Edgar Filing: TELULAR CORP

telular_10q-063012.htm

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to .

Commission File Number 0-23212

Telular Corporation

(Exact name of Registrant as specified in its charter)

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

311 South Wacker Drive, Suite 4300, Chicago, Illinois 60606-6622

(Address of principal executive offices and zip code)

(312) 379-8397

(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 X No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No

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

Large accelerated filer		Accelerated filer X
Non-accelerated filer		Smaller reporting company
(Do not check if a smaller reporting company)

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

Yes No X

The number of shares outstanding of the Registrant's common stock, par value $.01 per share, as of July 27, 2012, the latest practicable date, was 16,679,823 shares.

TELULAR CORPORATION

Index

Part I - Financial Information	Page No.

Item 1. Financial Statements:

Consolidated Balance Sheets June 30, 2012 (unaudited) and September 30, 2011	3

Consolidated Statements of Operations (unaudited) Three and Nine Months Ended June 30, 2012 and June 30, 2011	4

Consolidated Statement of Stockholders’ Equity (unaudited) Nine Months Ended June 30, 2012	5

Consolidated Statements of Cash Flows (unaudited) Nine Months Ended June 30, 2012 and June 30, 2011	6

Notes to Consolidated Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3. Quantitative and Qualitative Disclosures about Market Risk	36

Item 4. Controls and Procedures	36


Part II - Other Information

Item 1. Legal Proceedings	37

Item 1A. Risk Factors	37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3. Defaults Upon Senior Securities	37

Item 4. Mine Safety Disclosure	37

Item 5. Other Information	37

Item 6. Exhibits	37

Signatures	40

TELULAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	June 30, 2012			September 30, 2011
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,077		$	12,642
Trade accounts receivable, net		10,645			5,859
Inventories, net		6,573			3,005
Deferred taxes, net		767			672
Prepaid expenses and other current assets		997			465
Total current assets		30,059			22,643

Property and equipment, net		3,318			2,282
Other assets:
Goodwill		20,047			7,502
Intangible assets, net		24,103			3,469
Long term deferred taxes, net		33,794			31,839
Other		424			69
Total other assets		78,368			42,879
Total assets	$	111,745		$	67,804

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	5,244		$	2,916
Accrued liabilities		6,918			4,212
Income taxes payable		96			-
Current portion of long term debt		3,375			-
Total current liabilities		15,633			7,128

Long term debt		25,875			-
Other long term liabilities		46			249
Total long term liabilities		25,921			249
Total liabilities		41,554			7,377

Stockholders' equity:
Common stock; $.01 par value; 75,000,000 shares authorized; 21,256,736 and 19,712,493 shares issued at June 30, 2012 and September 30, 2011, respectively		212			197
Additional paid-in capital		192,210			181,266
Dividends		(26,721	)		(21,248	)
Accumulated deficit		(85,937	)		(90,215	)
Treasury stock, at cost; 4,577,163 shares at June 30, 2012 and September 30, 2011, respectively		(9,573	)		(9,573	)
Total stockholders' equity		70,191			60,427
Total liabilities and stockholders' equity	$	111,745		$	67,804

See accompanying notes

TELULAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)

(Unaudited)

	Three Months Ended June 30,					Nine Months Ended June 30,
	2012			2011		2012			2011
Revenue
M2M service revenue	$	13,310		$	7,987	$	33,014		$	23,091
M2M hardware sales		9,399			4,347		22,416			11,708
Subtotal M2M		22,709			12,334		55,430			34,799
Other product sales		190			490		968			2,607
Total revenue		22,899			12,824		56,398			37,406

Cost of sales
M2M service cost of sales		3,557			2,543		9,022			8,416
M2M hardware cost of sales		7,040			2,856		16,152			7,963
Subtotal M2M		10,597			5,399		25,174			16,379
Other product cost of sales		177			456		1,159			2,469
Total cost of sales		10,774			5,855		26,333			18,848

Gross margin		12,125			6,969		30,065			18,558

Operating expenses
Engineering and development expenses		2,117			1,122		5,434			3,358
Selling and marketing expenses		3,236			1,970		7,720			5,451
General and administrative expenses		4,128			1,587		9,646			5,492
Total operating expenses		9,481			4,679		22,800			14,301

Income from operations		2,644			2,290		7,265			4,257
Other income (expense), net		(226	)		-		(380	)		131
Income from continuing operations before income taxes		2,418			2,290		6,885			4,388
Provision for income taxes		936			255		2,607			1,852
Net income	$	1,482		$	2,035	$	4,278		$	2,536

Income per common share:
Basic	$	0.09		$	0.14	$	0.27		$	0.17
Diluted	$	0.08		$	0.13	$	0.25		$	0.16

Weighted average number of common shares outstanding:
Basic		16,630,662			15,072,061		15,942,938			15,008,214
Diluted		17,603,574			16,017,257		16,912,092			15,868,051

Dividends paid per share of common stock	$	0.11		$	0.10	$	0.33		$	1.29

See accompanying notes

TELULAR CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In Thousands)

(Unaudited)

	Common Stock and Additional Paid-In Capital									Accumulated			Treasury Stock						Total Stockholders'
	Amount			Shares			Dividends			Deficit			Amount			Shares			Equity

Balance at September 30, 2011	$	181,463			19,712		$	(21,248	)	$	(90,215	)	$	(9,573	)		(4,577	)	$	60,427


Comprehensive and Net Income		-			-			-			4,278			-			-			4,278
Stock based compensation expense		1,115			-			-			-			-			-			1,115
Stock issued:
Purchase of SkyBitz		8,687			992			-			-			-			-			8,687
Options exercised		3,733			770			-			-			-			-			3,733
Stock withheld for strike price and taxes on options exercised		(2,652	)		(315	)		-			-			-			-			(2,652	)
Restricted stock units converted		-			112			-			-			-			-			-
Stock withheld for taxes on restricted stock conversions		(82	)		(14	)		-			-			-			-			(82	)
Dividends paid		-			-			(5,315	)		-			-			-			(5,315	)
Dividend equivalent units issued		158			-			(158	)		-			-			-			-

Balance at June 30, 2012	$	192,422			21,257		$	(26,721	)	$	(85,937	)	$	(9,573	)		(4,577	)	$	70,191

See accompanying notes

TELULAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine months ended June 30,
	2012			2011
Operating Activities:
Net income	$	4,278		$	2,536
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
Depreciation		1,069			771
Amortization		2,913			519
Stock based compensation expense		1,115			1,347
Loss on disposal of operating assets		27			10
Deferred income taxes		1,559			1,676
Changes in assets and liabilities, net of the effects of acquisition:
Trade accounts receivable		(1,080	)		1,505
Inventories		(1,980	)		1,120
Prepaid expenses and other assets		398			(565	)
Trade accounts payable		1,056			(16	)
Accrued liabilities		(786	)		994
Income Taxes Payable		96			68
Net cash provided by operating activities		8,665			9,965

Investing Activities:
Acquisition of property and equipment		(856	)		(685	)
Purchase of SmartTank		-			(7,921	)
Purchase of SkyBitz		(42,855	)		-
Net cash used in investing activities		(43,711	)		(8,606	)

Financing Activities:
Proceeds from the exercise of stock options		859			362
Payment of dividends		(5,315	)		(19,386	)
Proceeds from bank loan		30,000			-
Payment of bank loan		(750	)		-
Stock issued for purchase of SkyBitz		8,687			-
Net cash provided by (used in) financing activities		33,481			(19,024	)

Net decrease in cash and cash equivalents		(1,565	)		(17,665	)

Cash and cash equivalents, beginning of period		12,642			27,678
Cash and cash equivalents, end of period	$	11,077		$	10,013

See accompanying notes

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30. 2012

(Unaudited, in thousands, except share data)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of financial statements in conformity with GAAP 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, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2012. 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, 2011. The amounts presented herein are in U.S. dollars and are in thousands, except for per share information.

2. Summary of Significant Accounting Policies

Financial Instruments

Financial instruments that potentially subject Telular Corporation (“Telular”) to significant concentrations of credit risk consist principally of cash and cash equivalents, trade accounts receivable, trade accounts payable and bank borrowings. The credit risks related to cash and cash equivalents are limited to Telular’s investments of cash in money market funds and the possibility that the per-unit value of these funds may decline below $1.00. As of June 30, 2012 and September 30, 2011, the per-unit value of these funds was $1.00.

	June 30 2012		September 30, 2011

Cash	$	10,994	$	12,559
Money market funds		83		83
Total cash and cash equivalents	$	11,077	$	12,642

At June 30, 2012 and September 30, 2011, the majority of Telular’s cash and cash equivalents are maintained at one institution, Silicon Valley Bank (“SVB”). All funds in Telular’s non-interest bearing deposit account are currently fully insured by the FDIC. Telular regularly reviews the investments that are included in the money market funds it invests in and, when appropriate, limits its credit risk by diversifying its investments. Credit risks with respect to trade accounts receivables are limited due to the diversity of customers comprising Telular’s customer base. For international sales, Telular generally receives payment in advance of shipment or irrevocable letters of credit that are confirmed by U.S. banks. Telular performs ongoing credit evaluations and charges amounts to operations when they are determined to be uncollectible. Credit risks associated with trade accounts payable are limited due to the following: (1) a significant amount of Telular’s purchases are from its contract manufactures with whom it has agreements; (2) substantially all of Telular’s significant purchases are done with accepted purchase orders and (3) substantially all of Telular’s payments to its vendors are made in U.S. currency. In determining the fair value of its financial instruments, Telular uses Level 1 guidance in which quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets.

Income Taxes

Telular utilizes the liability method of accounting for income taxes whereby it recognizes deferred tax assets and liabilities for future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets are reduced by a valuation allowance if, based upon management’s estimates, it is more likely than not, that a portion of the deferred tax assets will not be realized in a future period. The estimates utilized in the recognition of deferred tax assets are subject to revision in future periods based on new facts or circumstances. Telular recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement with the relevant tax authority. Telular does not include interest and penalties related to income tax matters in tax expense.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

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 to the assumed exercise of stock options and warrants and the assumed conversion of restricted stock units..

The following table reconciles the dilutive effect of common stock equivalents:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
Common Shares:
Basic weighted average common shares outstanding		16,630,662		15,072,061		15,942,938		15,008,214
Dilutive effect of stock options		610,935		653,320		666,334		628,596
Dilutive effect of restricted stock units		361,977		291,876		302,820		231,241
Dilutive effect of warrants		-		-		-		-
Total		17,603,574		16,017,257		16,912,092		15,868,051


Net Income	$	1,482	$	2,035	$	4,278	$	2,536

Income per common share:
Basic	$	0.09	$	0.14	$	0.27	$	0.17
Diluted	$	0.08	$	0.13	$	0.25	$	0.16

The following stock options, restricted stock units and warrants were excluded as being antidilutive from the shares outstanding used to compute diluted earnings per share:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011

Stock options		15,000		449,200		186,500		461,700
Restricted stock units		5,679		-		9,244		707
Warrants		50,000		50,000		50,000		50,000
		70,679		499,200		245,744		512,407

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

Stock Based Compensation

Telular has a Stock Incentive Plan, a 2008 Employee Stock Incentive Plan and a Non-Employee Director Stock Incentive Plan. The cost of stock options granted is calculated based on their grant date fair value and recognized over the vesting period. The fair value of stock options granted and warrants issued is estimated at the grant date or issuance date using a Black-Scholes stock option valuation model. Key factors in determining the valuation of a grant under the Black-Scholes model are: a volatility factor of the expected market price of Telular’s common stock, a risk-free interest rate, a dividend yield on Telular’s common stock and the expected term of the option.

On November 8, 2011 Telular awarded to officers and employees 187,400 stock options and 59,300 performance stock units (“PSUs”). Telular valued the stock options granted at $333 using the Black-Scholes valuation method. The PSUs were valued at $356 based on the price of Telular’s common stock on the date of issuance. The stock options will vest over a three year period and the cost will be taken as a charge to operating expenses over the vesting period. The PSUs will be earned based on the level of achievement of certain fiscal 2012 performance measures and will vest ratably from the grant date through September 30, 2014. For fiscal 2012 these performance measures include the achievement of targeted Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Non-Cash Compensation (“Adjusted EBITDA”) and the achievement of strategic revenue levels. The cost of these PSUs will be taken as a charge to operating expenses on a pro-rata basis over the vesting period. At September 30, 2012, the level of achievement of the performance measures will be determined and the actual amount of PSUs earned will be finalized.

Also on November 8, 2011, Telular made a final determination of the performance measures related to the PSUs issued to officers and employees on February 1, 2011. As a result, an additional 3,177 PSUs were issued to officers and employees. These PSUs were valued at $21 and include the true-up of dividend equivalent units (“DEUs”) valued at $1.

On November 29, 2011 in conjunction with the payment of Telular’s regular quarterly dividend, Telular issued 7,146 DEUs to director and employee holders of restricted stock units and PSUs. These DEUs were valued at $51 and were recorded as a dividend on common stock.

On January 31, 2012 Telular awarded 26,915 RSUs to directors, valued at $225, based on the price of Telular’s common stock on the date of issuance. The RSUs will vest over a one year period and the cost will be taken as a charge to operating expenses on a pro-rata basis over the vesting period.

On February 1, 2012, Telular awarded 46,800 PSUs to officers and employees of SkyBitz, Inc. (“SkyBitz”). The PSUs were valued at $410 based on the price of Telular’s common stock on the date of issuance. The PSUs will be earned based on the level of achievement of targeted Adjusted EBITDA over the nine months ended September 30, 2012 and will vest ratably from the grant date through September 30, 2014. The cost of these PSUs will be taken as a charge to operating expenses on a pro-rata basis over the vesting period. At September 30, 2012, the level of achievement of the performance measures will be determined and the actual amount of PSUs earned will be finalized. Subsequent to issuance of the grant, 1,400 PSUs valued at $12 were cancelled during the second quarter, and 11,700 PSUs valued at $102 were cancelled during the third quarter.

On February 21, 2012 in conjunction with the payment of Telular’s regular quarterly dividend, Telular issued 6,725 DEUs to director and employee holders of RSUs and PSUs. These DEUs were valued at $53 and were recorded as a dividend on common stock. During the third quarter 161 DEUs were cancelled at a value of $1.

On May 1, 2012 Telular awarded 15,000 stock options and 12,065 PSUs. Telular valued the stock options granted at $40 using the Black-Scholes valuation method. The PSUs were valued at $110 based on the price of Telular’s common stock on the date of issuance. The stock options will vest over a three-year period and the cost will be taken as a charge to operating expenses over the vesting period.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

The PSUs will be earned based on the level of achievement of certain fiscal 2012 performance measures and will vest ratably from the grant date through September 30, 2014. 1,375 of the PSUs were granted to Telular employees and performance measures match those for the PSUs granted on November 8, 2011. The remaining 10,690 PSUs were granted to SkyBitz employees and the performance measures match those for the PSUs granted on February 1, 2012. The cost of these PSUs will be taken as a charge to operating expenses on a pro-rata basis over the vesting period. At September 30, 2012, the level of achievement of the performance measures will be determined and the actual amount of PSUs earned will be finalized.

Also on May 1, 2012, Telular awarded 3,300 RSUs to directors, valued at $30, based on the price of Telular’s common stock on the date of issuance. The RSUs will vest over a nine-month period and the cost will be taken as a charge to operating expenses on a pro-rata basis over the vesting period.

On May 22, 2012, in conjunction with the payment of Telular’s regular quarterly dividend, Telular issued 7,494 DEUs to director and employee holders of RSUs and PSUs. These DEUs were valued at $56 and were recorded as a dividend on common stock. Subsequent to this grant, 155 DEUs were cancelled at a value of $1.

Telular recognized stock-based compensation expense as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011

Stock based compensation:
Stock options	$	90	$	76	$	335	$	322
Restricted stock		286		259		780		550
Common stock		-		-		-		475
	$	376	$	335	$	1,115	$	1,347

Fair Value of Financial Instruments

At June 30, 2012 and September 30, 2011, Telular’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable and bank borrowings. The carrying values reported in the consolidated balance sheet for these financials instruments approximate their fair value because of their short maturities.

Warranty

Telular provides warranty coverage for a period of 12 months on its tank monitoring and asset tracking equipment, 15 months on terminal products and 24 months on event monitoring products from the date of shipment. A provision for warranty expense is recorded at the time of shipment and adjusted quarterly based on historical warranty experience.

The following table is a summary of Telular’s accrued warranty obligations;

	Nine Months Ended June 30,
	2012			2011

Balance at the beginning of the period	$	115		$	95
Opening balance from acquisition during the period		1,677			-
Warranty expense during the period		199			165
Warranty payments made during the period		(291	)		(184	)
Balance at the end of the period	$	1,700		$	76

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

Segment Reporting

Telular reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions regarding resource allocations and assessing performance as the source of Telular’s reportable segments. Information about Telular’s major customers and geographic areas is also disclosed.

Dividends and Common Stock Issued

In November 2011, Telular declared a regular quarterly dividend of $0.11 per share of common stock payable on November 29, 2011 to shareholders of record on November 22, 2011. In connection with the distribution of the dividends, Telular issued DEUs to director and employee holders of RSUs at a total value of $51. The DEUs were then converted to RSUs at a per-unit value of $7.09, which represented the average of the high and low selling prices of Telular common stock traded on the dividend payment date of November 29, 2011. Telular paid $1,670 for the cash dividend and issued 7,146 RSUs.

In February 2012, Telular declared a regular quarterly dividend of $0.11 per share of common stock payable on February 21, 2012 to shareholders of record on February 14, 2012. In connection with the distribution of the dividends, Telular issued DEUs to director and employee holders of RSUs at a total value of $53. The DEUs were then converted to RSUs at a per-unit value of $7.91, which represented the average of the high and low selling prices of Telular common stock traded on the dividend payment date of February 21, 2012. Telular paid $1,774 for the cash dividend, recorded a dividend payable of $38 and issued 6,725 RSUs.

In May 2012, Telular declared a regular quarterly dividend of $0.11 per share of common stock payable on May 22, 2012 to shareholders of record on May 15, 2012. In connection with the distribution of the dividends, Telular issued DEUs to director and employee holders of RSUs at a total value of $53. The DEUs were then converted to RSUs at a per-unit value of $7.41, which represents the average of the high and low selling prices of Telular common stock traded on the dividend payment date of May 22, 2012. Telular paid $1,834 for the cash dividend and issued 7,494 RSUs.

Recently Issued Accounting Pronouncements

In the third quarter of fiscal 2012, there were no accounting standard updates that affected Telular.

3. Business Combinations

SkyBitz Acquisition

On February 1, 2012, Telular purchased 100% of the capital stock of SkyBitz. SkyBitz provides mobile resource management solutions focusing on over-the-road tracking via satellite. SkyBitz’s satellite-based technology provides real-time visibility of many asset types, including truck trailers, intermodal containers, sea-going containers, rail cars, power generators and rental equipment. The purchase was accounted for using the purchase method in accordance with ASU: Business Combinations (Topic 805), (“ASU 805”). Under the terms of the agreement, Telular paid consideration of approximately $42,855, comprised of $34,168 in cash and 991,626 shares of Telular’s common stock, valued at approximately $8,687. The cash portion of the consideration was funded with a $30,000 five-year term loan from SVB and approximately $4,168 from Telular’s cash on hand.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

The following table summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the date of the acquisition:

Cash and cash equivalents	$	2,334
Accounts receivable		3,706
Inventories, net		1,589
Deferred tax assets - current		796
Other current assets		667
Property and equipment, net		1,276
Customer relationships		9,080
Developed technology		6,130
Tradenames and trademarks		2,730
Backlog		5,560
Other long term assets		48
Deferred tax assets - long term		12,989
Goodwill		12,545
Total assets acquired		59,450

Accounts payable		1,272
Accrued liabilties		4,853
Deferred revenue		280
Deferred tax liabilities - long term		10,176
Other long term liabilities		14
Total liabilities assumed		16,595
Net assets acquired	$	42,855

The goodwill associated with the acquisition of SkyBitz is not deductible for income tax purposes.

The following summarized unaudited pro forma financial information for the full year ended September 30, 2011 and the nine months and three months ended June 30, 2012, assumes the acquisition occurred as of October 1, 2010 and October 1, 2011, respectively:

	Twelve Months Ended		Nine Months Ended
	September 30, 2011		June 30, 2012		June 30, 2011

Net revenues	$	85,297	$	69,116	$	63,237
Net income	$	3,593	$	4,756	$	825
Basic income per common share	$	0.22	$	0.28	$	0.05
Diluted income per common share	$	0.21	$	0.27	$	0.05

	Three Months Ended
	June 30, 2012		June 30, 2011

Net revenues	$	22,899	$	22,038
Net income	$	1,482	$	1,467
Basic income per common share	$	0.09	$	0.09
Diluted income per common share	$	0.08	$	0.09

Telular purchased SkyBitz on February 1, 2012. The financial results of its operations were fully consolidated with Telular’s results of operations for the months of February and March in the second quarter of fiscal 2012 and for all of the third quarter of fiscal 2012.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

The pro forma results include adjustments for amortization of intangibles, the reduction of interest expense related to SkyBitz debt which was fully paid in conjunction with the purchase, the addition of interest expense related to the new loan Telular incurred as part of the funding of the purchase of SkyBitz, and the adjustment of income tax expense. 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, 2010 and October 1, 2011, nor are they necessarily indicative of future consolidated results of operations.

SMARTank Acquisition

On January 7, 2011, Telular acquired certain assets and assumed certain liabilities underlying the SMARTank line of business of SmartLogix, Inc. (“SmartLogix”), Telular’s largest value added reseller of TankLink tank monitoring solutions. Telular also entered into a Sales and Service Agreement (“Service Agreement”) with SmartLogix. The purchase was accounted for using the purchase method in accordance with ASU 805.

Pursuant to the Asset Purchase Agreement (the “Agreement”), the aggregate purchase price was $7,921, which consisted of: $2,294 of cash paid directly to SmartLogix, $4,484 applied to the existing trade receivable balance due to TankLink from SmartLogix, and $1,143 of accrued earn-outs. Under the Agreement, Telular agreed to purchase certain net working capital assets for cash, such as trade accounts receivables, inventory, leased monitoring equipment, and trade accounts payable and deferred revenue. The total value of the net working capital of approximately $678 is included in the total cash paid to SmartLogix. Pursuant to an earn-out provision contained in the Agreement, SmartLogix has the ability to earn a total of $2,400 over a two year period depending on the future performance of SMARTank. Changes in the estimates of the amount of earn-outs that may be paid are taken to operations. At June 30, 2012 the accrued earn-outs totaled $291 and represent Telular’s best estimate of the actual amount of this future liability.

Under the Service Agreement, Telular appointed SmartLogix as an exclusive sales representative for the purpose of selling tank monitoring equipment to customers in the fuels and lubricants market. Pursuant to the terms in the Service Agreement, Telular will pay SmartLogix a 20% commission on gross product revenue, as well as a commission on service revenue earned on the monitoring units sold, typically calculated as three months of related service revenue. The initial term of the Service Agreement is two years and may be renewed for an additional year.

The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition:

Accounts receivable	$	438
Inventories		436
Property and equipment		94
Customer relationships		2,810
Non-compete agreement		20
Tradename		70
Goodwill		4,343
Total assets acquired		8,211

Accounts payable - Vendors		30
Deferred revenue		260
Total liabilities assumed		290
Net assets acquired	$	7,921

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

4. 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, are as follows:

	June 30, 2012			September 30, 2011


Trade receivables	$	11,037		$	5,898
Less: allowance for doubtful accounts		(392	)		(39	)
	$	10,645		$	5,859

The allowance for doubtful accounts increased by $353 primarily as a result of including SkyBitz’s allowance for doubtful accounts and identifiying certain customers who have outstanding accounts receivable balances that are significantly past due.

5. Inventories

Inventories consist of the following:

	June 30, 2012			September 30, 2011


Raw materials	$	1,001		$	1,559
Finished goods		6,197			2,095
		7,198			3,654
Less: reserve for obsolescence		(625	)		(649	)
	$	6,573		$	3,005

The reserve for obsolescence decreased by $24 due to the following:

$660 of disposal of parts that were no longer being used for the production of current finished goods, decreasing the reserve for obsolescence;

$336 the inclusion of SkyBitz’s reserve for obsolescence; and,

$300 of additional reserve for anticipated excess and obsolete inventory.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

6. Property and Equipment

Property and equipment consists of the following:

	June 30, 2012			September 30, 2011


Furniture and fixtures	$	317		$	108
Computer equipment		4,844			3,177
Machinery and equipment		7,845			3,769
Leasehold improvements		728			461
Product certification costs		615			546
		14,349			8,061
Less accumulated depreciation and amortization		(11,031	)		(5,779	)
Property and equipment, net	$	3,318		$	2,282

7. Goodwill and Intangible Assets

Goodwill balances as of June 30, 2012 and September 30, 2011 are as follows:

Balance at September 30, 2011	$	7,502
Additional goodwill		12,545
Impairment of goodwill		-
Balance at June 30, 2012	$	20,047

The increase in goodwill is attributable to Telular’s acquisition of SkyBitz. Telular evaluates the fair value and recoverability of the goodwill annually during Telular’s third quarter or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. During the third quarter of fiscal 2012, there were no events or changes in circumstances that would indicate that the carrying value of goodwill may not be recoverable.

During the first quarter of fiscal 2012, Telular incurred $7 of costs related to new patents. These costs are not complete, and therefore have not yet been amortized.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

Telular is amortizing its intangible assets over a period of 36 to 75 months. The balances are as follows:

	Weighted Average		June 30, 2012							September 30, 2011
	Useful Life (in months)		Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net

Customer Relationships		70.6	$	13,120	$	(2,160	)	$	10,960	$	4,040	$	(971	)	$	3,069
Developed Technology		53.3		6,450		(851	)		5,599		320		(192	)		128
Backlog		36.0		5,560		(772	)		4,788		-		-			-
Tradename		58.2		2,870		(350	)		2,520		140		(96	)		44
Patents & Trademarks		60.0		163		(34	)		129		116		(18	)		98
License Agreement		75.0		150		(53	)		97		150		(35	)		115
Non-Compete Agreement		36.0		20		(10	)		10		20		(5	)		15
Total intangible assets			$	28,333	$	(4,230	)	$	24,103	$	4,786	$	(1,317	)	$	3,469

As a result of the acquisition of SkyBitz, Telular recorded $23,500 of intangible assets consisting of $9,080 of customer relationships, $6,130 of developed technology, $5,560 of backlog and $2,730 of tradenames and trademarks. The amortization expense for the three months ended June 30, 2012 and 2011 was $1,567 and $223 respectively. Amortization expense for the nine months ended June 30, 2012 and 2011 was $2,913 and $519 respectively. Telular reviews for the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. There were no events or changes in circumstances during the three months ended June 30, 2012 that would indicate that the carrying value of intangibles may not be recoverable.

Amortization expense for the remaining estimated useful life of the acquired intangible assets is as follows for the years ending September 30:

Fiscal Year
2012	$	1,570
2013		6,254
2014		6,097
2015		4,461
2016		3,198
Thereafter		2,523
	$	24,103

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

8. Income Taxes

Telular has provided for income taxes based on U.S tax laws and rates. Deferred tax assets and liabilities are determined based on the difference between GAAP financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. For the three and nine months ended June 30, 2012 and 2011, income tax expense consisted of the following:

	For the Three Months Ended June 30,						For the Nine Months Ended June 30,
	2012			2011			2012			2011
Current:
Federal	$	194		$	53		$	837		$	101
State		105			28			211			75
Current income tax provision		299			81			1,048			176

Deferred:
Federal		675			214			1,600			871
State		(38	)		(40	)		(41	)		805
Deferred income tax provision		637			174			1,559			1,676
	$	936		$	255		$	2,607		$	1,852

The increase in Telular’s income tax expense for the three months ended June 30, 2012 over the corresponding period in 2011 is primarily due to an increase in non-deductible amortization expense related to the intangibles recorded as a result of the acquisition of SkyBitz. The increase in Telular’s income tax provision for the nine months ended June 30, 2012 over the corresponding period in 2011 is primarily due to increase in taxable income and the increase in non-deductible amortization expense related to the intangibles recorded as a result of the acquisition of SkyBitz.

The provision for income taxes differs from the amount obtained by applying the statutory rate as follows for the three and nine month periods ended June 30:

	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2012		2011		2012		2011
Provision for income taxes at statutory rate		34.0%		34.0%		34.0%		34.0%
Increases (decreases) in taxes resulting from:
Valuation allowance		0.0%		(28.9%)		0.0%		8.2%
Acquisition costs		0.6%		0.0%		1.1%		0.0%
Effect of state rate change		0.0%		0.0%		0.0%		(8.9%)
State taxes net of federal benefit		2.9%		7.3%		1.5%		7.7%
Other		1.2%		(1.3%)		1.3%		1.2%
		38.7%		11.1%		37.9%		42.2%

Telular recorded a tax provision of $936 for the three months ended June 30, 2012 as compared to a tax provision of $255 for the three months ended June 30, 2011, representing effective tax rates of 38.7% and 11.1% respectively. The difference between Telular’s effective tax rate and the 34% federal statutory rate in the current period is due primarily to the increase in state tax expense and the acquisition costs related to the purchase of SkyBitz which are not deductible for tax. The difference between Telular’s effective tax rate and the 34% statutory rate for the three months ended June 30, 2011 is due primarily to the change in valuation allowance and state taxes. In January of 2011, Illinois raised its corporate income tax rate to 9.5% from 7.5% and suspended the utilization of net operating losses (“NOLs”) for three years. Telular adopted a tax strategy to minimize current tax liabilities to the State of Illinois. As a result of this strategy, and Illinois’ decision to suspend the utilization of NOLs, Telular determined that it would have to restore a portion of the previously reversed allowance it had against its net deferred tax assets related to state NOLs. Increasing the valuation allowance resulted in an increase in the deferred tax provision.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

Telular recorded a tax provision of $2,607 for the nine months ended June 30, 2012 as compared to a tax provision of $1,852 for the same period of fiscal 2011, representing effective tax rates of 37.9% and 42.2%, respectively. The difference between Telular’s effective tax rate and the 34% federal statutory rate for the first nine months of fiscal 2012 is due primarily to the acquisition costs related to the purchase of SkyBitz which are not deductible for tax and the effect of state taxes and the effect of state tax expense. The difference between Telular’s effective tax rate and the 34% federal statutory rate for the first nine months of fiscal 2011 is primarily due to the effect the reinstatement of the valuation allowance for state NOLs and the change in the corporate income tax rate for the State of Illinois as discussed above.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Telular’s deferred tax assets are as follows:

	June 30, 2012			September 30, 2011
Deferred tax assets:
Reserve for inventory obsolescence	$	269		$	231
Allowance for doubtful accounts		146			13
Fixed assets		98			5
Intangible assets		133			43
Non-cash compensation		1,479			1,698
Alternative minimum tax credits		434			324
Accrued liabilities		754			427
Deferred revenue net of deferred cost of sales		247			-
Net operating loss carryfowards		45,224			35,810
Other		217			1
Total deferred tax assets		49,001			38,552

Deferred tax liabilities:
Intangible assets		(8,278	)		(282	)
Fixed assets		(338	)		(29	)
Production certification costs		(113	)		(118	)
Total deferred tax liabilities		(8,729	)		(429	)
Net deferred tax asset		40,272			38,123
Less valuation allowance		5,711			5,612
Net deferred tax assets	$	34,561		$	32,511

Telular files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. As of October 1, 2010, Telular is no longer subject to U.S. Federal examinations by taxing authorities for years prior to 2008. Income tax returns for fiscal years 2009, 2010 and 2011 are still open for examination. However, utilization of net operating loss carryforwards that were generated in years prior to 2008 may result in a prior tax year being open for IRS examination.

Based on Internal Revenue Code Section 382, changes in the ownership of Telular may limit the utilization of NOLs of Telular. Telular has determined, as of June 30, 2012, that there are no limitations on the utilization of its NOLs. SkyBitz was purchased on February 1, 2012. SkyBitz, as a result of ownership changes prior to Telular’s acquisition, has two limitations on the utilization of its NOLs. Telular’s acquisition has resulted in another limitation. Telular has made a preliminary assessment of the future utilization of SkyBitz’s NOLs. Approximately $11,631 of SkyBitz’s NOLs would expire unused as a result of its pre-Telular acquisition limitations. Telular estimates that there would be no further utilization limitations in the future. Accordingly, a deferred tax asset was recorded only for those NOLs Telular believes it will be able to utilize. Telular’s estimate may be revised subsequent to SkyBitz’s final tax return filing.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

9. Debt

On January 22, 2011, Telular executed an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with SVB. The Amended Loan Agreement provided for a two year term with total maximum borrowings of $10,000. Telular had the option under the Amended Loan Agreement to have interest calculated on SVB’s prime rate (with a floor of 5%) up to a maximum of prime plus 0.5% or calculated on the current LIBOR rate up to a maximum of LIBOR plus 3.0%. The Amended Loan Agreement also permitted Telular to borrow up to $7,000 under a revolving line of credit, with the ability to convert up to $5,000 of borrowings under the revolver into a three year term loan. The Amended Loan Agreement required Telular to comply with certain financial covenants such as maintaining certain levels of assets to liabilities and minimum levels of cash flow generation. Telular had no outstanding borrowings under the Amended Loan Agreement as of February 1, 2012, on which date Telular and SVB amended the Amended Loan Agreement in connection with the SkyBitz acquisition.

Simultaneous with the acquisition of SkyBitz on February 1, 2012, Telular executed the Second Amended and Restated Loan and Security Agreement with SVB (the “Second Amended Loan Agreement”). Under the Second Amended Loan Agreement, Telular borrowed $30,000 in the form of a term loan which was applied as a portion of the cash consideration for the acquisition of SkyBitz. The term loan matures on February 1, 2017, the 5th anniversary of the amendment. The loan requires quarterly payments of interest and principal, with annual principal amortization of 10%, 15%, 20%, 20% and 25% in each of the first five years, respectively, with the final 10% due on the maturity date. At the closing of the SkyBitz acquisition, the interest rate was 3.1%. At the option of Telular, interest will be incurred based on a rate ranging from 2.25% to 2.75% (depending on the calculation of the senior leverage ratio) above the published LIBOR rates, or at a rate of .25% to .75% above the Prime interest rate. The interest rate was 3% as of June 30, 2012.The Second Amended Loan Agreement requires Telular to comply with certain financial covenants such as maintaining a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The loan is secured by substantially all of the assets of Telular. At June 30, 2012 the outstanding loan balance was $29,250 and Telular was in compliance with all financial covenants. As of June 30, 2012, $338 of loan fees and related costs were paid by Telular and are being amortized over the term of the loan.

10. Commitments

Telular has entered into agreements with Speedy-Tech Electronics Ltd. (“Speedy”) and Creation Technologies Wisconsin Inc. (“Creation”) to manufacture final assemblies of Telular’s products. Creation also provides fulfillment services to Telular. The agreement with Speedy may be terminated upon 90 days prior written notice to either party. The agreement with Creation may be terminated upon six months prior written notice to either party. Under both agreements, Telular has the right to offset amounts due to Telular against amounts owed to the respective vendor by Telular. As of June 30, 2012, Telular had $4,053 and $1,005 in open purchase commitments with Speedy and Creation, respectively. Telular, through SkyBitz, has entered into an agreement with Flextronics International Ltd (“Flextronics”) to manufacture final assemblies of SkyBitz’s products. This agreement with Flextronics automatically renews annually for one-year terms. The agreement with Flextronics may be terminated by either party upon written notice delivered 90 days prior to renewal. As of June 30, 2012, SkyBitz had $120 in open purchase commitments with Flextronics. Additionally, SkyBitz has entered into a five-year agreement with a key supplier to manufacture modems that are included in SkyBitz’s new line of products. As of June 30, 2012, SkyBitz had no open commitments with this key supplier.

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

11. Segment Information and Geographic Data

Telular manages its business primarily along distinct product functions. Accordingly, Telular has identified its reportable operating segments as Event Monitoring (“EM”) and Asset Tracking (“AT”). Both segments sell M2M products and monitoring services. The EM segment focuses on products and services that monitor discrete events and reports those events utilizing cellular transceiver devices. The AT segment provides mobile resource management solutions focusing on over-the-road tracking via satellite.

Telular evaluates the performance of its operating segments based on net sales, margins, net income before taxes and Adjusted EBITDA, a non-GAAP measure. Net sales are based on the types of products and services sold. Income before taxes for each segment includes net sales to third parties, related costs of sales, operating expenses directly attributable to the segment, expenses allocated from departments that perform services for each segment and other income and expenses directly attributable to the segment. Costs excluded from segment income before taxes include the following: (1) certain corporate costs directly related to being a publicly traded company, such as exchange fees; (2) corporate costs incurred for the benefit of the consolidated entity, such as insurance, interest expense relate to corporate debt and directors’ expenses; (3) a portion of expenses related to corporate level employees, such as salaries and related benefits; and, (4) income taxes which are managed on a consolidated basis. There were no sales between segments and, therefore, there were no inter-segment revenues and profits to eliminate. Segment assets exclude cash and cash equivalents which are managed on a consolidated basis.

Summary information by operating reportable segment for the three and nine months ended June 30, 2012 is as follows:

	For the Three Months Ended June 30, 2012
	Event		Asset
	Monitoring		Tracking			Corporate			Total

Revenues	$	14,194	$	8,705		$	-		$	22,899

Net income (loss) before income taxes		3,909		(321	)		(1,170	)		2,418

Depreciation and amortization		499		1,474			-			1,973

Non-cash compensation		236		56			84			376

Property and equipment additions		272		14			-			286

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

	For the Nine Months Ended June 30, 2012
	Event Monitoring		Asset Tracking			Corporate			Total

Revenues	$	41,760	$	14,638		$	-		$	56,398

Net income (loss) before income taxes		11,241		(909	)		(3,447	)		6,885

Depreciation and amortization		1,499		2,483			-			3,982

Non-cash compensation		730		109			276			1,115

Property and equipment additions		684		172			-			856

	As of June 30, 2012
	Event Monitoring		Asset Tracking		Corporate		Total

Identifiable assets	$	53,568	$	47,100	$	11,077	$	111,745

Telular exports its products to three regions around the world: Central America / Latin America (“CALA”), Europe / Africa (“EA”) and Asia / Middle East (“AME”). Export sales are summarized in the tables below:

	Export Sales by Region
	CALA			EA			AME			Total			Domestic			Total Sales

Fiscal 2012 sales	$	106		$	-		$	-		$	106		$	22,793		$	22,899
Region's sales as % of total export sales		100.00	%		0.00	%		0.00	%		100.00	%
Region's sales as % of Total Telular sales		0.46	%		0.00	%		0.00	%		0.46	%		99.54	%		100.00	%

Fiscal 2011 sales	$	30		$	26		$	17		$	73		$	12,751		$	12,824
Region's sales as % of total export sales		41.10	%		35.61	%		23.29	%		100.00	%
Region's sales as % of Total Telular sales		0.24	%		0.20	%		0.13	%		0.57	%		99.43	%		100.00	%

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

Nine Months Ended June 30, 2012 and 2011:

	Export Sales by Region
	CALA			EA			AME			Total			Domestic			Total Sales

Fiscal 2012 sales	$	142		$	-		$	-		$	142		$	56,256		$	56,398
Region's sales as % of total export sales		100.00	%		0.00	%		0.00	%		100.00	%
Region's sales as % of Total Telular sales		0.25	%		0.00	%		0.00	%		0.25	%		99.75	%		100.00	%

Fiscal 2011 sales	$	214		$	30		$	36		$	280		$	37,126		$	37,406
Region's sales as % of total export sales		76.43	%		10.71	%		12.86	%		100.00	%
Region's sales as % of Total Telular sales		0.57	%		0.08	%		0.10	%		0.75	%		99.25	%		100.00	%

12. Major Customers

For the three months ended June 30, 2012 and 2011, Telular derived approximately $5,090 (22%) and $4,750 (37%), respectively, of its total revenue from one customer located in the United States.

For the nine months ended June 30, 2012 and 2011, Telular derived approximately $14,930 (26%) and $14,231 (38%), respectively, of its total revenue from one customer located in the United States.

Trade accounts receivable from this customer totaled $2,438 at June 30, 2012 and $1,795 at September 30, 2011.

13. Supplemental Disclosures of Cash Flow Information

	Nine Months Ended June 30,
	2012		2011
Supplemental disclosure of cash flow information:
Interest paid	$	308	$	-
Income taxes paid	$	289	$	247

Supplemental disclosure of non-cash investing and financing activities:
Dividend equivalent units awarded to holders of restricted common stock units - 21,229 and 55,333 shares, respectively	$	158	$	306
Restricted stock units converted to common stock - 98,192 and 0 shares, respectively	$	-	$	-

TELULAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited, in thousands, except share data)

14. Subsequent Events

On August 2, 2012, Telular announced the declaration of a regular quarterly dividend of $0.11 per share, payable on August 21, 2012 to shareholders of record at the close of business on August 14, 2012. Telular estimates the cost of this dividend to be approximately $1,835 depending on the number of shares outstanding at the time of the dividend.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (in thousands except when referring to ARPUs, units or share data)

Forward Looking Information

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Telular 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 forward-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. Except as required by law, Telular is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events.

Introduction

Telular creates services that utilize wireless networks for the remote monitoring, control, or tracking of equipment and facilities. Telular’s software-as-a-service (“SaaS”) offerings are created through Telular’s competence in developing complex software systems and data communication devices that utilize the data transport capabilities of today’s commercial wireless networks. To enable these services, Telular is a significant reseller of such commercial wireless services.

Telular generates a majority of its revenue through the delivery of machine-to-machine (“M2M”) services such as event monitoring service and asset tracking through its Telguard, TankLink, and SkyBitz business lines. A portion of its revenue comes from the sale of specialty cellular hardware products designed by Telular for use exclusively with its M2M services. Telular's operating expense levels are based in large part on its expectations for its future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and Telular'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 Item 1A of this Quarterly Report on Form 10-Q.

The market for Telular’s products is primarily in North America and consists of a number of vertical applications including Telguard security alarm conveyance; TankLink tank level monitoring; and, SkyBitz asset tracking. These markets are addressed primarily through indirect channels consisting of third party Value Added Resellers (“VARs”), distributors, representatives and agents along with in-house sales and customer support teams. A direct sales model is utilized for certain large customers. Fabrication of Telular’s products is accomplished through contract manufacturing. Contract manufacturers in China, Mexico, and the United States make and test all hardware products.

The following details areas of product delivery and research either undertaken or anticipated in fiscal 2012.

Telguard - Telular’s engineering team continues to update the Telguard product and service portfolio in various ways that will attract incremental demand from our security dealer customers. In fiscal 2011, Telular launched new features, such as Telguard Interactive Services which let end users remotely arm and disarm their security systems. In addition, we launched Telguard Voice, which allowed security dealers to speak with their end user customers in the event that an alarm condition was triggered. Perhaps the most significant development activity was the conversion of our full Telguard hardware product lines to 3G/4G capability. While 3G/4G capability was launched in early fiscal 2012, most of the development was accomplished in fiscal 2011. Product innovation within this space is important for the long-term success of Telguard and we expect to continue to enhance our Telguard software platform and underlying hardware products going forward. In 2012, the Telguard Message Center (“TMC”) server platform, which is the underlying core software system for the Telguard service, was enhanced such that Telular can offer service to dealers in Canada. Furthermore, the architecture of TMC will be updated so that it can support even more end-user, feature development and increased traffic volumes in the future.

TankLink – The fiscal 2009 acquisition of TankLink Corp. brought Telular a successful wireless communicator product line for tank level monitoring. In early fiscal 2011, the acquisition of TankLink end-user accounts from our key value added reseller, SmartLogix, Inc., gave Telular more direct control over the TankLink end users as well as improved profitability. Enhancements to the TankLink software platform, TankData Online, have been made during 2011. Telular plans to further enhance both the software platform and the hardware product during fiscal 2012 to include a new hardware device which will be more suitable for smaller tank vessels and will operate on 3G/4G networks.

SkyBitz – Telular closed on the acquisition of SkyBitz, Inc. (“SkyBitz”), on February 1, 2012. SkyBitz is a leading provider of mobile resource management (“MRM”) solutions focusing on tracking and management of truck trailers, intermodal containers, sea-going containers, rail cars, power generators and rental equipment. SkyBitz’s unique Global Locating System (“GLS”) satellite-based technology provides real-time visibility of many asset types. SkyBitz addresses a multi-billion dollar market opportunity by reducing operating costs, increasing efficiency and aiding in the compliance with regulatory requirements across an increasingly complex set of supply chains and business ecosystems.

Competition

Telular believes its advantages over the competition include:

Greater Focus –Telular is focused on creating M2M solutions, which we develop by combining our historical competency in designing cellular networking electronics and real-time transaction processing software with the data transport capabilities of commercial wireless networks. This focus allows us to develop high functioning software and products best suited to our customers’ needs, resulting in products that are easier to install and maintain and are more reliable. Our primary competitors have the bureaucracy normally associated with large companies and the management distraction associated with overseeing a broad array of products and services; many of which are unrelated to one another.

More Experience – Telular has been in the cellular electronics business for over 20 years. Telular has been creating and operating real-time transaction processing software for over a decade and understands the importance of high reliability in that regard. We have deployed products in more than 130 countries worldwide, reflecting the quality, reliability and innovation of our product portfolio.

Broader Product line –Telguard, our largest line of business, includes targeted software features and a more diverse set of hardware products than any of our competitors and we believe this gives our customers a greater selection of features and hardware devices from which to choose.

Economies of Scale –Telguard’s fully integrated end-to-end cellular solution is now utilized by over 592,300 individual subscribers, which helps to minimize costs on a per user basis. This large customer base also reflects our significant experience and demonstrates credibility to the market.

Service and Support – Telular provides customers with comprehensive customer service and product support. We believe that our commitment and ability to provide superior service differentiates us from our competition.

Financial Strength – Telular is currently generating cash from operations. We believe that this financial strength gives us an ability to develop new products and services and defend against competitive initiatives very well.

There are several firms that compete with Telular’s Telguard products and services. These primary competitors include: Honeywell, DSC, Numerex and Alarm.com. Based on its own internal estimates, Telular believes it has a 15-20% market share for all currently active cellular alarm communicators in the United States, having introduced the first such device for digital cellular networks in 2005. Demand for cellular communicators has once again increased markedly over the past year. We believe this is due to consumers eliminating traditional telephone lines and therefore, requiring a cellular communicator to enable a home security system. If this trend continues, Telular believes that Telular and its competitors will continue to see substantial demand for products and related services.

Telular’s Telguard hardware products will only interface with Telular’s proprietary message center, which interprets and forwards any alarms received to Telular’s security monitoring customers in near real-time. Telular believes its competitive advantages for this service are the fact that its hardware products interface with the vast majority of alarm panels on the market and that installers can quickly activate the hardware and service.

There are numerous, small competitors to Telular’s TankLink offering. The most significant of these is Centeron, a division of Robertshaw Industries, which in turn is a subsidiary of Invensys, Inc. More often, the TankLink offering competes against the pre-existing, manual methods utilized by tank owners to determine the fill level and reorder timing for products held within tank vessels. Telular believes the key to growing its TankLink revenue is lowering its prices to the greatest extent possible in order to cost justify implementation of the TankLink solution.

Our SkyBitz asset tracking solutions also have competition from numerous sources, including I.D. Systems, Inc., and Qualcomm. Telular differentiates its SkyBitz solutions by providing advanced features on the web portal through which its customers receive tracking data, maximizing battery life on the tracking units to minimize the frequency of changing batteries, and through efficient design and manufacturing of its products to enable a low cost solution for its customers.

With regard to the Fixed Cellular Terminals (“FCTs”) sold by Telular, there are a large number of competitors that manufacture and sell FCTs. They include: Ericsson, Axesstel, YX and numerous other manufacturers in Asia and elsewhere. Much of the demand for these terminals is outside the United States and demand is concentrated among the large wireless carriers that operate in various countries around the world. The FCT business is not a focus of Telular.

OUTLOOK

The statements contained in this outlook are based on current expectations. These statements are forward looking, and actual results may differ materially.

Telular expects to expend most of its market and product development resources on the M2M space, including continuing to capitalize on its favorable market position in the domestic security alarm market by virtue of its well-regarded Telguard offerings, as well as continuing to improve overall penetration in the tank level monitoring market through TankLink. Telular expects SkyBitz to continue to leverage its leading position in the trailer-tracking market while expanding into adjacent markets such as intermodal container and government asset tracking.

UNIT SALES

During the third quarter of fiscal 2012, Telular sold approximately 46,500 billable M2M units, compared with approximately 25,800 billable M2M units for the same period in fiscal 2011. During the first nine months of fiscal 2012, Telular sold approximately 119,100 billable M2M units compared with approximately 69,700 billable M2M units for the same period in fiscal 2011. These increases were primarily a result of strong demand for Telguard’s new 3G/4G security products and the inclusion of SkyBitz in the total units sold beginning on February 1, 2012. Our Telguard subscriber base rose in the quarter to approximately 592,300 at June 30, 2012 from 589,100 subscribers at the end of the second quarter of fiscal 2012 and increased by 36,000 subscribers from a June 30, 2011 subscriber base of 556,300. This increase was due primarily to a strong overall demand for our new Telguard 3G/4G products. We expect Telguard sales of between 25,000 and 35,000 units on a quarterly basis throughout fiscal 2012. Telular ended the third quarter of fiscal 2012 with combined billable M2M units of 808,600, compared to 577,500 for the same period of fiscal 2011, due in large part to the SkyBitz acquisition.

REVENUE TRENDS

Product sales have increased due to increased demand, the introduction of new 3G/4G security products and the inclusion of asset tracking products as a result of the purchase of SkyBitz. Service revenues represented 58% of total sales in the third quarter of fiscal 2012 compared to 62% for the same period in fiscal 2011. Service revenues represented 59% of total sales in the first nine months of fiscal 2012 compared to 62% for the same period of fiscal 2011. On a consolidated basis, Telular ended the third quarter of fiscal 2012 with service average revenue per unit (“ARPU”) of $5.52 compared to $4.50, excluding SkyBitz, for the same period of fiscal 2011. SkyBitz was not part of Telular during that period.

RECENT DEVELOPMENTS

Simultaneous with the acquisition of SkyBitz on February 1, 2012, Telular executed the Second Amended and Restated Loan and Security Agreement with SVB (the “Second Amended Loan Agreement”). Under the Second Amended Loan Agreement, Telular borrowed $30,000 in the form of a term loan which Telular applied towards a portion of the cash consideration for the acquisition of SkyBitz. The term loan matures on February 1, 2017, the 5th anniversary of the amendment. The loan requires quarterly payments of interest and principal, with annual principal amortization of 10%, 15%, 20%, 20% and 25% in each of the first five years, respectively, with the final 10% due on the maturity date. At the option of Telular, interest will be incurred based on a rate ranging from 2.25% to 2.75% (depending on the calculation of the senior leverage ratio) above the published LIBOR rates, or at a rate of .25% to .75% above the Prime interest rate. The Second Amended Loan Agreement requires Telular to comply with certain financial covenants such as maintaining a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The loan is secured by substantially all assets of Telular.

RESULTS OF OPERATIONS

(in thousands except when referring to ARPUs, units or share data)

Third quarter fiscal year 2012 compared to third quarter fiscal year 2011

Revenues and Cost of Sales

					Change
	2012		2011		Amount		Percentage
Revenues by Segment:
Event monitoring	$	14,194	$	12,824	$	1,370		11	%
Asset tracking		8,705		-		8,705	>100		%
Total revenues	$	22,899	$	12,824	$	10,075		79	%

					Change
		2012		2011	Amount			Percentage
Revenues
M2M service revenue	$	13,310	$	7,987	$	5,323			67	%
M2M hardware sales		9,399		4,347		5,052			116	%
Subtotal M2M		22,709		12,334		10,375			84	%
Other product sales		190		490		(300	)		-61	%
Total revenue		22,899		12,824		10,075			79	%
Cost of sales
M2M service cost of sales		3,557		2,543		1,014			40	%
M2M hardware cost of sales		7,040		2,856		4,184			146	%
Subtotal M2M		10,597		5,399		5,198			96	%
Other product cost of sales		177		456		(279	)		-61	%
Total cost of sales		10,774		5,855		4,919			84	%
Gross margin	$	12,125	$	6,969	$	5,156			74	%

Revenues

Segment

Event Monitoring (“EM”) revenues increased 11% primarily due to a 14% increase in Telguard revenues and an 11% increase in TankLink revenues, offset by a decrease of 61% in our terminal revenues. Telguard revenues increased primarily as a result increased cellular penetration in the security market and demand for of the new 3G/4G products. Telular is the first to market with a 3G/4G cellular communicator in the security products space. TankLink’s increase in revenues is primarily due to a stronger demand for tank measuring products. The decrease in our terminal revenues reflects Telular’s reduced focus in this product line because there is no subsequent recurring revenue stream associated with these products. Terminal products were approximately 0.8% of total revenue for the third quarter of fiscal 2012 as compared to 4% for the same period of fiscal 2011.

Telular purchased SkyBitz on February 1, 2012. There were no revenues in fiscal 2011 for the Asset Tracking (“AT”) segment.

Type

M2M service revenues increased 67% primarily due to the inclusion of SkyBitz during the full third quarter and an increase in billable units activated of 10,200 during the quarter as a result of stronger demand of new product offerings.

M2M hardware revenues increased 116% primarily due to the initial inclusion of SkyBitz. Telular sold approximately 46,500 monitoring and tracking hardware units during the third quarter of fiscal 2012, compared to 25,800 units during the same period of fiscal 2011. This increase was primarily due the addition of SkyBitz’s products to Telular’s revenues as a result of the purchase of SkyBitz in the second quarter and to stronger demand for our new 3G/4G security monitoring products.

Other product sales decreased 61% primarily due to overall decrease in demand for our terminal products. Telular expects this decline to continue and has shifted its focus away from selling these products.

Cost of Sales

M2M service cost of sales increased 40% primarily due to the inclusion of SkyBitz for the full third quarter. Service cost of sales went up approximately $1,141 as a result of adding SkyBitz, offset with reductions to Telguard’s services cost of sales of approximately $127 due to the migration to a cellular carrier that has reduced rates. The reduction of costs related to this migration began in the third quarter of fiscal 2011. Gross margin for M2M services was 73% in the third quarter of fiscal 2012 compared to 68% in the second quarter of fiscal 2011.This increase in gross margin is primarily due an increase in customers with a higher ARPU.

M2M hardware cost of sales increased 146% primarily due to including SkyBitz’s sales for the full third quarter. As a percentage of M2M hardware product revenues, M2M hardware cost of sales was 75% for the third quarter of fiscal 2012 compared to 66% for the third quarter of fiscal 2011. This increase of 9% is due to the costs incurred to re-configure existing inventory to 3G/4G products, increased costs to produce new 3G/4G products and a slight increase in AT unit costs. Gross margin for M2M hardware was 25% in the third quarter of fiscal 2012 as compared to 34% in the second quarter of fiscal 2011. The decrease is attributable to reduced margins related to the terminal products and increase in M2M unit costs.

Operating Expenses

					Change					% of Revenues
	2012		2011		Amount		Percentage			2012			2011

Engineering and development	$	2,117	$	1,122	$	995		89	%		9	%		9%
Selling and marketing		3,236		1,970		1,266		64	%		14	%		15%
General and administrative		4,128		1,587		2,541		160	%		18	%		12%
	$	9,481	$	4,679	$	4,802					41	%		36%

Engineering and Development

The increase of $995 in engineering and development was primarily due to including SkyBitz expenses for the full third quarter of $822 and the following increases in engineering development expenses for Telular and TankLink:

$163 of salary and related benefits attributable to increased engineering headcount; and,

$23 of outside services related to increased usage of engineering consultants for specific projects.

Offsetting these increases was a decrease of $13 of prototype materials and testing expenses.

Selling and Marketing

The increase in selling and marketing of $1,266 was primarily due to including SkyBitz expenses for the full third quarter of $1,229 and the following:

$72 increase in third-party services, including consultants, primarily due to a two-year servicing agreement with SmartLogix. SmartLogix is providing monthly customer support services in conjunction with Telular’s purchase of the SMARTank business unit from SmartLogix; and,

$26 increase in the earnout provision contained in the Agreement between Telular and SmartLogix for the purchase of the SMARTank business unit.

Offsetting these increases were decreases of $50 related to reduced expenditures during the period for advertising, trade shows and marketing materials and an $11 decrease in various other expenses.

General and Administrative

The increase in general and administrative expenses of $2,541 was primarily due to including SkyBitz expenses for the full third quarter of $2,490, of which $1,345 was an increase in amortization expense due to capitalized intangibles related to the acquisition and $852 of typical departmental expenses such as salaries and related benefits, professional fees, office expenses and a one-time severance charge of $293 and the following:

$69 increase in professional fees such as accounting, tax and consultants;

$46 increase in costs related to the acquisition of SkyBitz;

$19 increase in bank fees associated with the increased debt related to the SkyBitz acquisition; and,

$17 increase in costs related to NASDAQ fees and investor conferences.

Offsetting these increases was a $100 decrease in legal fees. Telular was able to successfully resolve a patent infringement lawsuit in fiscal 2011.

Other Income (Expense)

Other income (expense) for the three months ended June 30, 2012 increased $226 compared to the same period of fiscal 2011. This increase was primarily due to an increase in interest expense of $231 related to the Second Amended Loan Agreement with SVB entered into in connection with the purchase of SkyBitz on February 1, 2012 and an increase of $5 in interest income and other income.

Income Taxes

The provision for income taxes increased $681 to $936 for the third quarter of fiscal 2012 as compared to $255 for the same period of fiscal 2011 primarily due to the increase in non-deductible amortization expense related to the intangibles recorded as a result of the acquisition of SkyBitz.

First nine months of fiscal year 2012 compared to first nine months of fiscal year 2011

Revenues and Cost of Sales

					Change
	2012		2011		Amount		Percentage
Revenues by Segment:
Event monitoring	$	41,760	$	37,406	$	4,354		12	%
Asset tracking		14,638		-		14,638	>100		%
Total revenues	$	56,398	$	37,406	$	18,992		51	%

					Change
		2012		2011	Amount			Percentage
Revenues
M2M service revenue	$	33,014	$	23,091	$	9,923			43	%
M2M hardware sales		22,416		11,708		10,708			91	%
Subtotal M2M		55,430		34,799		20,631			59	%
Other product sales		968		2,607		(1,639	)		-63	%
Total revenue		56,398		37,406		18,992			51	%
Cost of sales
M2M service cost of sales		9,022		8,416		606			7	%
M2M hardware cost of sales		16,152		7,963		8,189			103	%
Subtotal M2M		25,174		16,379		8,795			54	%
Other product cost of sales		1,159		2,469		(1,310	)		-53	%
Total cost of sales		26,333		18,848		7,485			40	%
Gross margin	$	30,065	$	18,558	$	11,507			62	%

Revenues

Segment

EM revenues increased 12% primarily due to an 17% increase in Telguard revenues and a 21% increase in TankLink revenues offset, by a decrease of 63% in our terminal revenues. Telguard revenues increased primarily as a result of increased cellular penetration in the security market and demand for the new 3G/4G products. Telular is the first to market with 3G/4G technology in its Telguard security products. TankLink’s increase in revenues is primarily due to a stronger demand for tank measuring products, and the inclusion of incremental revenue resulting from the acquisition of the SMARTank business unit from SmartLogix in January 2011. The decrease in our terminal revenues reflects Telular’s reduced focus in this product line because there is no subsequent recurring revenue stream associated with these products. Terminal products were approximately 2% of total revenue for the first nine months of fiscal 2012 as compared to 7% for the same period of fiscal 2011.

Telular purchased SkyBitz on February 1, 2012. There were no revenues in fiscal 2011 for the AT segment.

Type

M2M service revenues increased 43% primarily due to due to the inclusion of SkyBitz during the period as well as an increase in active billable units and ARPU during the first nine months of fiscal 2012. Telular ended the third quarter of fiscal 2012 with total Telguard subscribers of 592,300 units with an ARPU of $4.37 compared to 556,300 billable units with an ARPU of $4.20 for the third quarter of fiscal 2011.

M2M hardware revenues increased 91% primarily due to the initial inclusion of SkyBitz. Telular sold approximately 119,100 billable M2M units during the first nine months of fiscal 2012, compared to 69,700 units during the same period of fiscal 2011. This increase was primarily due the addition of SkyBitz’s products to Telular’s revenues as a result of the purchase of SkyBitz during the second quarter and to stronger demand for our new 3G/4G security monitoring products.

Other product sales decreased 63% primarily due to overall decrease in demand for our terminal products. Telular expects this decline to continue and has shifted its focus away from selling these products because there is no subsequent recurring revenue stream associated with these products.

Cost of Sales

M2M service cost of sales increased 7% primarily due additional monitoring units Telular has successfully migrated its subscriber base to a new cellular carrier that has reduced rates based on volume, mitigating the increase in volume. The reduction of costs related to this migration began in the third quarter of fiscal 2011. Gross margin for M2M services was 73% in the first nine months of fiscal 2012 compared to 64% in the same period of fiscal 2011. This increase was primarily due to the reduced cost of providing monitoring services described above.

M2M hardware cost of sales increased 103% primarily due to including SkyBitz’s sales for the nine month period ended June 30, 2012. As a percentage of M2M hardware product revenues, M2M hardware cost of sales was 72% for the first nine months of fiscal 2012 compared to 68% for the first nine months of fiscal 2011. This increase of 4% is primarily due to increase in sales volume. Gross margin for M2M hardware was 28% in the first nine months of fiscal 2012 as compared to 32% in the same period of fiscal 2011. The decrease is attributable to increased cost of sales due in part to the higher costs of 3G/4G products.

Operating Expenses

					Change					% of Revenues
	2012		2011		Amount		Percentage			2012			2011

Engineering and development	$	5,434	$	3,358	$	2,076		62	%		9	%		9%
Selling and marketing		7,720		5,451		2,269		42	%		14	%		14%
General and administrative		9,646		5,492		4,154		76	%		17	%		15%
	$	22,800	$	14,301	$	8,499					40	%		38%

Engineering and Development

The increase of $2,076 in engineering and development was primarily due to including SkyBitz expenses since February 1, 2012 of $1,479 and the following increases in engineering development expenses for Telular and TankLink:

$436 of salary and benefits related expenses primarily due to increased headcount;

$52 of prototype materials and testing services;

$80 of outside consulting services; and,

$29 of travel and facility expenses.

Selling and Marketing

The increase in selling and marketing of $2,269 was primarily due to including SkyBitz expenses since February 1, 2012 of $2,120 and the following:

$181 of third-party agent commissions

$64 of marketing expenses related to trade shows, advertising and special promotion activities; and,

$62 of consultants and outside services; and,

$36 of travel expenses.

Offsetting these increases were decreases of $158 related to an earnout provision contained in the Agreement between Telular and SmartLogix for the purchase of the SMARTank business unit and $36 in various other expenses.

General and Administrative

The increase in general and administrative expenses of $4,154 was primarily due to including $4,324 of SkyBitz’s general and administrative expenses of which $2,241 was an increase in amortization expense due to capitalized intangibles related to the acquisition and $1,790 of typical departmental expenses such as salaries and related benefits, professional fees, office expenses and other and a one-time severance charge of $293, offset by the following:

$387 decrease in payroll expenses related to a special bonus paid in the first quarter of fiscal 2011 to holders of stock options in conjunction with the payment of a one-time dividend of $1.00 per share. This special bonus was paid to mitigate the dilutive effects to option holders of the special dividend. There was no such dividend paid fiscal 2012;

$362 decrease in professional fees primarily related to legal fees and directors compensation. Legal fees decreased as a result of Telular favorably settling a patent lawsuit in fiscal 2011. Directors’ compensation was higher in the first six months of fiscal 2011 as a result of the special bonus paid to holders of stock options mentioned above;

$327 increase in corporate development costs related to the SkyBitz acquisition;

$151 increase in amortization expense related to intangibles recorded as a result of the purchase of the SMARTank business unit; and

$101 increase in banks fees related to the new loan, credit card fees and various other terms.

Other Income (Expense)

Other income (expense) for the nine months ended June 30, 2012 decreased $511 compared to the same period of fiscal 2011. This decrease was primarily due to an increase in interest expense of $386 related to the Second Amended Loan Agreement with SVB entered into in connection with the purchase of SkyBitz on February 1, 2012 and a loss of interest income of $125. In the first six months of fiscal 2011 Telular received interest on the outstanding trade receivable from SmartLogix. This trade receivable was forgiven as part of the consideration for the purchase of the SMARTank business unit on January 7, 2011 from SmartLogix. Telular no longer received these interest payments in fiscal 2012.

Income Taxes

The provision for income taxes increased $755 to $2,607 for the nine months ended June 30, 2012 as compared to $1,852 for the same period of fiscal 2011 primarily due to an increase in taxable income and an increase in nondeductible amortization expense related to the intangibles recorded as a result of the acquisition of SkyBitz

LIQUIDITY

Management regularly reviews net working capital in addition to available cash to determine if it has enough cash to operate the business. On June 30, 2012, Telular had $11,077 of unrestricted cash and cash equivalents and working capital of $14,426, compared to cash and cash equivalents of $12,642 and working capital of $15,515 on September 30, 2011. On February 1, 2012, Telular executed the Second Amended Loan Agreement with SVB. Under the Second Amended Loan Agreement, Telular borrowed $30,000 in the form of a term loan which was applied as a portion of the cash consideration for the acquisition of SkyBitz. The term loan matures on February 1, 2017, the 5th anniversary of the amendment. The loan requires quarterly payments of interest and principal, with annual principal amortization of 10%, 15%, 20%, 20% and 25% in each of the first five years, respectively, with the final 10% due on the maturity date. At the closing of the SkyBitz acquisition, the interest rate was 3.1%. At the option of Telular, interest will be incurred based on a rate ranging from 2.25% to 2.75% (depending on the calculation of the senior leverage ratio) above the published LIBOR rates, or at a rate of .25% to .75% above the Prime interest rate. The interest rate was 3% as of June 30, 2012. Under the Second Amended Loan Agreement, Telular is required to comply with certain financial covenants such as maintaining a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The loan is secured by substantially all of the assets of Telular. At June 30, 2012 the outstanding loan balance was $29,250 and Telular was in compliance with all financial covenants. As of June 30, 2012, $338 of loan fees and related costs were paid by Telular and are being amortized over the term of the loan.

Telular expects to continue generating significant cash flows from operations in fiscal 2012. As a result, Telular has substantial flexibility to meet its financial commitments, including dividends, debt servicing requirements and contractual obligations, with cash generated from operating activities.

Operations

Telular generated $8,665 of cash from operations during the first nine months of fiscal year 2012 compared to cash generated of $9,965 during the same period of fiscal year 2011. The components of cash generated for the first nine months of fiscal 2012 are as follows:

$ (1,080)		The increase in trade accounts receivable is due primarily to the timing of customer payments and increased
		sales volume.
(1,980)		The increase in inventory reflects the Telular's build up of certain products such as the new 3G/4G Telguard
		units and ceratin SkyBitz products.
398		The decrease in prepaid expenses and other assets is primarily due expensing prepaid company insurance.
		Telular renews all of its insurance as of October 1, 2011 and ratably expenses it over the fiscal year.
1,056		Trade accounts payable primarily consists of amounts due to Telular's contract manufacturers. The increase reflects
		increased purchases from our contract manufacturers, mostly during the last month of the quarter. These vendors have
		extended payments terms, thereby increasing the overall trade accounts payable balance at June 30, 2012.
6,683		Non-cash expenses: $1,115 from stock based compensation; $1,069 depreciation expense;
		$2,913 amortization expense related to intangibles recorded as a result of the SMARTank business unit and
		SkyBitz acquisitions; $27 from loss on disposal of operating assets, primarily due to the
		write-off of leasehold improvements, and $1,559 increase in deferred tax provision.
(690)		Net cash used by other working capital items, primarily related to the payment of accrued bonuses in the
		first quarter of fiscal 2012.
4,278		Net income; cash provided
$ 8,665		Total cash provided by continuing operations

Investing Activities

Investing activities used $43,711 of cash for the first nine months of fiscal 2012: $42,855 for the acquisition of SkyBitz and $856 for the acquisition of capital equipment. This compares to cash used by investing activities of $8,606 for the same period of fiscal 2011: $7,921 for the acquisition of the SMARTank business unit and $685 for the purchase of capital equipment.

Financing Activities

Financing activities generated $33,481 of cash for the first nine months of fiscal 2012 consisting of:

$29,250 of proceeds from the new loan from SVB for the acquisition of SkyBitz: $30,000 from the initial borrowing net of a principal payment of $750, during the period;

$8,687 related to stock issued for the acquisition of SkyBitz;

$859 related to the exercise of stock options;

Less $5,315 of dividends paid during the period.

Financing activities used $19,024 of cash for the first nine months of fiscal 2011 primarily for dividends paid during the period, including the one-time special dividend of $1.00 per share, net of cash proceeds received for the exercise of stock options.

Critical Accounting Policies

Telular’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Telular believes that the following represent the critical accounting policies that currently affect the presentation of Telular’s financial condition and results of operations.

Revenue Recognition

Telular’s revenue is primarily generated from three sources:

·	The sale of hardware units, under non-recurring agreements;

·	The provision of monitoring services, under recurring agreements; and,

·	The provision of ancillary services such as installation and non-warranty repairs and royalty revenue.

Revenue is recognized when persuasive evidence of an agreement exists, the hardware unit or the service has been delivered, fees and prices are fixed and determinable and collectability is probable when all other significant obligations have been fulfilled.

Telular recognizes revenue and associated costs from hardware unit sales at the time of shipment of products which is when title transfers. Hardware unit discounts are recorded as a reduction in revenue in the same period that the revenue is recognized. Telular offers customers the right to return hardware units that do not function properly within a limited time after delivery, see “Reserve for Warranty” below. Telular continuously monitors and tracks such hardware unit returns and records a provision for the estimated amount of such future returns, based on historical experience. While such returns have historically been within expectations, Telular cannot guarantee that it will continue to experience the same return rates that it has experienced in the past. Any significant increase in hardware unit failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize.

Monitoring service revenue is recognized at the time the service is provided. Payments received in advance of providing monitoring services are deferred and recognized over the period in which the service is delivered. Costs associated with providing the monitoring service are recorded when the service is provided.

For those arrangements that include multiple deliverables, Telular follows the guidance in Accounting Standard Codification (“ASC”) Subtopic 605-25, as amended by Accounting Standards Update (“ASU”) 2009-13. ASC Subtopic 605-25 established criteria for determining if a revenue arrangement has multiple deliverables. ASU 2009-13 amended the multiple-element revenue guidance to (1) modify the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item, and (2) eliminate the use of the residual method of allocation and instead required that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. Certain multiple-element revenue arrangements include both product and monitoring services. Telular has determined that the revenue from multiple-deliverable arrangements has met the criteria for treating each revenue source as a separate element. Consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method, based on Telular’s best estimate of selling price. Key factors that are considered when establishing a selling price are the industry segment to which the products and services are sold, estimated selling price of our competitors, where available, and an internally established gross margin range. Product revenue is billed and recognized upon shipment to the customer while monitoring services revenue is billed periodically, usually monthly, and recognized when the service is provided.

Telular recognizes ancillary service revenues when the service is delivered. Costs associated with these services are recorded in the period the service is delivered. Royalty revenue, which is based on a percentage of sales by the licensee, is estimated by Telular, based upon historical data provided by the licensee, in the period in which management estimated the sales have taken place. Telular periodically reconciles these estimates to the actual payments received from the licensee, adjusting revenue accordingly. Historically, Telular’s estimates have not been materially different than the payments received from the licensee.

Allowance for Doubtful Accounts

Telular maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payment for products and services. Telular evaluates the collectibility of customer receivables by considering the payment history and the financial stability of its customers. If Telular believes that an account receivable may not be collected, a charge is recorded to the allowance account. At June 30, 2012 and September 30, 2011, the allowance for doubtful accounts related to trade accounts receivable was $392 and $39, respectively. The increase in the allowance is attributable to the inclusion of SkyBitz’s allowance for doubtful accounts and identifiying certain customers who have outstanding accounts receivable balances that are significantly past due.

Reserve for Obsolescence

Significant management judgment is required to determine the reserve for obsolete or excess inventory. Telular currently considers inventory quantities greater than a one-year supply based on current year activity, to be excess unless that inventory has alternative uses. Telular 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, 2012, and September 30, 2011, the inventory reserves were $625 and $649, 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.

Reserve for Warranty

Telular maintains a reserve for products that are returned within Telular’s warranty period due to inoperability. Telular has different warranty periods for its different product groups: the security monitoring products have a 24 month warranty period; the tank monitoring and asset tracking products have a 12 month warranty period; and, the terminal products have a 15 month warranty period. Significant management judgment is required to determine the warranty reserve. Telular utilizes historical information regarding units returned within the appropriate warranty period and the costs incurred to repair returned units. Telular then estimates required warranty reserves for future products that may be returned. At June 30, 2012 and September 30, 2011, the warranty reserve was $1,700 and $115, respectively. The increase reflecting the acquisition of SkyBitz.

Goodwill and Intangible Assets

Telular evaluates the fair value and recoverability of the goodwill at least annually or whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. Telular first assesses various qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, it is determined that it is more likely than not the fair value of a reporting unit is less than its carrying amount, Telular will then perform impairment tests to determine the fair value of the reporting unit. In determining fair value and recoverability, Telular makes projections regarding future cash flows. These projections are based on assumptions and estimates of:

·	growth rates for net revenues, cost of sales and operating expenses for the monitoring and asset tracking businesses:

·	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. As of June 30, 2012 and September 30, 2011, goodwill was not impaired.

Telular reviews for the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Telular 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 cash flow analysis.

Income Taxes

In determining income for financial statement purposes, Telular must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.

In evaluating the ability to recover its deferred tax assets, Telular considers all available positive and negative evidence including its past operating results, the existence of cumulative losses and its forecast of future taxable income. In estimating future taxable income, Telular developed assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, the utilization of net operating loss (“NOL”) carryforwards to offset taxable income and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates Telular is using to manage the underlying business.

Telular has recorded significant valuation allowances that are intended to be maintained until it is more likely than not the deferred tax asset will be realized. The current valuation allowance of $5,711 is primarily for state NOLs that will expire before they can be realized. The realization of the remaining deferred tax assets is primarily dependent on future taxable income in the appropriate state jurisdiction. Significant factors that could negatively impact Telular’s determination of the recognition of the net deferred tax assets would be changes in the ownership of Telular and changes in tax laws and rates. Based on Internal Revenue Code Section 382 (“Section 382”), changes in the ownership of Telular may limit the utilization of NOL carryforwards. Any Section 382 limitation may require that Telular record an additional valuation allowance against its deferred tax assets. Management is not aware, at this time, of any such ownership changes for Telular that would have a negative impact on the recognition of the net deferred tax assets. Any reduction in future taxable income may require that Telular record an additional valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a material impact on Telular’s future earnings. Management performed a preliminary Section 382 analysis of SkyBitz’s NOLs. SkyBitz had approximately $44,781 of NOLs that were subject to three distinct Section 382 limitations; two of which preceded Telular’s acquisition of SkyBitz, while the third limitation was a result of Telular’s acquisition. Approximately $11,631 of SkyBitz’s NOLs would expire unused as a result of the pre-Telular acquisition limitations. These expiring NOLs were not recorded as part of the purchase. It was determined that the limitation as a result of the acquisition would not cause a reduction in the utilization of SkyBitz’s remaining NOLs, approximately $33,150. Accordingly, a deferred tax asset was recorded for these NOLs. A final determination on the utilization of SkyBitz’s NOLs will be performed after their final tax return as an unconsolidated entity is filed.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. The State of Illinois increased its corporate income tax rate from 7.3% to 9.5% in January 2011. The State also suspended the use of NOLs to offset current taxable income for three years. Telular implemented a tax strategy that would lower taxable income apportioned to Illinois, thereby lowering the current state tax payable. This strategy reduced Telular’s estimated use of future NOLs in Illinois, resulting in the increase in the valuation allowance against the net deferred tax assets which increased Telular’s deferred tax provision.

In December 2011, the State of Illinois passed tax legislation allowing for the utilization of $100 of NOLs per year for the period over which the State suspended use of NOLs.

Under the uncertain tax position provisions of ASC 740, Income Taxes, Telular would recognize liabilities for tax issues in the U.S based on Telular’s estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities would be recorded in income taxes in the Consolidated Balance Sheets. As of June 30, 2012, Telular has no uncertain tax positions recorded in its financial statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in Telular’s market risk exposure from the exposures described in its Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

Item 4. CONTROLS AND PROCEDURES

Telular maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by Telular 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 Telular’s disclosure controls and procedures was carried out under the supervision and with the participation of Telular’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on that evaluation, the CEO and CFO have concluded that Telular’s disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

Telular acquired SkyBitz on February 1, 2012. Telular began to integrate SkyBitz into its internal control over financial reporting structure subsequent to the acquisition date. As such there have been changes during the three and nine month periods ended June 30, 2012 associated with the continued establishment and implementation of internal control over financial reporting with respect to SkyBitz.

During the quarter ended June 30, 2012, there were no other changes in Telular’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15, which have materially affected, or are reasonably likely to materially affect, Telular’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Telular 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 Telular’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, Telular may be required to pay damages and other expenses, which could have a material adverse effect on Telular’s financial position and results of operations.

Item 1A. RISK FACTORS

For information regarding risk factors that could affect our results of operations, financial condition and liquidity, see discussion of risk factors set forth in Item 1A of both our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 and our Quarterly Reports on Form 10-Q for the fiscal quarters ended December 31, 2011 and March 31, 2012, each previously filed with the SEC and hereby incorporated by reference. At June 30, 2012, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 and our Quarterly Reports on Form 10-Q for the fiscal quarters ended December 31, 2011 and March 31, 2012.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchase of Equity Securities

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURE

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS

Agreements included as exhibits to this Quarterly Report on Form 10-Q are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about Telular Corporation (including its consolidated subsidiaries) or the other parties to the agreements. Where an agreement contains representations and warranties by any party, those representations and warranties have been made solely for the benefit of the other parties to the agreement or express third-party beneficiaries as explicitly set forth in the agreement. Any such representations and warranties:

•

should not be treated as categorical statements of fact, but rather as an allocation of risk;

•

may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

•

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

•

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and may be subject to more recent developments.

Accordingly, any such representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.

The following documents are filed as Exhibits to this report:

Number	Description	Reference

3.1	Certificate of Incorporation	Incorporated by reference From Exhibit 3.1 to Registration Statement No. 33-72096 (the Registration Statement)

3.2	Amendment No. 1 to Certificate of Incorporation	Incorporated by reference From Exhibit 3.2 to the Registration Statement

3.3	Amendment No. 2 to Certificate of Incorporation	Incorporated by reference From Exhibit 3.3 to the Registration Statement

3.4	Amendment No. 3 to Certificate of Incorporation	Incorporated by reference From Exhibit 3.4 to Form 10-Q filed February 16, 1999

3.5	Amendment No. 4 to Certificate of Incorporation	Incorporated by reference From Exhibit 3.5 to Form 10-Q filed February 16, 1999

3.6	By-Laws	Incorporated by reference From Exhibit 3.4 to the Registration Statement

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

101.INS **	XBRL Instance

101.SCH**	XBRL Taxonomy Extension Schema

101.CAL**	XBRL Taxonomy Extension Calculation

101.DEF**	XBRL Taxonomy Extension Definition

101.LAB**	XBRL Taxonomy Extension Labels

101.PRE**	XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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 9, 2012	By:	/s/ Joseph A. Beatty
			Joseph A. Beatty
			President and Chief Executive Officer

Date	August 9, 2012	/s/ Jonathan M. Charak
		Jonathan M. Charak
		Chief Financial Officer

Date	August 9, 2012	/s/ Robert Deering
		Robert Deering
		Controller and Chief Accounting Officer