudited) Three and Nine Months Ended June 30, 2006 and June 30, 2005			4
Consolidated Statement of Stockholders’ Equity (unaudited) Nine Months Ended June 30, 2006			5
Consolidated Statements of Cash Flows (unaudited) Nine Months Ended June 30, 2006 and June 30, 2005			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			20
Item 4. Controls and Procedures			20
Part II — Other Information
Item 1. Legal Proceedings			20
Item 6. Exhibits			21
Signatures			22
Exhibit Index			23
Loan and Security Agreement
Non-Recourse Receivable Purchase Agreement
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 1350

TELULAR CORPORATION

		June 30,				September 30,
		2006				2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	6,762			$	10,023
Restricted cash			6,000				4,000
Marketable securities			—				12,075
Trade accounts receivable, less allowance for doubtful accounts			21,305				11,106
Inventories, net			14,282				7,655
Prepaid expenses and other current assets			744				333
Total current assets			49,093				45,192
Property and equipment, net			5,153				3,028
Other assets:
Goodwill			2,044				2,554
Other intangible assets, less accumulated amortization of $2,203 and $1,350 at June 30, 2006 and September 30, 2005, respectively			5,000				1,650
Other			403				48
Total other assets			7,447				4,252
Total assets		$	61,693			$	52,472
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	11,602			$	5,741
Accrued liabilities			5,608				2,939
Working capital line of credit			3,749				—
Total current liabilities			20,959				8,680
Stockholders’ equity:
Common stock; $.01 par value; 75,000,000 shares authorized; 18,066,411 and 16,111,015 outstanding at June 30, 2006 and September 30, 2005, respectively			181				161
Additional paid-in capital			168,586				162,034
Deficit			(128,033	)			(118,403	)
Total stockholders’ equity			40,734				43,792
Total liabilities and stockholders’ equity		$	61,693			$	52,472

See accompanying notes

TELULAR CORPORATION

		Three Months Ended June 30,								Nine Months Ended June 30,
		2006				2005				2006				2005
Revenue
Net product sales		$	16,736			$	9,151			$	59,669			$	31,444
Service revenue			2,822				2,264				8,015				6,707
Total revenue			19,558				11,415				67,684				38,151
Cost of sales
Net product cost of sales			13,414				9,112				50,138				26,545
Service cost of sales			1,515				1,264				4,315				3,779
Total cost of sales			14,929				10,376				54,453				30,324
Gross margin			4,629				1,039				13,231				7,827
Engineering and development expenses			2,034				1,804				5,628				5,125
Selling and marketing expenses			3,048				2,445				8,482				7,050
General and administrative expenses			1,433				1,213				4,163				3,754
Amortization			553				150				853				450
Goodwill impairment loss			4,045				—				4,045				—
Total operating expenses			11,113				5,612				23,171				16,379
Loss from operations			(6,484	)			(4,573	)			(9,940	)			(8,552	)
Other income, net			45				70				310				177
Net loss		$	(6,439	)		$	(4,503	)		$	(9,630	)		$	(8,375	)
Net loss per common share:
Basic		$	(0.37	)		$	(0.34	)		$	(0.58	)		$	(0.63	)
Diluted		$	(0.37	)		$	(0.34	)		$	(0.58	)		$	(0.63	)
Weighted average number of common shares outstanding:
Basic			17,280,976				13,304,867				16,511,585				13,292,228
Diluted			17,280,976				13,304,867				16,511,585				13,292,228

See accompanying notes

TELULAR CORPORATION

						Additional								Total
		Common				Paid-In								Stockholders’
		Stock				Capital				Deficit				Equity
Balance at September 30, 2005		$	161			$	162,034			$	(118,403	)		$	43,792
Comprehensive income:
Net loss for period from October 1, 2005 to June 30, 2006			—				—				(9,630	)			(9,630	)
Stock based compensation expense			—				671				—				671
Stock options exercised			1				50				—				51
Stock issued in connection with services			—				10				—				10
Stock issued in connection with purchase of business unit			19				5,486				—				5,505
Warrants issued to secure working capital loan			—				356				—				356
Cost associated with the sale of common stock in a private placement			—				(21	)			—				(21	)
Balance at June 30, 2006		$	181			$	168,586			$	(128,033	)		$	40,734

See accompanying notes

TELULAR CORPORATION

		Nine Months Ended June 30,
		2006				2005
Operating Activities:
Net loss		$	(9,630	)		$	(8,375	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			1,298				1,046
Amortization			853				450
Goodwill impairment loss			4,045				—
Provision for inventory obsolescence			474				2,782
Stock based compensation expense			671				—
Common stock issued for services			10				12
Changes in assets and liabilities, net of effects of acquisition:
Trade accounts receivable			(10,199	)			1,819
Inventories			(7,034	)			(880	)
Prepaid expenses and other assets			(298	)			(174	)
Trade accounts payable			5,861				(1,352	)
Accrued liabilities			1,802				5
Net cash used in operating activities			(12,147	)			(4,667	)
Investing Activities:
Acquisition of property and equipment			(1,073	)			(549	)
Acquisition of business unit			(3,895	)			—
Proceeds from sale of marketable securities			12,075				1,125
Increase in restricted cash			(2,000	)			—
Net cash provided by investing activities			5,107				576
Financing Activities:
Proceeds from working capital line of credit			3,749				—
Expenditures related to the issuance of common stock			(21	)			—
Proceeds from the exercise of stock options			51				107
Net cash provided by financing activities			3,779				107
Net decrease in cash and cash equivalents			(3,261	)			(3,984	)
Cash and cash equivalents, beginning of period		$	10,023			$	10,227
Cash and cash equivalents, end of period		$	6,762			$	6,243

See accompanying notes

TELULAR CORPORATION

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 nine months ended June 30, 2006, are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2006. 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, 2005.
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 17,280,976 and 13,304,867, for the three months ended June 30, 2006 and 2005, respectively. The weighted average number of shares of common stock for the computation of basic and diluted earnings per share was 16,511,585 and 13,292,228, for the nine months ended June 30, 2006 and 2005, respectively.
		The shares outstanding used to compute diluted earnings per share for the three months ended June 30, 2006 and 2005 exclude outstanding options and warrants to purchase 192,666 and 110,602 shares of common stock, respectively. The shares outstanding used to compute diluted earnings per share for the nine months ended June 30, 2006 and 2005 exclude outstanding options and warrants to purchase 252,474 and 251,584 shares of common stock, respectively. The options were excluded because their inclusion in the computation would have been antidilutive.
3.		Stock Based Compensation
		Effective October 1, 2005, Telular Corporation (the Company) adopted Statement of Financial Accounting Standards No. 123(R), Share Based Payment, (SFAS 123(R)) which requires the cost of all share-based payments, including grants of employee stock options and issuance of warrants, to be recognized in the financial statements based on their fair value. The Company calculates the cost of stock options grants based on their grant date fair value and recognizes these costs over the grant’s 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 common stock, a risk-free interest rate, a dividend yield and the expected term of the option. The Company implemented SFAS 123 (R) under the Modified Prospective Transition (MPT) method. Under the MTP method, the cost for awards that were granted prior to, but not vested, as of October 1, 2005, will be recognized in operations over their remaining vesting period.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited, dollars in thousands, except share data)

For the quarters ended June 30, 2006 and 2005, the Company valued stock options granted and warrants issued using the Black-Scholes valuation method with the following assumptions:

		Nine Months Ended June 30,
		2006				2005
Valuation Assumptions:
Volatility			75	%			60	%
Expected term		4.5 yrs.				5.3 yrs
Risk free interest rate			4.32% - 5.01	%			3.8	%
Dividend yield			0.0	%			0.0	%

The Company recognized $221 and $671 of stock-based compensation expense during the three and nine month periods ended June 30, 2006, respectively. Prior to the adoption of SFAS 123(R), the Company accounted for stock based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion 25, Accounting for Stock-Based Compensation, (APB 25). Under APB 25, no compensation expense related to stock options was recognized in operations. As a result of adopting SFAS 123(R) on October 1, 2005, the Company’s loss before income taxes and net loss for the three months ended (and nine months) ended June 30, 2006, are each $221 ($671) lower, respectively, than if the Company had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share of common stock for the three and nine months ended June 30, 2006, are each $0.01 and $0.04 lower, respectively, than if the Company had continued to account for share-based compensation under APB 25. Had the Company not adopted SFAS 123(R) effective October 1, 2005, there would have been no changes to the cash used in operation and cash provided by financing activities for the nine months ended June 30, 2006.

Had the Company recognized all stock-based compensation expense in the three and nine month periods ended June 30, 2005 based under the fair-value method at the grant date for the stock options, the Company’s pro forma net loss and loss per share would have been as follows:

		Three Months Ended				Nine Months Ended
		June 30, 2005				June 30, 2005
Net loss as reported		$	(4,503	)		$	(8,375	)
Less: stock based employee compensation expense determined under the fair value based method for all awards, net of related tax effects, not recorded in net loss as reported			(102	)			(727	)
Pro forma net loss		$	(4,605	)		$	(9,102	)
Net loss per share:
Basic — as reported		$	(0.34	)		$	(0.63	)
Basic — pro forma		$	(0.35	)		$	(0.68	)
Diluted — as reported		$	(0.34	)		$	(0.63	)
Diluted — pro forma		$	(0.35	)		$	(0.68	)

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited, dollars in thousands, except share data)

4.		Restricted Cash
		On June 30, 2006, the Company had $6,000 of restricted cash. This cash is collateral for a letter of credit granted to the Company’s contract manufacturer in China. The letter of credit expires on September 1, 2006, but is expected to be renewed.
5.		Marketable Securities
		The Company has investments in marketable securities consisting of investment-grade instruments as follows:

		June 30,				September 30,
		2006				2005
		(Unaudited)
Corporate bonds		$	—			$	4,675
Auction rate securities			—				7,400
		$	—			$	12,075

		The Company categorizes its investments in marketable securities as available-for-sale securities. The cost of these securities approximates fair value, therefore, there are no unrealized gains or losses included in accumulated other comprehensive income.
6.		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 June 30, 2006 and September 30, 2005 are as follows:

		June 30,				September 30,
		2006				2005
		(Unaudited)
Trade accounts receivable		$	21,505			$	11,291
Less: allowance for doubtful accounts			200				185
		$	21,305			$	11,106

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited, dollars in thousands, except share data)

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

		June 30,				September 30,
		2006				2005
		(Unaudited)
Raw materials		$	5,401			$	6,703
Finished goods			10,803				4,209
			16,203				10,912
Less: reserve for obsolescence			(1,922	)			(3,257	)
		$	14,282			$	7,655

8.		Goodwill and Other Intangibles
		Intangible asset data as of June 30, 2006 is as follows:

		Capitalized				Customer								Intangible
		Technology				Relationships				Other				Assets				Goodwill
Net balance at September 30, 2005		$	1,650			$	—			$	—			$	1,650			$	2,554
Additions			840				3,070				293				4,203				3,534
Amortization expense			(570	)			(255	)			(28	)			(853	)			—
Impairment loss			—				—				—				—				(4,045	)
Net balance at June 30, 2006		$	1,920			$	2,815			$	265			$	5,000			$	2,044
September 30, 2005 balance at cost		$	3,000			$	—			$	—			$	3,000			$	4,896
Acquired intangibles and goodwill			840				3,070				293				4,203				3,534
Accumulated amortization & loss			(1,920	)			(255	)			(28	)			(2,203	)			(6,387	)
Net balance at June 30, 2006		$	1,920			$	2,815			$	265			$	5,000			$	2,044

As of June 30, 2006, the Company completed its annual impairment review of goodwill in accordance with Statement of Financial Accounting Standards 142, Goodwill and Other Intangible Assets, (SFAS 142) and determined that all of the goodwill within its Fixed Cellular Phones business segment (FCP) was impaired. Accordingly, the Company recognized a charge of $4,045 in its Consolidated Statements of Operations for the periods ended June 30, 2006. The impaired goodwill included $3,534 of goodwill recorded as a result of the acquisition of the fixed wireless division business of CSI Wireless Inc. in May 2006 (see footnote 14 Business Combination).

The method used by the Company to determine goodwill impairment included determining the fair value of its

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited, dollars in thousands, except share data)

reporting business segments using discounted cash flows. The Company determined that goodwill impairment was limited to FCP and was due to a decline in projected cash flows solely in that segment. FCP has recently experienced substantial growth at the same time that product prices and margins are declining due to increased competition, each unfavorably effecting cash flow.

The following table indicates estimated amortization expense for intangible assets other than goodwill for the years ended:

September 30, 2006		$	1,606
September 30, 2007			2,417
September 30, 2008			1,494
September 30, 2009			130
September 30, 2010 and thereafter			206

9.		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 June 30, 2006, the Company had outstanding borrowings of $3,749 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 Agreement, 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.
10.		Commitments
		During fiscal year 2002, the Company entered into an agreement with Plexus Services Corporation relating to the manufacturing of circuit card assemblies and final assemblies of the Company’s products. Either party may terminate the agreement upon 90 days prior written notice to the other party. As of June 30, 2006, the Company had $371 in open purchase commitments pursuant to this agreement.
		During fiscal year 2005, the Company entered into an agreement with Celestica Limited 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. As of June 30, 2006, the Company had $7,808 in open purchase commitments pursuant to this agreement.
		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. As of June 30, 2006, the Company had $8,963 in open purchase commitments pursuant to this agreement.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited, dollars in thousands, except share data)

11.		Segment and Major Customer Disclosures
		Beginning October 1, 2005, the Company adopted a new business strategy which focuses on two distinct segments: Fixed Cellular Phones (FCP) and Fixed Cellular Terminals (FCT). The FCP segment consists of high-volume, low cost fixed cellular phones and the FCT segment consists of feature-rich, high end fixed cellular terminals, including the Telguard family of products and services.
		The FCP market is prevalent in countries outside of North America with low fixed line penetration. 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.
		Summarized below are the Company’s revenues and net income (loss) by reportable segment. Prior year information has been restated to conform to current year’s segmentation disclosure.

		Three Months Ended June 30,								Nine Months Ended June 30,
		2006				2005				2006				2005
Revenue:
Fixed Cellular Phones		$	5,171			$	4,863			$	38,807			$	17,755
Fixed Cellular Terminals			14,387				6,552				28,877				20,396
		$	19,558			$	11,415			$	67,684			$	38,151
Net Income (Loss):
Fixed Cellular Phones		$	(7,679	)		$	(3,963	)		$	(12,724	)		$	(8,759	)
Fixed Cellular Terminals			1,195				(610	)			2,784				207
Non-segment other income			45				70				310				177
		$	(6,439	)		$	(4,503	)		$	(9,630	)		$	(8,375	)

For the three and nine month periods ended June 30, 2006, the Company had five customers that accounted for 73% and 64% of the FCP revenue, respectively. These customers were located in Venezuela (18% and 20%), Mexico (45% and 28%), India (0% and 16%) and South Africa (10% and 0%).

Export sales for the three months ended June 30, 2006 and 2005 were 37% and 54% of total revenues, respectively. Export sales for the nine months ended June 30, 2006 and 2005 were 63% and 57% of total revenues, respectively.

For the three and nine month periods ended June 30, 2006, the Company had one customer that accounted for 41% and 26% of its FCT revenue, respectively. This customer is located in the United States. Additionally, 20% and 28% of the FCT revenues were from transmission services for the three and nine month periods ended June 30, 2006 respectively.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited, dollars in thousands, except share data)

12.

Supplemental Disclosures of Cash Flow Information

		For the Nine Months Ended June 30,
		2006				2005
Supplemental disclosure of cash flow information:
Interest paid		$	1			$	—
Income taxes paid		$	—			$	—
Supplemental disclosure of non-cash investing activities:
Common stock issued in connection with acquisition:
1,931,745 shares		$	5,505			$	—
Supplemental disclosure of non-cash financing activities:
Increase in additional paid-in capital related to warrants issued to secure working capital line of credit: 320,856 warrants		$	356			$	—

13.		Plant Closing
		On June 30, 2006, the Company ceased operations at its Vernon Hills, Illinois facility. This leased facility housed corporate general and administration functions, company-wide purchasing and logistics, sales and marketing functions for both the FCP and FCT segments and manufacturing of FCP and FCT products, including distribution and warehousing activities. The Company is currently investigating new sites for its general and administrative functions, purchasing and logistics and sales and marketing functions and anticipates moving into a new facility no later than February 26, 2007, the date the current lease expires. The manufacturing, distribution and warehouse activities will be moved to the Company’s contract manufacturers located around the world.
14.		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, we 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 an earn-out provision contained in the Purchase Agreement. The purchase will be accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. The Company’s Statements of Operations for the periods ended June 30, 2006 include the results of operations for the purchased assets and liabilities since May 8, 2006.
		The 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

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited, dollars in thousands, except share data)

five day period ended two days after the terms of the Purchase Agreement were finalized. The following table summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition:

		May 8, 2006
Inventories		$	69
Prepaid expenses and deposits			112
Property and equipment, net			2,349
Licenses			163
Total assets acquired			2,693
Reserve on purchase orders commitments			517
Accured warranty reserve			40
Capital lease obligations			113
Liabilities in connection with the purchase			197
Total liabilities assumed			867
Net assets acquired		$	1,826

     The purchase price has been allocated as follows:

Net assets acquired		$	1,826
Customer relationships			3,070
Acquired technology			840
Non-compete agreements			130
Goodwill			3,534
		$	9,400

The following summarized unaudited pro forma financial information for the nine months ended June 30, 2006 and 2005, respectively, assumes the acquisition occurred as of October 1, 2005 and 2004, respectively:

		2006				2005
Net revenues		$	84,054			$	64,290
Net loss			(12,611	)			(9,069	)
Basic and diluted net loss per common share		$	(0.76	)		$	(0.60	)

The pro forma results include depreciation of property and equipment acquired and the amortization of intangibles acquired and exclude 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) designs, develops, manufactures and markets products that are responsive to the needs of its customers and are based on its proprietary interface technologies. These products provide the capability to connect standard telecommunications equipment, including standard telephones, fax machines, data modems and alarm panels with wireless communication networks in the cellular and PCS frequency bands (collectively cellular). We refer to this concept as Fixed Cellular. Telular has roots stretching back to 1986 when it acquired the intellectual property rights for its cellular interface concept and methodology. These patents cover not only circuitry, but also the core concept and principles underlying the use of an intelligent interface device in conjunction with cellular-type transceivers and systems. In the ensuing years, Telular has not only added to its patent portfolio, but has done so while establishing a worldwide customer base in over 130 countries. In nearly every part of the world that has a cellular network, Telular products can be found delivering solutions from basic voice needs to sophisticated applications.

In developing and developed countries where wireline services are deficient or even non-existent, our products provide basic telephone service and, in some cases, enhanced service over existing cellular networks and new networks being constructed to expand telephone service in those countries.

Wireless network operators and their distribution partners increasingly share our vision that cellular systems in both developed and developing countries have matured in coverage and quality for use as basic telephone service networks.

Key trends and enablers fueling the worldwide adoption of Fixed Cellular programs include the following:

	•		Decreasing airtime rates, terminal equipment costs and the cost of building cellular networks;
	•		Rapid deployment of next generation digital networks that provide greater voice capacity and higher data speeds;
	•		Acceptance by consumers of cellular service as reliable, cost effective telecommunications service;
	•		Multiple local or regional cellular operators in a region vying for the same number of subscriber usage minutes;
	•		The need for backup service and disaster recovery for monitoring of material property and lifeline services; and
	•		Growing recognition of an expanded value chain for the delivery of applications using the cellular networks.

Addressing the needs of voice, fax, data and security, the Company’s business operations are divided into two distinct segments: Fixed Cellular Phones (FCP) and Fixed Cellular Terminals (FCT). Based upon trends noted from data collected in the industry, such as declining cost for cellular technology and strong demand for FCP’s in key markets such as India, the Company believes that the market for fixed cellular products will experience substantial growth over the next several years.

The Company generates its revenue by making and selling products and providing transmission services to certain customers. It recognizes revenue when its products ship from various manufacturing locations to customers and when it delivers services.

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 fiscal quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and the Company’s operating results for that fiscal quarter, and potentially for future fiscal quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in “Cautionary Statements” attached as Exhibit 99 to Company’s Form 10-K for the fiscal year ended September 30, 2005.

The Company believes that the FCP segment would benefit from industry consolidation and is actively pursuing target companies of interest for merger or acquisition. To this end, 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. We believe that this acquisition provides important strategic benefits. As a result of the acquisition, we established a greater presence with key customers in India and Latin America and obtained advanced technology for wireless public telephony.

Results of Operations

Third quarter fiscal year 2006 compared to third quarter fiscal year 2005

Net product sales. Net product sales of $16.7 million for the three months ended June 30, 2006, increased 83% compared to the same period last year. Sales of FCP products increased 6%, or $0.3 million, to $5.2 million during the third quarter of fiscal year 2006 compared to the same period of fiscal year 2005. These increases were primarily the result of increased shipments to new and existing customers in Latin America and Africa. Sales of FCT products during the third quarter of fiscal year 2006 of $11.6 million increased 170%, or $7.3 million, over the same period last year primarily as a result of a 394% increase in sales of TELGUARD® products to primarily domestic customers.

Service revenue. Service revenue increased 25% to $2.8 million during the third quarter of fiscal year 2006 from $2.3 million during the same period last year. The increase is primarily the result of the increased services related to TELGUARD® products sold during the third quarter of fiscal year 2006.

Gross margin. Gross margin for the three months ended June 30, 2006 of $4.6 million, or 24% of total revenue, compares to $1.0 million, or 9% of total revenue, for the same period last year. The increase in gross margin as a percentage of total revenue is the result of higher sales volume and 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 June 30, 2006, increased 13%, or $0.2 million compared to the same period of fiscal year 2005. The increase is due to an increase in outside contract engineering that was used to augment engineering resources, the addition of former CSI employees and due to the recognition of stock based compensation expense.

Selling and marketing expenses. Selling and marketing expenses of $3.0 million for the three months ended June 30, 2006, increased 25% compared to the same period of fiscal year 2005. This increase reflects increased offshore warehouse costs (resulting from increased inventory), increases in compensation costs as a result of recognition of stock based compensation and increases in sales commissions as a result of increased sales volume.

General and administrative expenses. General and administrative expenses of $1.4 million for the three months ended June 30, 2006, increased 18% compared to the same period of fiscal year 2005. This increase was primarily due to the recognition of stock based compensation expense and increased legal expenses related to corporate development activities.

Amortization. Amortization expense of $0.6 million for the three months ended June 30, 2006, increased 269% compared to the same period of fiscal year 2005. 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 loss. Goodwill impairment loss of $4.0 million for the three months ended June 30, 2006, compares to no loss in the same period of fiscal year 2005. This loss in the current year resulted from our annual impairment review of goodwill (see financial statement footnote 8).

Net income (loss). The Company recorded a net loss of ($6.4) million for the third quarter of fiscal year 2006 compared to a net loss of ($4.5) million for the third quarter of fiscal year 2005. The increase in net loss this year is the result of increased operating expenses, including the goodwill impairment loss, partially offset by increased gross margin. Net loss

in the third quarter from the FCP segment of ($7.7) million compares to net loss of ($4.0) million last year. Net income in the third quarter from the FCT segment of $1.2 million compares to net loss of ($0.6) million last year.

Net loss per Common Share. Net loss per share of $0.37 for the third quarter of fiscal year 2006 compares to net loss per share of $0.34 for the third quarter of fiscal year 2005.

First nine months fiscal year 2006 compared to first nine months fiscal year 2005

Net Product Sales. Net product sales of $59.7 million for the first nine months of fiscal year 2006 increased 90%, or $28.2 million compared to the same period last year. Sales of FCP products increased 119%, or $21.0 million, to $38.8 million during the first nine months of fiscal year 2006 compared to the same period of fiscal year 2005. This increase was primarily the result of increased shipments to customers in India, Venezuela and Mexico. Sales of FCT products during the first nine months of fiscal year 2006 of $20.9 million increased 52%, or $7.2 million compared to the same period last year. The increase was primarily the result of a 158% increase in the sales of TELGUARD® products to primarily domestic customers.

Service Revenue. Service revenue increased 20% to $8.0 million during the first nine months of fiscal year 2006 from $6.7 million during the same period last year. The increase is primarily the result of the increase in services related to TELGUARD® products sold during the first nine months of fiscal year 2006.

Gross margin. Gross margin for the nine months of fiscal year 2006 was $13.2 million, or 20% of total revenues, compares to $7.8 million, or 21% of total revenues, for the same period last year. The decrease in gross margin as a percentage of total revenues is primarily the result of continuing the Company’s strategy to become a high volume provider of fixed cellular phones.

Engineering and development expenses. Engineering and development expenses increased $0.5 million, or 10% to $5.6 million for the first nine months of fiscal year 2006 compared to the same period last year. The increase is due to an increase in outside contract engineering that was used to augment engineering resources, the addition of former CSI employees and due to the recognition of stock based compensation expense.

Selling and marketing expenses. Selling and marketing expenses of $8.5 million for the first nine months of fiscal year 2006, increased 20%, or $1.4 million compared to the same period of fiscal year 2005. The increase is primarily due to (1) increased billable freight costs (the invoicing of these costs are included in revenues), (2) increased offshore warehouse costs, (3) increased commissions resulting from the higher sales volume, (4) the recognition of stock based compensation expense, offset by (5) reduced travel expenses, (6) elimination of non-recurring recruiting costs and (7) the elimination of certain marketing expenses.

General and administrative expenses. General and administrative expenses of $4.2 million for the first nine months of fiscal year 2006, increased $0.4 million, or 11% compared to the same period of fiscal year 2005. This increase is primarily due to the recognition of stock based compensation expense, increased legal fees related to corporate development activities, offset by the fiscal year 2005 $0.5 million of termination pay under the employment agreement with the Company’s former Chairman and Chief Executive Officer.

Amortization. Amortization expense of $0.9 million for the nine months ended June 30, 2006, increased 90% compared to the same period of fiscal year 2005. 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 loss. Goodwill impairment loss of $4.0 million for the nine months ended June 30, 2006, compares to no loss in the same period of fiscal year 2005. This loss in the current year resulted from our annual impairment review of goodwill (see financial statement footnote 8).

Net income (loss). The Company recorded a net loss of ($9.6) million for the first nine months of fiscal year 2006 compared to net loss of ($8.4) million for the first nine months of fiscal year 2005. The increase in net loss this year is the result of increased operating expenses, including the goodwill impairment loss, partially offset by increased gross margin. A net loss in the first nine months from the FCP segment of ($12.7) million compares to a net loss of ($8.8) million for the first nine months of fiscal year 2005. Net income in the first nine months from the FCT segment of $2.8 million compares to net income of $0.2 million in the corresponding period of last year. The increase is the result of higher sales volume.

Net loss per Common Share. Net loss per share of $0.58 for the first nine months of fiscal year 2006 compares to net loss per share of $0.63 for the first nine months of fiscal year 2005. The decreased net loss per share is primarily the result of increased sales in the both segments.

Financial Position

During fiscal year 2006, the Company has utilized all of its marketable securities investments to fund operating losses, working capital needs, and capital expenditures. Management regularly reviews net working capital in addition to cash to determine if it has enough cash to operate the business. On June 30, 2006, the Company had $6.8 million of unrestricted cash and cash equivalents and a working capital surplus of $28.1 million.

The Company used $11.9 million of cash in operations during the first nine months of fiscal year 2006 compared to cash used of $4.7 million during the same period of fiscal year 2005. Cash used in operations during the first nine months of fiscal year 2006 includes $2.3 million due to the cash portion of the net loss and $9.7 million due to net unfavorable changes in working capital, primarily from increases in trade accounts receivable and inventories. The increase in trade accounts receivables is the result of higher sales volume. The increase in inventories resulted from unfavorable timing of customer orders to factory orders. The $4.7 million decrease in cash from operations during the first nine months of the prior year included $9.6 million due to the cash portion of the net loss and $4.9 million of favorable changes in working capital, primarily from decreases in trade accounts receivable and inventories.

The FCP segment used $15.1 million of cash in operations during the first nine months of fiscal year 2006, while the FCT segment generated $3.2 million of cash in operations. During the first nine months of fiscal year 2005, the FCP segment used $9.2 million of cash in operations, while the FCT segment generated $0.8 million of cash in operations.

Cash of $4.9 million was generated through investing activities during the first nine months of fiscal year 2006 compared to cash generated from investing activities of $0.6 million during the same period of the prior year, primarily as a result of proceeds for the sale of marketable securities, partially offset by $4.1 million of cash used in the CSI acquisition.

The increase in cash provided by financing activities of $3.7 million this year when compared to last year resulted from borrowings under the line of credit with Silicon Valley Bank (see financial statement footnote 9).

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 June 30, 2006 and September 30, 2005, the inventory reserves were $1.9 million and $3.3 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”, and “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, 2005 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, 2005.

The Company may invest 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 has liquidated all of its marketable securities as of June 30, 2006 and has no exposure to market risk fluctuations for these types of investments.

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. 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 US 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, 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 6. EXHIBITS

The following documents are filed as Exhibits to this report:

Number		Description		Reference
10.1		Loan and Security Agreement (Working Capital Line of Credit) dated June 27, 2006		Filed herewith
10.2		Non-Recourse Receivable Purchase Agreement dated June 27, 2006		Filed herewith
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 August 7, 2006		By:		/s/ Michael J. Boyle   Michael J. Boyle
				President & Chief Executive Officer
Date August 7, 2006				/s/ Jeffrey L. Herrmann   Jeffrey L. Herrmann
				Executive Vice President, Chief Operating Officer
				& Chief Financial Officer
Date August 7, 2006				/s/ Robert Deering   Robert Deering
				Controller & Chief Accounting Officer

Exhibit Index

Number		Description		Reference
10.1		Loan and Security Agreement (Working Capital Line of Credit) dated June 27, 2006		Filed herewith
10.2		Non-Recourse Receivable Purchase Agreement dated June 27, 2006		Filed herewith
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