Introduction
Telular Corporation ("Telular" or "the Company") designs, develops, and distributes products and services that utilize wireless networks to provide data and voice connectivity among people and machines. Telular's product and service offerings take advantage of the pervasiveness and data transport capabilities of wireless phone networks in order to replace functionality historically provided by wireline communications networks. Bridging the gap between traditional, wireline equipment and wireless phone networks, the Company's products and services replace the wireline network while providing the added flexibility and security of wireless connectivity.
The Company generates most of its revenue by designing, producing and selling products and through the delivery of machine-to-machine ("M2M") and event monitoring services, such as its TELGUARD and TankLink services, which are delivered via 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.
The Company's operating expense levels are based in large part on expectations of future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and the Company's operating results for that quarter, and potentially for future quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in Cautionary Statements that are set forth in Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2008.
The market for the Company's products is primarily in North and South America and consists of a number of vertical applications. The Telguard and TankLink lines of business combine a specialty terminal product with an ongoing service component to monitor alarm systems and the level of fluid in tanks. Telular's PHONECELL FCTs are electronic communications devices which provide users voice, fax and internet capabilities over commercial wireless networks. 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.
The Company believes that its future success depends on its ability to continue to meet customers' needs through product and service innovation, particularly the creation of event monitoring services that can be sold with products. 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. The Company has designed and developed the TELGUARD DIGITAL TG-11 model for certain vendor panels in the security industry. Similarly, the Company is enhancing and expanding the specialty communications products associated with its TankLink service in order to better serve customer demand in that market. In addition, Telular completed development of the SX6 and SX7 terminal products during fiscal 2008 and in the early part of fiscal 2009, which carry voice, data, and fax services over 2G and 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 the Company's 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.

Results of Operations
First quarter fiscal year 2009 compared to first quarter fiscal year 2008
Revenues and Cost of Sales

                                                                     Change
                                    2009         2008        Amount       Percentage
         Net product sales
         Monitoring Equipment     $  3,789     $ 10,135     $ (6,346 )            -63 %
         Terminal                    1,871        4,195       (2,324 )            -55 %

         Total product revenues      5,660       14,330       (8,670 )            -61 %
         Service revenues            5,115        5,396         (281 )             -5 %

         Total revenues             10,775       19,726       (8,951 )            -45 %

         Cost of sales
         Products                    3,959        9,783       (5,824 )            -60 %
         Services                    2,358        2,896         (538 )            -19 %

                                     6,317       12,679       (6,362 )            -50 %

         Gross margin             $  4,458     $  7,047     $ (2,589 )

Revenues
Product revenues decreased 61% primarily due to the decreased sales of our Telguard monitoring equipment as a result of lower, relative customer demand. Demand for these products during the first quarter of fiscal 2008 was heightened by an FCC mandated transition from analog to digital cellular service. In addition, certain of our Terminal distributors in Central American Latin American ("CALA") region reduced their existing inventory during the quarter, resulting in decreased purchases.
Service revenues decreased 5% due to a reduction in the number of monitoring units placed in service during the quarter. Despite activating 23,000 new subscribers during the period, the Company experienced an unexpected reduction of existing subscribers in excess of that amount as a result of one major dealer cleansing its customer database to eliminate inactive subscribers. Cost of Sales
The decrease in cost of sales of 50% in the first quarter of fiscal 2009 when compared to the same period of fiscal 2008 reflects the lower sales volumes. Gross margin, as a percentage of sales, was 41% for the first quarter of fiscal 2009 as compared to 36% for the same period last year. Service revenue, as a percentage of total revenues, was 47% for the three months ended December 31, 2008, compared 27% for the same period of fiscal 2008. This resulted in the increase in total margin because service revenue has a lower cost of sales than products.

Operating Expenses

                                                              Change                 % of Revenues
                               2009        2008       Amount      Percentage       2009         2008

Engineering and development   $ 1,248     $ 1,367     $  (119 )            -9 %        11 %         7 %
Selling and marketing           1,408       1,546        (138 )            -9 %        13 %         8 %
General and administrative      1,706       1,894        (188 )           -10 %        16 %        10 %
Amortization                       70           -          70            >100 %         1 %         0 %

                              $ 4,432     $ 4,807     $  (375 )                        41 %        25 %

Engineering and Development
The decrease of 9% was primarily due to decreased professional fees of $46, as a result of utilizing fewer consultants, reduced travel costs of $50 and a decrease in engineering materials and supplies of $23. Selling and Marketing
The decrease in selling and marketing of 9% was primarily due to $350 decrease in agent commission offset by an increase in payroll related expenses of $212, of which, $80 was an increase in non-cash compensation and the remaining $132 was an increase in salaries, taxes and benefits. The decrease in agent commissions was due to the lower sales volume. The increase in salaries was to due to additional marketing personnel hired during fiscal year 2008. General and Administrative (G&A)
The decrease of 10% was primarily due to a $138 decrease in payroll related expenses, a $30 decrease in bank and credit card fees, a $25 decrease in professional fees and a $20 decrease in travel expenses, offset by an increase in proxy solicitation costs of $25 related to the recently settled proxy contest. The decrease to payroll expenses relates to a decrease in non-cash compensation of $54 and an $83 decrease in bonus expense. Other Income
Other income for the three months ended December 31, 2008 increased $84 to $91 from $7 for the same period of fiscal 2008. The increase was primarily due to an increase of $16 of interest income, a reduction of miscellaneous business taxes of $60 and $15 for decrease in various miscellaneous expenses. Income Taxes
The Company recorded no income tax provision for the three months ended December 31, 2008 because the Company was able to utilize its net operating loss carrforward to offset taxable income.

Liquidity
Management regularly reviews net working capital in addition to cash to determine if it has enough cash to operate the business. On December 31, 2008, the Company had $19,258 of unrestricted cash and cash equivalents and a working capital surplus of $33,604. 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 volatility of demand in certain 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.
Cash From operations
The Company generated $710 of cash from operations during the first three months of fiscal year 2009 compared to cash used of $3,893 during the same period of fiscal year 2008. The components of cash generated for the first three months of fiscal 2009 are as follows:

    $   1,782      The decrease in trade accounts receivable is due primarily to
                   the collection during the period of balances outstanding on
                   September 30, 2008 and timely customer payments on sales made
                   during the three month period.
          425      The decrease in inventory reflects the Company overall
                   inventory strategy; to sell from existing inventory while
                   reducing production levels to augment the reduction in sales
                   levels.
       (1,396 )    Trade accounts payable primarily consists of amounts due to
                   Telular's contract manufacturers. The decrease
                   in trade accounts payble is consistent with the Company's
                   strategy to reduce production in response to reduced sales
                   levels.
       (1,583 )    The decrease in accrued liabilities was primarily due to
                   payments for bonuses, royalties and co-op advertising and the
                   reduction in liability balances related to reduced sales
                   volumes such as agent commissions and certain operating
                   expenses.
          820      Non-cash expenses: $551 from stock based compensation; $199
                   depreciation expense; $70 amortization expense.
          545      Net cash provided by other working capital items.
          117      Income from continuing operations; cash provided.

    $     710      Total cash provided by continuing operations

Cash Used in Investing Activities
Investing activities used $2,410 of cash for the first three months of fiscal 2009 primarily from the acquisition of SupplyNet Communications for $2,179 and from the purchase of equipment of $231. This compares to cash provided by investing activities of $181, primarily from the release of restricted cash, for the same period of fiscal 2008.
Cash Used in Financing Activities
The decrease in cash from financing activities of $1,798 in the first three months of fiscal 2009 is due to the Company's payment of notes payable of $923, which were acquired in the SupplyNet purchase and the repurchase of its common stock on the open market of $875. Cash of $2,090 was provided by financing activities in the first three months of fiscal year 2008 as a result of the exercise of stock options and warrants.
Cash Flows of Discontinued Operations
The increase in cash from discontinued operations of $1,588 was due to the collections of trade accounts receivable of $1,494 and $94 from the sale of the remaining fixed assets.

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, 2008, and September 30, 2008, the inventory reserves for continuing operations were $247 and $84, 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 and Intangible Assets
The Company evaluates the fair value and recoverability of the goodwill whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable or at least annually. In determining fair value and recoverability, the Company makes projections regarding future cash flows. These projections are based on assumptions and estimates of growth rates for the related business segment, anticipated future economic conditions, and the assignment of discount rates relative to risk associated with companies in similar industries and estimates of terminal values. An impairment loss is assessed and recognized in operating earnings when the fair value of the asset is less than its carrying amount.
The Company reviews for the impairment of other intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates recoverability of other intangible assets by comparing the carrying amount of the intangible asset to future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets calculated using a discounted future cash flow analysis. Income Taxes
The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Currently, the Company has significant deferred tax assets principally related to the carryforward of net operating losses. Deferred tax assets are reviewed regularly for recoverability, and when necessary, valuation allowances are established based on historical tax losses, projected future taxable income, and expected timing of reversals of existing temporary differences. Valuation allowances have been provided for all deferred tax assets, as management makes assessments about the realizability of such deferred tax assets. Changes in the Company's expectations could result in significant adjustments to the valuation allowances, which would significantly impact the Company's results of operations.
Forward Looking Information
The Company includes certain estimates, projections and other forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934 in its reports and in other publicly available material. Statements regarding expectations, including performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forwarding-looking statements.
These statements reflect management's judgments based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, management has made assumptions regarding, among other things, customer growth and retention, pricing, operating costs and the economic environment.

The words "estimate", "project", "intend", "expect", "believe", "target" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout Management's Discussion and Analysis. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. The Company is not obligated to and expressly disclaims any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. Other risks and uncertainties are discussed in Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2008 which is hereby incorporated by reference.