8-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 22, 2007

TEKELEC

(Exact name of registrant as specified in its charter)

California	000-15135	95-2746131
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

5200 Paramount Parkway, Morrisville, North Carolina	27560
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (919) 460-5500

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

o Written Communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

Item 2.02	Results of Operations and Financial Condition	1
Item 9.01	Financial Statements and Exhibits	1
Exhibit 99.1

i

Item 2.02      Results of Operations and Financial Condition

     On February 22, 2007, the Company issued a press release announcing its financial results for the fourth quarter and fiscal year ended December 31, 2006. A copy of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K.

     The information in this Item 2.02 and in Exhibit 99.1 furnished herewith shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.

Item 9.01.       Financial Statements and Exhibits

     (d)            Exhibit

     The following Exhibit 99.1 is furnished as a part of this Current Report on Form 8-K:

Exhibit No.	Description
99.1	Press Release dated February 22, 2007 of the Company

1

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Tekelec
Dated: February 22, 2007	By:	/s/ Franco Plastina
		Franco Plastina
		President and Chief Executive Officer

2

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release dated February 22, 2007 of the Company

3

EX-99.1

EXHIBIT 99.1

Tekelec Announces 2006 Q4 and Full Year Results

Revenues up 14% Year over Year

Morrisville, N.C. February 22, 2007 — Tekelec (NASDAQ: TKLC), a leading developer of high-performance network applications for next-generation fixed, mobile and packet networks, today announced its earnings for the fourth quarter and full year of 2006. The results for the year ended December 31, 2006 include the results of the Company’s former IEX contact center business unit which are reported in the results of discontinued operations.

2006 Q4 Results from Continuing Operations
Revenue from continuing operations for the fourth quarter of 2006 was $154.5 million, up 11% compared to $138.6 million for the fourth quarter of 2005. For the fourth quarter of 2006, the Company had orders for the Telecom business of $154.8 million, up 43 % compared to $108.0 million for the third quarter of 2006 and down 15 % compared to $182.4 million for the fourth quarter of 2005. Telecom backlog as of December 31, 2006 was $455.3 million compared to $455.0 million as of September 30, 2006 and $520.2 million as of December 31, 2005.

On a GAAP basis, the Company reported a loss from continuing operations for the fourth quarter of 2006 of $1.1 million, or $0.02 loss per diluted share, compared to a loss from continuing operations of $51.5 million, or $0.77 loss per diluted share, for the fourth quarter of 2005. GAAP operating results for the fourth quarter of 2006 include on a pre-tax basis $9.0 million of stock-based compensation expense and $3.8 million of restructuring expenses.

On a non-GAAP basis, income from continuing operations for the fourth quarter of 2006 was $7.2 million, or $0.10 per diluted share, compared to income from continuing operations of $3.1 million, or $0.05 per diluted share, for the fourth quarter of 2005. Please refer to the attached financial statement schedules for a reconciliation of the Company’s GAAP operating results to its non-GAAP operating results.

The GAAP and non-GAAP operating results for the fourth quarter of 2006 include a tax benefit of $2.8 million resulting from the retroactive reinstatement of the Federal R & D tax credit in the fourth quarter of 2006.

Full Year 2006 Results from Continuing Operations
Revenue from continuing operations for the full year 2006 was $553.6 million, up 14% compared to $486.5 million for the full year 2005. For the full year 2006, the Company had orders from continuing operations of $488.8 million, down 15 % compared to $573.6 million for the full year 2005.

On a GAAP basis, the Company reported a loss from continuing operations for the full year 2006 of $103.2 million, or $1.53 loss per diluted share, compared to a loss from continuing operations of $44.9 million, or $0.68 loss per diluted share, for the full year 2005. GAAP operating results for the full year 2006 include on a pre-tax basis a non-cash impairment charge of $100.6 million related to the write-down of certain goodwill and acquired technology assets of our Switching Solutions Group (“SSG”), $7.2 million of restructuring expenses and $34.7 million of stock-based compensation expense.

Corporate Office: 5200 Paramount Parkway, Morrisville, N.C. 27560 • Tel 919.460.5500 • Fax 919.460.0877

Q4 2006 Results

On a non-GAAP basis, income from continuing operations for the full year 2006 was $19.2 million, or $0.28 per diluted share, compared to income from continuing operations of $20.9 million, or $0.31 per diluted share, for the full year 2005. Please refer to the attached financial statement schedules for a reconciliation of the Company’s GAAP operating results to its non-GAAP operating results.

At December 31, 2006, Tekelec’s consolidated cash, cash equivalents and short-term investments totaled $424.5 million, compared to $426.8 million at September 30, 2006. Deferred revenue from continuing operations was $222.2 million at December 31, 2006, compared to $225.2 million at September 30, 2006.

Results from Discontinued Operations
The sale of the IEX Contact Center business to NICE Systems, Inc. was completed on July 6, 2006 and accordingly, the results of operations of IEX and the gain on the sale have been reported in discontinued operations for the full year 2006. On a GAAP basis, income from discontinued operations, net of taxes, for the full year 2006 was $189.2 million, or $2.81 per diluted share, compared to income from discontinued operations, net of taxes, of $11.1 million, or $0.17 per diluted share, for the full year 2005. Included in income from discontinued operations for the year ended December 31, 2006 was a gain on the sale of IEX of $177.5 million, net of taxes.

Restructuring Charges
In the fourth quarter of 2006, the Company expanded the scope of the restructuring of SSG, which was initiated in the second quarter of 2006. The Company incurred pre-tax charges in the aggregate amount of $3.8 million in the fourth quarter of 2006 and $7.2 for the full year to cover severance and other costs associated with SSG restructuring activities together with certain other 2006 restructuring activities and previously announced employee resignations.

As previously announced, the Company has retained J. P. Morgan as an advisor to help evaluate strategic alternatives to leverage its switching technology portfolio. As part of this evaluation, Tekelec has considered the benefits of a possible sale of this business and is currently engaged in active discussions with potential buyers of SSG. However, no decision has been made to sell the business and there can be no assurance that such a sale will actually occur. In the meantime, the Company will continue to run the business with the objective of bringing it to profitability. The Company will make the appropriate disclosures if a determination is made to sell the business, or alternatively to keep the business, once the evaluation of strategic alternatives has been completed.

Consolidated GAAP Results
The Company’s consolidated net loss for the three months ended December 31, 2006 was $1.2 million, or $0.02 loss per diluted share, compared to a consolidated net loss for the three months ended December 31, 2005 of $47.9 million, or $0.72 loss per diluted share. The Company’s consolidated net income for the year ended December 31, 2006 was $86.1 million, or $1.28 per diluted share, compared to a consolidated net loss for the year ended December 31, 2005 of $33.7 million, or $0.51 loss per diluted share.

“We are pleased with our fourth quarter results” said Frank Plastina, president and CEO of Tekelec. “In particular, our order input reflected several new customer wins for our Network Solutions Group (“NSG”), and our Communications Software Solutions Group (“CSSG”) was profitable for the year on an operating basis. We also continued to strengthen our balance sheet in 2006 and ended the year with $424.5 million in cash and investments and $435.4 million in working capital. ”

Conference Call
Tekelec has scheduled a conference call for Thursday, February 22, 2007, for its management to discuss fourth quarter and full year 2006 results. The Company also plans to provide on its web site prior to the commencement of the call certain non-GAAP information for the fourth quarter and the year ended December 31, 2006 and 2005 and to discuss during this call certain forward looking information concerning the Company’s prospects and strategic plans for 2007.

Q4 2006 Results

“Live” Webcast and Replay
Tekelec will host a live webcast of its conference call on Thursday, February 22, 2007 at 4:45 p.m. To access the webcast, visit Tekelec’s web site located at www.tekelec.com, enter the Investor Relations section and click on the webcast icon. A webcast replay will be available at approximately 7:45 p.m. on Thursday, February 22, 2007 and for 90 days thereafter.

Telephone Replay
A telephone replay of the call will also be available for one week after the live webcast by calling either (800) 642-1687 or (706) 645-9291, and entering the conference ID # 7325816

Non-GAAP Information
Certain non-GAAP financial measures are included in this press release, including a full non-GAAP statement of operations. In the calculation of these measures, Tekelec generally excludes certain items such as amortization of acquired intangibles, restructuring and other charges, non-cash stock-based compensation charges, and unusual, non-recurring gains and charges. Tekelec believes that excluding such items provides investors and management with a representation of the Company’s core operating performance and with information useful in assessing its prospects for the future and underlying trends in Tekelec’s operating expenditures and continuing operations. Management uses such non-GAAP measures and the resulting non-GAAP statements of operations to (i) evaluate financial results; (ii) manage the Company’s operations; and (iii) establish operational goals. Further, each of the individual non-GAAP measures within the non-GAAP statement of operations and the non-GAAP statement of operations itself is utilized by the Company’s management and board of directors to determine incentive compensation and evaluate key trends within the business. In addition, since the Company has historically reported non-GAAP measures to the investment community, the Company believes the inclusion of this information provides consistency in our financial reporting. The attachments to this release provide a reconciliation of each of the non-GAAP measures, including the full non-GAAP statement of operations, referred to in this release to the most directly comparable GAAP measure, GAAP net income (loss) from continuing operations. The non-GAAP financial measures are not meant to be considered a substitute for the corresponding GAAP financial measures.

FORWARD-LOOKING STATEMENTS
Certain statements made in this press release are forward looking, reflect the Company’s current intent, belief or expectations and involve certain risks and uncertainties. The Company’s actual future performance may not meet the Company’s expectations. As discussed in the Company’s Quarterly Reports on Form 10-Q (the “Form 10-Qs”) for the 2006 first, second and third quarter, its Annual Report on Form 10-K for 2005 (the “2005 Form 10-K”) and its other filings with the Securities and Exchange Commission (the “Commission”), the Company’s future operating results are difficult to predict and subject to significant fluctuations. Factors that may cause future results to differ materially from the Company’s current expectations, in addition to those identified in the Company’s filings with the Commission, include, among others, the impact on future operating results of changes in revenue recognition described in the 2005 Form 10-K, the Form 10-Qs for the 2006 first, second and third quarter, and prior reports filed with the Commission, the risk of continuing losses in the Company’s Switching Solutions Group, the risk that the Company will not realize all the benefits of its restructuring activities and the risk that the Company’s financial results for the full year 2007 or any quarter therein will not meet the Company’s expectations. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

Q4 2006 Results

About Tekelec
Tekelec is a high-performance network applications company that is accelerating the transition to IP Multimedia Subsystem (IMS) networks for service providers around the globe. With its experience at the intersection of network applications and session control, Tekelec creates highly efficient platforms for managing media and delivering network solutions. Corporate headquarters are in Morrisville, N.C., USA in the Research Triangle Park area, with research and development facilities and sales offices throughout the world. For more information, please visit www.tekelec.com.

###

Investor Contacts:
Jim Chiafery
Director of Investor Relations
919-461-6825 office
James.chiafery@tekelec.com

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended December 31,						Year Ended December 31,
	2006			2005			2006			2005
	(thousands, except per share data)
Revenues	$	154,496		$	138,628		$	553,647		$	486,505
Cost of sales:
Cost of goods sold		76,295			75,250			256,789			210,584
Amortization of purchased technology		746			1,275			4,219			5,819
Impairment of purchased technology(1)		—			22,660			25,615			22,660
Total cost of sales		77,041			99,185			286,623			239,063
Gross profit		77,455			39,443			267,024			247,442
Research and Development		36,395			30,437			148,443			119,234
Sales and Marketing		24,402			21,766			92,961			83,775
General and administrative		22,576			19,054			74,719			64,366
Acquired in-process research and development(2)		2,100			2,363			2,100			3,573
Restructuring and other(3)		3,761			3,386			7,173			7,735
Amortization of intangible assets		217			605			1,938			2,887
Impairment of goodwill(1)		—			27,245			75,000			27,245
Total operating expenses		89,451			104,856			402,334			308,815
Loss from operations		(11,996	)		(65,413	)		(135,310	)		(61,373	)
Interest and other income (expense), net		4,970			(12	)		10,216			(495	)
Loss from continuing operations before provision for income taxes		(7,026	)		(65,425	)		(125,094	)		(61,868	)
Provision for (benefit from) income taxes		(5,924	)		(13,929	)		(21,941	)		(6,752	)
Loss before minority interest		(1,102	)		(51,496	)		(103,153	)		(55,116	)
Minority Interest(4)		—			—			—			10,248
Net loss from continuing operations		(1,102	)		(51,496	)		(103,153	)		(44,868	)
Income from discontinued operations, net of taxes		(145	)		3,573			189,209			11,127
Net income (loss)	$	(1,247	)	$	(47,923	)	$	86,056		$	(33,741	)
Loss per share from continuing operations:
Basic	$	(0.02	)	$	(0.77	)	$	(1.53	)	$	(0.68	)
Diluted		(0.02	)		(0.77	)		(1.53	)		(0.68	)
Earnings (loss) per share from discontinued operations:
Basic	$	(0.00	)	$	0.05		$	2.81		$	0.17
Diluted		(0.00	)		0.05			2.81			0.17
Earnings (loss) per share:
Basic	$	(0.02	)	$	(0.72	)	$	1.28		$	(0.51	)
Diluted		(0.02	)		(0.72	)		1.28			(0.51	)
Earnings per share weighted average number of shares outstanding:
Basic		68,309			66,571			67,340			66,001
Diluted		68,309			66,571			67,340			66,001

Notes to Unaudited Condensed Consolidated Statements of Operations:

(1)     For the year ended December 31, 2006, impairment of purchased technology and of goodwill were $25,615,000 and $75,000,000, respectively. These 2006 impairment charges are related to one of our reporting units, consisting of our Santera and VocalData product lines within our Switching Solutions business unit. For both the three months and year ended December 31, 2005, impairment of purchased technology and of goodwill were $22,660,000 and $27,245,000, respectively. These 2005 impairment charges are related to one of our reporting units, consisting of our Taqua product line within our Switching Solutions business unit.

(2)     For both the three months and year ended December 31, 2006, the write-off of in-process research and development amounted to $2,100,000 and related to our acquisition of certain signaling technology. For the three months ended December 31, 2005, the write-off of in-process research and development amounted to $2,363,000 and related to our acquisition of the remaining minority interest in Santera. For the year ended December 31, 2005, the write-off of in-process research and development amount to $3,573,000 and was comprised of $1,210,000 related to our acquisition of iptelorg in the second quarter of 2005 and $2,363,000 related to our acquisition of the remaining minority interest in Santera.

(3)     This amount represents restructuring and other costs related principally to reductions in staff associated with the (i) restructuring of our operations in 2006 (the “2006 Restructuring”), (ii) our corporate headquarters and Taqua relocations in 2005, and (iii) the relocation of our manufacturing operations in 2004. The 2006 Restructuring involved the (i) the termination of approximately 153 employees across our business units, and related customer service, operations and other personnel, (ii) the decision not to replace 22 employees who left Tekelec during the third quarter of 2006, and (iii) the termination of approximately 25 contractors. The majority of the terminated employees worked directly for, or in support of, our Switching Solutions Group Business Unit in Plano, Texas. The estimated annual operating cost savings resulting from the 2006 Restructuring are expected to be between $24.0 million and $26.0 million.

(4)     On October 3, 2005, we acquired the remaining shares of Santera capital stock held by the minority shareholders and on that date, Santera became a wholly owned subsidiary of Tekelec. For all periods presented, the results of Santera are included in the consolidated results of operations of Tekelec. The consolidated provision for income taxes does not include any benefit from the losses generated by Santera prior to October 3, 2005 due to the following:

• Prior to October 3, 2005, Santera’s losses could not be included on Tekelec’s consolidated federal tax return because its ownership interest in Santera did not meet the threshold to consolidate under income tax rules and regulations.

• Prior to October 3, 2005, a full valuation allowance had been established on the income tax benefits generated by Santera as a result of Santera’s historical operating losses.

TEKELEC
UNAUDITED NON-GAAP(1) STATEMENTS OF OPERATIONS FOR CONTINUING OPERATIONS

	Three Months Ended December 31,					Year Ended December 31,
	2006		2005			2006		2005
	(thousands, except per share data)
Revenues	$	154,496	$	138,628		$	553,647	$	486,505
Cost of sales:
Cost of goods sold		74,875		69,898			251,124		203,483
Gross profit		79,621		68,730			302,523		283,022
Research and Development		32,670		30,304			133,841		118,926
Sales and Marketing		22,915		21,766			86,271		83,775
General and administrative		19,939		14,721			65,337		57,785
Total operating expenses		75,524		66,791			285,449		260,486
Income from operations		4,097		1,939			17,074		22,536
Interest and other income (expense), net		3,695		(12	)		7,148		849
Income from continuing operations before provision for income taxes		7,792		1,927			24,222		23,385
Provision for (benefit from) income taxes(2)		544		(1,154	)		5,059		10,748
Income before minority interest		7,248		3,081			19,163		12,637
Minority Interest		—		—			—		8,280
Net income from continuing operations	$	7,248	$	3,081		$	19,163	$	20,917
Earnings per share:
Basic	$	0.11	$	0.05		$	0.28	$	0.32
Diluted (3)		0.10		0.05			0.28		0.31
Earnings per share weighted average number of shares outstanding:
Basic		68,309		66,571			67,340		66,001
Diluted (3)		76,112		68,165			68,561		68,072

Notes to Unaudited Non-GAAP Statements of Operations for Continuing Operations:

(1)     Please refer to the attached reconciliations of the GAAP Statements of Operations to the above Non-GAAP Statements of Operations.

(2)     The above Non-GAAP Statements of Operations assume effective income tax rates of 7% and 12.7% for the three months ended December 31, 2006 and 2005, respectively, and effective income tax rates of 21% and 32% for the years ended December 31, 2006 and 2005, respectively. For the first nine months of the year ended December 31, 2005, there were no income tax benefits associated with the losses generated by Santera.

(3)     For the three months ended December 31, 2006, the calculation of diluted earnings per share includes the add-back to net income of $581,000 for assumed after-tax interest cost related to the convertible debt using the “if-converted” method of accounting for diluted earnings per share. The weighted average number of shares outstanding for the three months ended December 31, 2006 includes 6,361,000 shares related to the convertible debt using the “if-converted” method. For the three months ended December 31, 2005 and both the years ended December 31, 2006 and 2005, these adjustments were excluded from the calculation of diluted earnings per share as these adjustments were anti-dilutive.

TEKELEC
CONSOLIDATED BALANCE SHEETS

	December 31,
	2006			2005
	(Thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	45,451		$	52,069
Short-term investments, at fair value		379,045			174,260
Total cash, cash equivalents and short-term investments		424,496			226,329
Accounts receivable, net		162,622			115,789
Inventories		49,451			47,512
Income taxes receivable		14,698			—
Deferred income taxes		32,206			27,456
Deferred costs and prepaid commissions		65,187			78,190
Prepaid expenses and other current assets		29,134			15,298
Assets of discontinued operations		—			18,647
Total current assets		777,794			529,221
Property and equipment, net		53,273			40,474
Investments in privately-held companies		7,322			7,322
Deferred income taxes, net		62,103			68,585
Other assets		3,521			6,047
Goodwill		40,882			116,324
Intangible assets, net		24,362			57,214
Total assets	$	969,257		$	825,187
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	31,779		$	32,347
Accrued expenses		62,306			47,960
Accrued payroll and related expenses		32,296			28,156
Short-term notes and current portion of notes payable		—			96
Current portion of deferred revenues		216,023			208,278
Liabilities of discontinued operations		—			23,279
Total current liabilities		342,404			340,116
Long-term convertible debt		125,000			125,000
Deferred income taxes		1,481			1,694
Long-term portion of deferred revenues		6,131			5,217
Total liabilities		475,016			472,027
Commitments and Contingencies
Shareholders’ equity:
Common stock, without par value, 200,000,000 shares authorized; 68,728,986 and 66,838,310 shares issued and outstanding, respectively		322,620			274,413
Deferred stock-based compensation		—			(5,680	)
Retained earnings		171,722			85,666
Accumulated other comprehensive income (loss)		(101	)		(1,239	)
Total shareholders’ equity		494,241			353,160
Total liabilities and shareholders’ equity	$	969,257		$	825,187

TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended December 31,
	2006			2005
	(Thousands)
Cash flows from operating activities:
Net income (loss)	$	86,056		$	(33,741	)
Income from discontinued operations		(189,209	)		(11,127	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss (gain) on investments		(3,069	)		1,375
Minority interest		—			(10,248	)
Impairment of purchased technology		25,615			22,660
Impairment of goodwill		75,000			27,245
Provision for doubtful accounts and returns		3,582			2,946
Inventory write downs		10,054			12,071
Write-off of leasehold improvements and other assets		—			166
Depreciation		23,703			19,629
Amortization of intangibles		7,237			10,112
Amortization, other		3,026			5,946
Amortization of deferred financing costs		763			763
Acquired in-process research and development		2,100			3,573
Deferred income taxes		1,088			(17,537	)
Stock-based compensation, net of forfeitures		35,706			3,377
Tax benefit related to stock options		—			1,383
Excess tax benefits from stock-based compensation		(1,991	)		—
Changes in operating assets and liabilities (net of business disposal and acquisitions):
Accounts receivable		(49,583	)		(17,719	)
Inventories		(11,960	)		(26,893	)
Deferred costs		13,003			(31,984	)
Prepaid expenses and other current assets		(7,309	)		2,363
Trade accounts payable		(820	)		(2,655	)
Accrued expenses		5,861			31,280
Accrued payroll and related expenses		3,931			5,278
Deferred revenues		8,402			53,214
Income taxes payable / receivable		(13,091	)		(593	)
Net cash provided by operating activities — continuing operations		28,095			50,884
Net cash provided by (used in) operating activities — discontinued operations		(16,763	)		15,476
Net cash provided by operating activities		11,332			66,360
Cash flows from investing activities:
Proceeds from sales and maturities of investments		861,490			417,767
Purchases of investments		(1,063,652	)		(370,934	)
Purchase of property and equipment		(36,471	)		(29,911	)
Cash paid for iptelorg, net of cash acquired		—			(7,105	)
Cash paid for minority interest in Santera		—			(75,750	)
Other non-operating assets		1,770			(4,186	)
Net cash used in investing activities — continuing operations		(236,863	)		(70,119	)
Net cash provided by (used in) investing activities — discontinued operations		199,902			(327	)
Net cash used in investing activities		(36,961	)		(70,446	)

TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

	For the Years Ended December 31,
	2006			2005
	(Thousands)
Cash flows from financing activities:
Payments on notes payable		(96	)		(3,243	)
Proceeds from issuance of Common Stock		17,481			10,382
Excess tax benefits from stock-based compensation		1,991			—
Cash paid to settle stock options		(255	)		—
Net cash provided by financing activities		19,121			7,139
Effect of exchange rate changes on cash		(110	)		91
Net increase (decrease) in cash and cash equivalents		(6,618	)		3,144
Cash and cash equivalents at beginning of the year		52,069			48,925
Cash and cash equivalents at end of the year	$	45,451		$	52,069

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME FROM CONTINUING OPERATIONS

	Three Months Ended December 31, 2006
	(thousands, except per share data)
	GAAP						Non-GAAP
	Continuing						Continuing
	Operations			Adjustments			Operations
Revenues	$	154,496		$	—		$	154,496
Costs and expenses:
Cost of sales:
Cost of goods sold		76,295			(1,150	)(1)		74,875
					(270	)(2)
Amortization of purchased technology		746			(746	)(2)		—
Total cost of sales		77,041			(2,166	)		74,875
Gross profit		77,455			2,166			79,621
Research and Development		36,395			(3,725	)(1)		32,670
Sales and Marketing		24,402			(1,487	)(1)		22,915
General and administrative		22,576			(2,637	)(1)		19,939
Acquired in-process research and development		2,100			(2,100	)(3)		—
Restructuring and other		3,761			(3,761	)(4)		—
Amortization of intangible assets		217			(217	)(2)		—
Total operating expenses		89,451			(13,927	)		75,524
Income (loss) from operations		(11,996	)		16,093			4,097
Interest and other income (expense), net		4,970			(1,275	)(5)		3,695
Income (loss) from continuing operations before provision for income taxes		(7,026	)		14,818			7,792
Provision for (benefit from) income taxes		(5,924	)		6,468	(6)		544
Income (loss) before minority interest		(1,102	)		8,350			7,248
Minority Interest		—			—			—
Net income (loss) from continuing operations	$	(1,102	)	$	8,350		$	7,248
Earnings (loss) per share:
Basic	$	(0.02	)				$	0.11
Diluted (7)		(0.02	)					0.10
Earnings per share weighted average number of shares outstanding:
Basic		68,309						68,309
Diluted (7)		68,309						76,112

Notes to Unaudited Impact of Non-GAAP Adjustments on Net Income:

(1)     The adjustments represent stock-based compensation expense recognized related to awards of stock options, SARs, restricted stock or restricted stock units and stock purchase rights granted under our employee stock purchase plans.

(2)     The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, iptelorg and Santera.

(3)     The adjustment represents acquired in-process research and development relating to the acquisition of certain signaling technology.

(4)     The adjustment represents restructuring and other costs related to our 2006 restructuring.

(5)     The adjustment represents the gain recognized related to our receipt of 89,642 shares of Alcatel-Lucent that were released from escrow.

(6)     The adjustment represents the income tax effect of footnotes (1), (2) and (4) in order to reflect our non-GAAP effective tax rate of 7%.

(7)     For the three months ended December 31, 2006, the calculations of non-GAAP diluted earnings per share include a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method.

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME FROM CONTINUING OPERATIONS

	Three Months Ended December 31, 2005
	(thousands, except per share data)
				IEX			GAAP						Non-GAAP
	Tekelec			(Discontinued			Continuing						Continuing
	(w/ IEX)			Operations)			Operations			Adjustments			Operations
Revenues	$	154,338		$	(15,710	)	$	138,628		$	—		$	138,628
Costs and expenses:
Cost of sales:
Cost of goods sold		79,680			(4,430	)		75,250			260			69,898
											(612	)(2)
											(5,000	)(3)
Amortization of purchased technology		1,275			—			1,275			(1,275	)(2)		—
Impairment of purchased technology		22,660			—			22,660			(22,660	)(4)		—
Total cost of sales		103,615			(4,430	)		99,185			(29,287	)		69,898
Gross profit		50,723			(11,280	)		39,443			29,287			68,730
Research and Development		32,118			(1,681	)		30,437			(133	)(1)		30,304
Sales and Marketing		24,318			(2,552	)		21,766			—			21,766
General and administrative		20,376			(1,322	)		19,054			(805	)(1)		14,721
											(3,528	)(5)
Acquired in-process research and development		2,363			—			2,363			(2,363	)(7)		—
Restructuring and other		3,386			—			3,386			(3,386	)(6)		—
Amortization of intangible assets		605			—			605			(605	)(2)		—
Impairment of goodwill		27,245			—			27,245			(27,245	)(4)		—
Total operating expenses		110,411			(5,555	)		104,856			(38,065	)		66,791
Income (loss) from operations		(59,688	)		(5,725	)		(65,413	)		67,352			1,939
Interest and other income (expense), net		(39	)		27			(12	)		—			(12	)
Income (loss) from continuing operations before provision for income taxes		(59,727	)		(5,698	)		(65,425	)		67,352			1,927
Provision for (benefit from) income taxes		(11,804	)		(2,125	)		(13,929	)		12,775			(1,154	)
Income (loss) before minority interest		(47,923	)		(3,573	)		(51,496	)		54,577			3,081
Minority Interest		—			—			—			—			—
Net income (loss) from continuing operations	$	(47,923	)	$	(3,573	)	$	(51,496	)	$	54,577		$	3,081
Earnings (loss) per share:
Basic	$	(0.72	)				$	(0.77	)				$	0.05
Diluted (9)		(0.72	)					(0.77	)					0.05
Earnings per share weighted average number of shares outstanding:
Basic		66,571						66,571						66,571
Diluted (9)		66,571						66,571						68,165

Notes to Unaudited Impact of Non-GAAP Adjustments on Net Income:

(1)     The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock, restricted stock units and stock purchase rights granted under our employee stock purchase plans.

(2)     The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, iptelorg and Santera.

(3)     The adjustment represents the recording of a warranty obligation associated with a Class A defect.

(4)     The adjustments represent the impairment charges related to the writeoff of Taqua purchased technology and goodwill.

(5)     The adjustment represents expenses related to the 2006 restatement of our audited financial statements.

(6)     The adjustment represents restructuring and other costs related to our manufacturing, corporate headquarters and Taqua relocations.

(7)     The adjustment represents acquired in-process research and development relating to the acquisition of the minority interest in Santera.

(8)     The adjustment represents the income tax effect of footnotes (1), (2), (3), (4), (5) and (6) in order to reflect our non-GAAP effective tax rate at 12.7% for the Tekelec business, excluding Santera.

(9)     For the three months ended December 31, 2005, the calculations of non-GAAP diluted earnings per share exclude a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method as the effects of including such amounts are anti-dilutive.

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME FROM CONTINUING OPERATIONS

	Year Ended December 31, 2006
	(thousands, except per share data)
	GAAP						Non-GAAP
	Continuing						Continuing
	Operations			Adjustments			Operations
Revenues	$	553,647		$	—		$	553,647
Costs and expenses:
Cost of sales:
Cost of goods sold		256,789			(4,585	)(1)		251,124
					(1,080	)(2)
Amortization of purchased technology		4,219			(4,219	)(2)		—
Impairment of purchased technology		25,615			(25,615	)(3)		—
Total cost of sales		286,623			(35,499	)		251,124
Gross profit		267,024			35,499			302,523
Research and Development		148,443			(14,602	)(1)		133,841
Sales and Marketing		92,961			(6,690	)(1)		86,271
General and administrative		74,719			(8,830	)(1)		65,337
					(342	)(4)
					(210	)(5)
Acquired in-process research and development		2,100			(2,100	)(6)		—
Restructuring and other		7,173			(7,173	)(7)		—
Amortization of intangible assets		1,938			(1,938	)(2)		—
Impairment of goodwill		75,000			(75,000	)(3)		—
Total operating expenses		402,334			(116,885	)		285,449
Income (loss) from operations		(135,310	)		152,384			17,074
Interest and other income (expense), net		10,216			(3,068	)(8)		7,148
Income (loss) from continuing operations before provision for income taxes		(125,094	)		149,316			24,222
Provision for (benefit from) income taxes		(21,941	)		27,000	(9)		5,059
Income (loss) before minority interest		(103,153	)		122,316			19,163
Minority Interest		—			—			—
Net income (loss) from continuing operations	$	(103,153	)	$	122,316		$	19,163
Earnings (loss) per share:
Basic	$	(1.53	)				$	0.28
Diluted (10)		(1.53	)					0.28
Earnings per share weighted average number of shares outstanding:
Basic		67,340						67,340
Diluted (10)		67,340						68,561

Notes to Unaudited Impact of Non-GAAP Adjustments on Net Income:

(1)     The adjustments represent stock-based compensation expense recognized related to awards of stock options, SARs, restricted stock or restricted stock units and stock purchase rights granted under our employee stock purchase plans.

(2)     The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, iptelorg and Santera.

(3)     The adjustments represent the elimination of the impairment charges incurred related to the intangible assets and the goodwill associated with our Core Switching reporting segment.

(4)     The adjustment represents $342,000 in legal expenses incurred to settle the IEX vs. Blue Pumpkin litigation.

(5)     The adjustment represents $210,000 in costs associated with the 2006 restatement of our consolidated financial statements.

(6)     The adjustment represents acquired in-process research and development relating to the acquisition of certain signaling technology.

(7)     The adjustment represents restructuring and other costs related to our 2006 restructuring and changes in estimates relating to the restructuring of our manufacturing, corporate headquarters and Taqua relocations in 2005 and 2004.

(8)     The adjustment represents a $1.8 million gain recognized related to our receipt of 642,610 shares of Lucent that were released from escrow and a $1.3 million gain recognized related to our receipt of 89,642 shares of Alcatel-Lucent that were released from escrow.

(9)     The adjustment represents the income tax effect of footnotes (1), (2), (3), (4), (5), (7) and (8) in order to reflect our non-GAAP effective tax rate of 21%.

(10)     For the year ended December 31, 2006, the calculations of diluted earnings per share exclude a potential add-back to net income of $2,324,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method as the effects of including such amounts are anti-dilutive.

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME FROM CONTINUING OPERATIONS

	Year Ended December 31, 2005
	(thousands, except per share data)
				IEX			GAAP						Non-GAAP
	Tekelec			(Discontinued			Continuing						Continuing
	(w/ IEX)			Operations)			Operations			Adjustments			Operations
Revenues	$	536,909		$	(50,404	)	$	486,505		$	—		$	486,505
Costs and expenses:
Cost of sales:
Cost of goods sold		223,729			(13,145	)		210,584			(11	)(1)		203,483
											(2,090	)(2)
											(5,000	)(3)
Amortization of purchased technology		5,819			—			5,819			(5,819	)(2)		—
Impairment of purchased technology		22,660			—			22,660			(22,660	)(4)		—
Total cost of sales		252,208			(13,145	)		239,063			(35,580	)		203,483
Gross profit		284,701			(37,259	)		247,442			35,580			283,022
Research and Development		125,664			(6,430	)		119,234			(308	)(1)		118,926
Sales and Marketing		93,206			(9,431	)		83,775			—			83,775
General and administrative		67,940			(3,574	)		64,366			(3,053	)(1)		57,785
											(3,528	)(5)
Acquired in-process research and development		3,573			—			3,573			(3,573	)(6)		—
Restructuring and other		7,735			—			7,735			(7,735	)(7)		—
Amortization of intangible assets		2,887			—			2,887			(2,887	)(2)		—
Impairment of goodwill		27,245			—			27,245			(27,245	)(4)		—
Total operating expenses		328,250			(19,435	)		308,815			(48,329	)		260,486
Income (loss) from operations		(43,549	)		(17,824	)		(61,373	)		83,909			22,536
Interest and other income (expense), net		(573	)		78			(495	)		1,344	(8)		849
Income (loss) from continuing operations before provision for income taxes		(44,122	)		(17,746	)		(61,868	)		85,253			23,385
Provision for (benefit from) income taxes		(133	)		(6,619	)		(6,752	)		17,500	(9)		10,748
Income (loss) before minority interest		(43,989	)		(11,127	)		(55,116	)		67,753			12,637
Minority Interest		10,248			—			10,248			(1,968	)(10)		8,280
Net income (loss) from continuing operations	$	(33,741	)	$	(11,127	)	$	(44,868	)	$	65,785		$	20,917
Earnings (loss) per share:
Basic	$	(0.51	)				$	(0.68	)				$	0.32
Diluted (11)		(0.51	)					(0.68	)					0.31
Earnings per share weighted average number of shares outstanding:
Basic		66,001						66,001						66,001
Diluted (11)		66,001						66,001						68,072

Notes to Unaudited Impact of Non-GAAP Adjustments on Net Income:

(1)     The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock, restricted stock units and stock purchase rights granted under our employee stock purchase plans.

(2)     The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, iptelorg and Santera.

(3)     The adjustment represents the recording of a warranty obligation associated with a Class A defect.

(4)     The adjustments represent the impairment charges related to the writeoff of Taqua purchased technology and goodwill.

(5)     The adjustment represents expenses related to the 2006 restatement of our audited financial statements.

(6)     The adjustment represents acquired in-process research and development relating to the acquisitions of iptelorg and the minority interest in Santera.

(7)     The adjustment represents restructuring and other costs related to our manufacturing, corporate headquarters and Taqua relocations.

(8)     The adjustment represents a realized loss on the sale of Santera’s holdings of Alcatel shares received in conjunction with warrants exercised in December 2004.

(9)     The adjustment represents the income tax effect of footnotes (1), (2), (3), (4), (5), (7) and (8) in order to reflect our non-GAAP effective tax rate at 32% for the Tekelec business, excluding Santera.

(10)     The adjustment represents the minority interest impact of footnotes (2) and (8).

(11)     For the year ended December 31, 2005, the calculations of diluted earnings per share exclude a potential add-back to net income of $2,324,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method as the effects of including such amounts are anti-dilutive.