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

RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
Fiscal Year 2008 Compared to Fiscal Year 2007

Revenues and Costs of Sales

                                                                     Change
                                   2008         2007        Amount        Percentage
        Net product sales
        Telguard                 $ 28,391     $ 40,694     $ (12,303 )            -30 %
        Terminal                   17,542       16,442         1,100                7 %

        Total product revenues     45,933       57,136       (11,203 )            -20 %
        Service revenues           20,221       17,371         2,850               16 %

        Total revenues             66,154       74,507        (8,353 )            -11 %

        Cost of sales
        Products                   31,805       40,539        (8,734 )            -22 %
        Services                    9,817        9,169           648                7 %

                                   41,622       49,708        (8,086 )            -16 %

        Gross margin             $ 24,532     $ 24,799     $    (267 )

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

Operating Expenses

                                                                     Change                     % of Revenues
                                 2008          2007         Amount        Percentage         2008           2007

Engineering and development    $  5,171      $  6,930      $ (1,759 )             -25 %           8 %            9 %
Selling and marketing             6,287         6,157           130                 2 %           9 %            8 %
General and administrative        7,283         6,114         1,169                19 %          11 %            8 %

                               $ 18,741      $ 19,201      $   (460 )                            28 %           25 %

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

                                      2008         2007        Change        Percentage

      Revenues                      $  7,544     $ 20,931     $ (13,387 )            -64 %
      Cost of sales                   11,252       20,357        (9,105 )            -45 %

      Gross margin                    (3,708 )        574        (4,282 )
      Engineering and development          -          723          (723 )           -100 %
      Selling and marketing              767        3,313        (2,546 )            -77 %
      Amortization                         -        3,149        (3,149 )           -100 %
      Impairment loss                  1,711          563         1,148              204 %
      Loss on asset disposals          1,083            -         1,083            > 100 %
      Other                              211          397          (186 )            -47 %

                                    $ (7,480 )   $ (7,571 )   $      91

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

                                                                     Change
                                    2007         2006        Amount       Percentage
         Net product sales
         Telguard                 $ 40,694     $ 21,630     $ 19,064               88 %
         Terminal                   16,442       12,932        3,510               27 %

         Total product revenues     57,136       34,562       22,574               65 %
         Service revenues           17,371       11,144        6,227               56 %

         Total revenues             74,507       45,706       28,801               63 %

         Cost of sales
         Products                   40,539       26,175       14,364               55 %
         Services                    9,169        5,937        3,232               54 %

                                    49,708       32,112       17,596               55 %

         Gross margin             $ 24,799     $ 13,594     $ 11,205

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

Operating Expenses

                                                                     Change                     % of Revenues
                                 2007          2006        Amount        Percentage          2007           2006

Engineering and development    $  6,930      $  3,935      $ 2,995                 76 %           9 %            9 %
Selling and marketing             6,157         4,575        1,582                 35 %           8 %           10 %
General and administrative        6,114         6,101           13                < 1 %           8 %           13 %

                               $ 19,201      $ 14,611      $ 4,590                               25 %           32 %

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

                                     2007         2006         Change        Percentage

     Revenues                      $ 20,931     $  47,394     $ (26,463 )            -56 %
     Cost of sales                   20,357        43,312       (22,955 )            -53 %

     Gross margin                       574         4,082        (3,508 )
     Engineering and development        723         3,622        (2,899 )            -80 %
     Selling and marketing            3,313         5,983        (2,670 )            -45 %
     Amortization                     3,149         1,606         1,543               96 %
     Impairment loss                    563         4,045        (3,482 )            -86 %
     Other                              397             -           397            > 100 %

                                   $ (7,571 )   $ (11,174 )   $   3,603

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

Fiscal 2008
The Company generated cash of $7,084 from continuing operations during fiscal
year 2008 compared to cash generated of $1,566 during the same period of fiscal
2007. The components of the change for fiscal 2008 are as follows:

    $   6,101      Income from continuing operations; cash provided.
        2,388      Non-cash expenses: $1,705 from stock based compensation; $674
                   depreciation expenses; $9 loss on disposal of fixed assets.
       12,819      The decrease in trade accounts receivable is due primarily to
                   the collection during the period of outstanding balances at
                   September 30, 2007 and timely customer payments on sales made
                   during fiscal 2008.
       (6,507 )    The increase in inventory reflects the buildup of Telguard
                   and terminal inventory as the Company anticipated stronger
                   sales in the fourth quarter of fiscal 2008 . Inventory levels
                   decreased substantially in the fourth quarter of fiscal 2007
                   as a result large sale of Telguard units to customers who
                   were anticipating the conversion of cellular networks to
                   digital from analog.
       (6,913 )    Trade accounts payable primarily consists of amounts due to
                   Telular's contract manufacturers. To assure timely production
                   of inventory to meet customers needs, these accounts are kept
                   current. That process, in addition to the payments made to
                   our contract manufacturers in the first quarter of fiscal
                   2008 for the production to support the increased sales in the
                   fourth quarter of fiscal 2007, led to the reduction in trade
                   accounts payable.
         (804 )    Net cash used in other working capital items primarily due to
                   a $850 increase in notes receivable related to a temporary
                   cash advance to related party. The note receivable has been
                   repaid in October 2008.

    $   7,084      Total cash provided by continuing operations

Fiscal 2007
The Company generated cash of $1,566 from continuing operations during fiscal
year 2007 compared to cash used of $886 during the same period of fiscal 2006.
The components of the change for fiscal 2007 are as follows:

    $   5,625      Income from continuing operations; cash provided.
        1,716      Non-cash expenses: $924 from stock based compensation; $732
                   depreciation expenses; $60 loss on disposal of fixed assets.
       (8,403 )    The increase in trade accounts receivable is due primarily to
                   the increased sales volume; a 64% increase in fourth quarter
                   fiscal 2007 sales over the same period of fiscal 2006.
       (1,023 )    The increase in inventory reflects the buildup of Telguard
                   and terminal inventory in response to increased customer
                   demand in the fourth quarter of fiscal 2007.
        2,497      Trade accounts payable primarily consists of amounts due to
                   Telular's contract manufacturers. The increase is due to
                   increased production as a result of significant sales
                   increase in the fourth quarter of fiscal 2007.
        1,154      Net cash provided by other working capital items primarily
                   due to a $973 increase in accrued liabilities resulting from
                   liabilities that fluctuate directly with sales volumes such
                   as internal and external commissions.

    $   1,566      Total cash provided by continuing operations

The Company generally requires its foreign customers to prepay, obtain letters of credit or qualify for export credit insurance underwritten by third party credit insurance companies prior to making international shipments. Such prepayments, letters of credit and credit insurance are not obtained for orders from our Venezuelan customers, which may represent a material portion of customer receivables at any given time. Also, 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.

The following table sets forth our total contractual cash obligations as of September 30, 2008:

                                                                     Payments Due by Period
                                                Less than
Contractual Cash Obligations      Total          1 year          1-3 years        4-5 years        After 5 years

Operating leases                $   3,785      $       716      $     2,225      $       783      $            61
Purchase Commitments                5,190            5,190                -                -                    -

Total contractual cash
obligations                     $   8,975      $     5,906      $     2,225      $       783      $            61

Purchase commitments are for purchases made in the normal course of business to meet operational requirements, consisting primarily of raw materials and finished goods inventory. The Company expects to satisfy these commitments primarily from cash from the revenues generated by the delivery of backlogged orders.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, management evaluates its estimates and judgments, including those related to the net realizable value of inventories and intangible assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following . . .