10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2005

Or

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

Commission file number 0-15135

TEKELEC

(Exact name of registrant as specified in its charter)

California
(State or other jurisdiction of
incorporation or organization) 95-2746131
(I.R.S. Employer
Identification No.)

5200 Paramount Parkway
Morrisville, North Carolina 27560
(Address and zip code of principal executive offices)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

     As of July 29, 2005, there were 65,982,051 shares of the registrant’s common stock, without par value, outstanding.

TEKELEC

TABLE OF CONTENTS
FORM 10-Q
INDEX

		Page
Part I — Financial Information
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004		2
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2005 and 2004		3
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2005 and 2004		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2005 and 2004		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		27
Item 4.	Controls and Procedures		27
Part II — Other Information
Item 1.	Legal Proceedings		28
Item 4.	Submission of Matters to a Vote of Security Holders		29
Item 5.	Other Information		29
Item 6.	Exhibits		30
Signatures			32
Exhibits
Exhibit 10.2
Exhibit 10.6
Exhibit 10.7
Exhibit 10.8
Exhibit 10.9
Exhibit 10.10
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

TEKELEC

Unaudited Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2005			2004
	(Thousands, except share data)
Assets
Current assets:
Cash and cash equivalents	$	34,549		$	48,925
Short-term investments, at fair value		173,478			134,435
Accounts receivable, less allowances of $4,884 and $4,847, respectively		99,817			107,850
Inventories		51,372			33,654
Deferred income taxes, net		13,703			15,804
Prepaid expenses and other current assets		51,482			44,639
Total current assets		424,401			385,307
Long-term investments, at fair value		93,293			93,622
Property and equipment, net		38,083			30,617
Investments in privately-held companies		7,322			7,322
Deferred income taxes, net		46,829			45,748
Other assets		5,616			6,757
Goodwill		128,851			128,732
Intangible assets, net		80,529			83,538
Total assets	$	824,924		$	781,643
Liabilities and Shareholders’ Equity
Current liabilities:
Trade accounts payable	$	38,442		$	35,316
Accrued expenses		25,611			30,417
Accrued payroll and related expenses		25,696			23,478
Short-term notes and current portion of notes payable		2,163			3,266
Current portion of deferred revenues		127,328			92,182
Income taxes payable		2,169			646
Total current liabilities		221,409			185,305
Long-term portion of notes payable		45			78
Long-term convertible debt		125,000			125,000
Deferred income taxes		18,026			19,586
Long-term portion of deferred revenues		3,852			2,187
Total liabilities		368,332			332,156
Minority interest		11,264			20,489
Commitments and Contingencies (Note J)
Shareholders’ equity:
Common stock, without par value, 200,000,000 shares authorized; 65,897,267 and 65,543,767 shares issued and outstanding, respectively		262,787			258,656
Deferred stock-based compensation		(2,930	)		(4,480	)
Retained earnings		186,500			174,268
Accumulated other comprehensive income (loss)		(1,029	)		554
Total shareholders’ equity		445,328			428,998
Total liabilities and shareholders’ equity	$	824,924		$	781,643

See notes to consolidated financial statements.

2

TEKELEC

Unaudited Condensed Consolidated Statements of Operations

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
				(Thousands, except per share data)
Revenues	$	133,044		$	95,618		$	252,419		$	174,488
Cost of sales:
Cost of goods sold		39,692			23,953			71,294			43,338
Amortization of purchased technology		1,997			2,392			3,752			5,456
Total cost of sales		41,689			26,345			75,046			48,794
Gross profit		91,355			69,273			177,373			125,694
Operating expenses:
Research and development		30,966			24,169			60,972			44,788
Selling, general and administrative		50,942			38,165			98,330			70,436
Acquired in-process research and development.		—			8,000			—			8,000
Restructuring and other		2,503			110			2,760			1,052
Amortization of intangible assets		702			409			1,581			941
Total operating expenses		85,113			70,853			163,643			125,217
Income (loss) from operations		6,242			(1,580	)		13,730			477
Other income (expense):
Interest income		1,720			1,077			2,984			2,610
Interest expense		(917	)		(1,081	)		(1,915	)		(2,199	)
Loss on sale of investments		—			—			(1,344	)		—
Other, net		(377	)		(349	)		(817	)		(296	)
Total other income (expense), net		426			(353	)		(1,092	)		115
Income (loss) from operations before provision for income taxes		6,668			(1,933	)		12,638			592
Provision for income taxes		3,942			6,952			9,631			13,205
Income (loss) before minority interest		2,726			(8,885	)		3,007			(12,613	)
Minority interest		2,850			8,581			9,225			18,158
Net income (loss)	$	5,576		$	(304	)	$	12,232		$	5,545
Earnings (loss) per share:
Basic	$	0.08		$	(0.00	)	$	0.19		$	0.09
Diluted		0.08			(0.00	)		0.18			0.09
Weighted average number of shares outstanding:
Basic		65,723			62,458			65,660			62,246
Diluted		67,258			62,458			67,652			65,174

See notes to consolidated financial statements.

3

TEKELEC

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
				(Thousands)
Net income (loss)	$	5,576		$	(304	)	$	12,232		$	5,545
Other comprehensive income (loss):
Foreign currency translation adjustments		(129	)		58			(172	)		14
Net unrealized gain (loss) on available-for-sale securities, net of income taxes		418			(1,021	)		(1,411	)		(1,243	)
Comprehensive income (loss)	$	5,865		$	(1,267	)	$	10,649		$	4,316

See notes to consolidated financial statements.

4

TEKELEC

Unaudited Condensed Consolidated Statements of Cash Flows

	Six Months Ended
	June 30,
	2005			2004
	(Thousands)
Cash flows from operating activities:
Net income	$	12,232		$	5,545
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on investment in publicly-traded company		1,344			—
Minority interest		(9,225	)		(18,158	)
Allowance for doubtful accounts		(113	)		—
Restructuring		—			(72	)
Depreciation		8,790			6,974
Amortization		8,966			14,422
Amortization of deferred financing costs		491			556
Convertible note accretion		—			203
Deferred income taxes		(128	)		(2,497	)
Stock-based compensation		1,914			585
Tax benefit related to stock options exercised		458			2,489
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		7,829			(15,618	)
Inventories		(17,897	)		(7,807	)
Prepaid expenses and other current assets		(6,233	)		(7,354	)
Trade accounts payable		3,274			12,305
Accrued expenses		(4,479	)		(4,805	)
Accrued payroll and related expenses		2,332			3,136
Deferred revenues		37,107			9,900
Income taxes payable		1,518			4,178
Total adjustments		35,948			(1,563	)
Net cash provided by operating activities		48,180			3,982
Cash flows from investing activities:
Proceeds from sales and maturities of available-for-sale investments		104,821			425,027
Purchases of available-for-sale investments		(149,009	)		(345,525	)
Purchases of property and equipment		(16,308	)		(8,788	)
Purchase of technology license		(4,000	)		—
Cash paid for Taqua net of cash acquired		—			(86,994	)
Purchase of technology		—			(1,350	)
Change in other assets		(80	)		(226	)
Net cash used in investing activities		(64,576	)		(17,856	)
Cash flows from financing activities:
Payments on notes payable		(1,173	)		(6,886	)
Proceeds from issuance of common stock		3,309			13,411
Net cash provided by financing activities		2,136			6,525
Effect of exchange rate changes on cash		(116	)		16
Net change in cash and cash equivalents		(14,376	)		(7,333	)
Cash and cash equivalents at beginning of period		48,925			45,261
Cash and cash equivalents at end of period	$	34,549		$	37,928

See notes to consolidated financial statements.

5

TEKELEC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A. Basis of Presentation

     The accompanying condensed consolidated financial statements include the accounts of Tekelec, our wholly owned subsidiaries, and our majority owned subsidiary, Santera, less minority interest. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements included in the Company’s Annual Report of Form 10-K for the year ended December 31, 2004. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the instructions for Forms 10-Q and Article 10 of Regulation S-X.

     In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial condition and consolidated results of operations. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year. Certain items shown in the prior consolidated financial statements have been reclassified to conform to the presentation of the current period.

     We operate under a thirteen-week calendar quarter. For financial statement presentation purposes, the reporting periods are referred to as ended on the last calendar day of the quarter. The accompanying consolidated financial statements for the three and six months ended June 30, 2005 and 2004 are for the thirteen and twenty-six weeks ended July 1, 2005 and July 2, 2004, respectively.

     We conduct business in a number of foreign countries and are organized into four geographic territories. The four territories are: (1) North America, comprised of the United States and Canada, (2) “EMEA,” comprised of Europe, the Middle East and Africa, (3) “CALA,” comprised of the Caribbean and Latin America including Mexico, and (4) Asia Pacific, comprised of Asia and the Pacific region including China.

     These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004 and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2004.

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (Revised 2004) “Share-Based Payment” (“SFAS 123R”). In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 expresses the views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules. In April 2005, the SEC delayed the implementation of SFAS 123R for public companies until the first annual period beginning after June 15, 2005. We expect to adopt SFAS 123R on January 1, 2006. We are currently in the process of reviewing SFAS 123R, but have not yet determined the fair value model or transition method we will use upon its adoption. However, because we have historically granted a significant number of stock options, the adoption of SFAS 123R is expected to have a material impact on our consolidated results of operations and earnings per share.

     In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 “Accounting Changes and Error Corrections: (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in an accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 will have a material impact on our financial position, results of operations or cash flows for the current or any prior periods.

     In December 2004, the FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29”. This Statement amended APB Opinion 29 to eliminate the exception for non-monetary exchanges of

6

similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 153 will have a material impact on our financial position, results of operations or cash flows.

     In November 2004, FASB issued SFAS No. 151 “Inventory Costs”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 will have a material impact on our financial position, results of operations or cash flows.

Note B. Acquisitions

     On April 8, 2004, we completed the acquisition of all of the outstanding shares of capital stock of privately held Taqua, Inc. (“Taqua”). Taqua develops, markets and sells solutions for next-generation switches optimized for the small switch service provider market. The acquisition was accomplished by means of a reverse triangular merger of a new wholly owned subsidiary of Tekelec (“Merger Sub”), with and into Taqua (the “Acquisition”). As a result of the Acquisition, Taqua is the surviving corporation and a wholly owned subsidiary of Tekelec. The operations of Taqua have been integrated into the operations of our Switching Solutions Group as of June 30, 2005.

     Taqua’s operating results are included in our consolidated results since the date of acquisition. The following table shows our pro forma revenue, net income and earnings per share giving effect to the Taqua acquisition as of the beginning of 2004:

	Six Months Ended
	June 30, 2004
	(Thousands, except per
	share amounts)
Revenues	$	177,320
Net income		15,649
Earnings per share:
Basic		0.25
Diluted		0.24

     The above pro forma information excludes the impact of the write-off of acquired in-process research and development costs of $8.0 million that were included in our results of operations for the six months ended June 30, 2005.

7

Note C. Minority Interest in Santera

     The net income and losses of Santera are allocated between Tekelec and the minority stockholders based on their relative interests in the equity of Santera and the related liquidation preferences. This approach requires net losses to be allocated first to the Series A Preferred Stock until fully absorbed and then to the Series B Preferred Stock. Subsequent net income will be allocated first to the Series B Preferred Stock to the extent of previously recognized net losses allocated to Series B Preferred Stock. Additional net income will then be allocated to the Series A Preferred Stock to the extent of previously recognized losses allocated to Series A Preferred Stock and thereafter to the holders of Santera common stock in proportion to their relative ownership interests in the equity of Santera. The loss allocated to minority interest of Santera for the three and six months ended June 30, 2005 and 2004, was computed as follows (dollars in thousands):

	Three Months			Three Months Ended			Six Months Ended			Six Months Ended
	Ended June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(Thousands)
Santera net loss (includes amortization of intangibles of $753, $1,057, $1,265 and $2,936, respectively)	$	4,597		$	13,840		$	14,879		$	29,287
Percentage of losses attributable to the minority interest based on capital structure and liquidation preferences		62	%		62	%		62	%		62	%
Minority interest losses	$	2,850		$	8,581		$	9,225		$	18,158

     Since our acquisition of a majority interest in Santera, the total net losses that are allocable to the Series A Preferred Stock are $80.2 million, leaving $18.2 million of losses to be allocated to the Series A Preferred Stock until fully absorbed. After the Series A Preferred Stock has fully absorbed such losses, all subsequent net losses of Santera, if any, will be allocated to the Series B Preferred Stock, of which we own 100%. As discussed further in Note N, on August 3, 2005, we amended our agreement with the other shareholders of Santera in order to purchase the remaining interest of Santera for $75.6 million. We expect to complete the acquisition of the remaining interest in the fourth quarter of 2005.

Note D. Restructuring and Other Costs

     We account for restructuring costs related to relocation costs and retention bonuses in accordance with Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). Restructuring charges are recorded as liabilities as incurred. Accordingly, retention bonuses are accrued and expensed over the required service period. We account for severance costs in accordance with Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits.” The severance benefits provided as part of restructurings are part of an ongoing benefit arrangement, and accordingly, we have accrued a liability for expected severance costs. Restructuring liabilities are included in accrued expenses and accrued payroll and operating expenses in the accompanying financial statements.

Corporate Headquarters and Taqua Restructure

     In April 2005, we announced plans to relocate our corporate offices from Calabasas, California to our facilities in Morrisville, North Carolina. The relocation will provide a significant opportunity to improve our operations by integrating our finance, accounting, corporate and information technology functions into the business units they support. In addition, we announced that our Taqua facility in Hyannis, Massachusetts, will be consolidated into our Plano, Texas facilities during 2005. Both of these relocations will result in employee terminations and relocations, and qualify as Exit Activities as that term is defined in SFAS No. 146, which specifies the measurement and recognition accounting principles for these one-time costs. The termination costs include retention bonuses, severance pay and benefit costs extended through the required service period and for up to one year thereafter. Additionally, in the second quarter of 2005 we recorded a one-time charge of $150,000 related to the termination of our lease in Hyannis. Other costs related to the management of the relocation projects and the costs to relocate equipment will be expensed as incurred.

     During 2004, we entered into a lease agreement for approximately 22,400 square feet of office space in Westlake Village, California through December 2014. During the first quarter of 2005, after being notified by the Landlord for this building that it would be unable to deliver possession of the premises in accordance with the lease terms, we terminated the lease. The Landlord disputes our right to terminate the lease. As a result of our decision to terminate the lease, we recorded a charge of $291,000 in the six months ended June 30, 2005 related to the write-off of certain leasehold improvements, anticipated legal costs associated with the disputed termination of the lease and the anticipated forfeiture of our deposits paid to the Landlord.

8

     Costs related to the Corporate Headquarters Relocation and Taqua Restructuring are as follows:

			Costs Incurred		Cumulative
	Total Costs		for the		Costs Incurred
	Expected to be		Three Months Ended		through
	Incurred		June 30, 2005		June 30, 2005
	(Thousands)
Severance costs and retention bonuses	$	2,866	$	1,873	$	1,873
Employee relocation costs		229		9		9
Facility relocation costs		1,124		389		580
Other(1)		996		198		198
Total	$	5,215	$	2,469	$	2,660

(1) Consists of costs related to the transition of our corporate headquarters including recruitment, signing bonuses and training costs related to the hiring of finance and administrative personnel in Morrisville as well as travel costs during the transition period. In addition, other costs include salary costs for duplicative employees during the transition of job responsibilities from employees located in Calabasas to the successor employees in Morrisville. These transition costs are expensed as incurred.

     Activity related to the Corporate Headquarters Relocation and Taqua Restructuring accrual is as follows:

	Total Restructuring		Payments as of		Balance at
	Charges Accrued, Net		June 30, 2005		June 30, 2005
	(Thousands)
Severance costs and retention bonuses	$	1,873	$	—	$	1,873
Facility costs		161		—		161
Total	$	2,034	$	—	$	2,034

Manufacturing Relocation

     In January 2004, we announced the implementation of a global strategic manufacturing plan which included the outsourcing of the majority of our manufacturing operations and the relocation of our remaining signaling product manufacturing operations from Calabasas, California to our facilities in Morrisville, North Carolina. The plan included the elimination of approximately 23 positions during 2004 and one position in April 2005, resulting in restructuring costs such as employee severance and relocation costs. This cost reduction initiative resulted in restructuring charges of $34,000 and $110,000 for the three months ended June 30, 2005 and 2004, respectively and $100,000 and $1.1 million for the six months ended June 30, 2005 and 2004, respectively.

     The costs related to the Manufacturing Relocation Restructuring were as follows:

			Costs Incurred		Cumulative
	Total Costs		for the		Costs Incurred
	Expected to be		Three Months Ended		through
	Incurred		June 30, 2005		June 30, 2005
	(Thousands)
Severance costs and retention bonuses	$	972	$	—	$	972
Employee relocation costs		550		34		550
Facility relocation costs		243		—		243
Total	$	1,765	$	34	$	1,765

     Activity related to the Manufacturing Relocation Restructuring accrual is as follows:

	Total Restructuring		Payments as of			Balance at
	Charges Accrued, Net		June 30, 2005			June 30, 2005
	(Thousands)
Severance costs and retention bonuses	$	972	$	(924	)	$	48
Total	$	972	$	(924	)	$	48

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Note E. Gain (Loss) on Investment in Alcatel

     In December 2004, in connection with the acquisition of Spatial Communications Technologies (“Spatial”) by Alcatel, Santera, our majority owned subsidiary, received an aggregate of 1,363,380 shares of freely tradable Alcatel shares valued at $14.91 per share in exchange for shares of Spatial common stock then held by Santera. During the first quarter of 2005, Santera sold 1,263,380 Alcatel shares for proceeds of $17.5 million resulting in realized losses of $1.3 million.

     In addition, Santera may receive up to 185,513 additional shares of Alcatel currently held in escrow as security for any acquisition-related indemnification claims that Alcatel may assert following the closing of the acquisition. These shares are anticipated to be released from escrow beginning in December 2005. We may recognize additional gains from these Alcatel shares when released from escrow.

Note F. Certain Balance Sheet Items

	June 30,			December 31,
	2005			2004
	(Thousands)
Inventories consist of the following:
Raw materials	$	31,793		$	20,972
Work in process		6,092			4,147
Finished goods		13,487			8,535
Inventories	$	51,372		$	33,654
Property and equipment consist of the following:
Manufacturing and development equipment	$	89,391		$	82,120
Furniture and office equipment		48,185			44,599
Demonstration equipment		3,720			4,016
Leasehold improvements		12,415			10,992
		153,711			141,727
Less accumulated depreciation		(115,628	)		(111,110	)
Property and equipment, net	$	38,083		$	30,617
Intangible assets consist of the following:
Purchased technology	$	136,462		$	133,124
Other		18,790			18,790
		155,252			151,914
Less accumulated amortization		(74,723	)		(68,376	)
Intangible assets, net	$	80,529		$	83,538

     The identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. The estimated remaining amortization expense related to identifiable intangible assets as of June 30, 2005 is as follows:

For the Years Ending December 31,	(Thousands)
2005	$	6,123
2006		8,832
2007		7,531
2008		7,422
2009		7,326
Thereafter		43,295
Total	$	80,529

Note G. Financial Instruments

     We use derivative instruments, such as forward contracts, to manage our exposure to market risks such as interest rate and foreign exchange risks. We record derivative instruments in the consolidated financial statements at fair value.

     Corresponding gains and losses on these contracts, as well as gains and losses on the items being hedged, are included as a component of other income and expense in our consolidated statements of income. When we elect not to designate a derivative instrument and hedged item as a fair value hedge at inception of the hedge, or the relationship does not qualify for fair value hedge accounting, the change in the fair value of the derivative instrument is recognized in the consolidated statements of operations.

     As of June 30, 2005, we had five foreign currency forward contracts outstanding to sell approximately 11.7 million Euros, in order to hedge certain receivables balances denominated in that currency. These contracts had expiration dates of July 6, 2005 and are accounted for as fair value hedges. As of June 30, 2004, we had no foreign currency forward contracts outstanding.

     For the three months ended June 30, 2005 and 2004, other income from foreign currency forward contracts was

10

$917,000 and $42,500, respectively. For the six months ended June 30, 2005 and 2004, our other income (loss) from foreign currency forward contracts was $1,790,000 and $(250,000), respectively. These gains (losses) were offset by a corresponding gain or loss on the item being hedged, which is also recorded in other income (loss) in the accompanying unaudited condensed consolidated financial statements.

Note H. Income Taxes

     The income tax provisions for the three months ended June 20, 2005 and 2004 were $3.9 million and $7.0 million, respectively, and for the six months ended June 30, 2005 and 2004 were $9.6 million and $13.2 million, respectively, and reflect the effects of non-deductible acquisition-related costs and non-deductible losses of Santera.

     Our provision for income taxes does not include any benefit from the losses generated by Santera, as such losses cannot be included on our federal consolidated tax return inasmuch as our majority ownership interest in Santera does not meet the threshold to consolidate under income tax rules and regulations. A full valuation allowance has been established against Santera’s deferred tax assets due to uncertainties surrounding the timing and realization of the benefits from Santera’s tax attributes in future tax returns. Accordingly, we have provided an $82.7 million valuation allowance against the deferred tax assets of Santera as of June 30, 2005. In addition to the fully reserved deferred tax assets of Santera, we have deferred tax assets of $60.5 million as of June 30, 2005, against which we have not provided a valuation allowance. The realization of these assets is dependent on the generation of future taxable income.

     Excluding the effects of acquisition-related items and Santera’s operating results, an effective tax rate of 35% was applied to income from operations for the three and six month periods ended June 30, 2005 and 2004, and represented federal, state and foreign taxes on our income, reduced primarily by estimated research and development credits, foreign tax credits, the manufacturing deduction and other benefits from foreign-sourced income.

Note I. Lines of Credit, Notes Payable and Long-Term Convertible Debt

     As of June 30, 2005, we had a $30.0 million credit facility collateralized by a pledged account where our investments are held by an intermediary financial institution. This credit facility bears interest at, or in some cases below, the lender’s prime rate (6.25% at June 30, 2005), and expires on December 15, 2005, if not renewed. In the event that we borrow against this facility, we are required to maintain collateral in the amount of the borrowing in the pledged account. As of June 30, 2005, we maintained $7.0 million in this collateral account, reported as long-term investments on the consolidated balance sheet. There have been no borrowings under this facility, however, in the normal course of business, we issue letters of credit under this facility. There were no letters of credit outstanding as of June 30, 2005. The commitment fees paid on the unused line of credit were not significant for the three and six months ended June 30, 2005. Under the terms of this credit facility, we are required to maintain certain financial covenants. We were in compliance with these covenant requirements as of June 30, 2005.

     As of June 30, 2005, Santera had one note payable for $2.0 million that is collateralized by assets purchased under the note and substantially all of Santera’s other assets, bears interest at 6.36%, and matures in November 2005. Under the terms of this note, we are required to maintain certain financial covenants, including a covenant that requires that Santera provide audited financial statements within 120 days of year end.

     In June 2003, we issued and sold $125 million aggregate principal amount of our 2.25% Senior Subordinated Convertible Notes due 2008 (the “Notes”). The Notes were issued in a private offering in reliance on Section 4(2) of the Securities Act of 1933, as amended. The initial purchaser of the Notes was Morgan Stanley & Co. Incorporated, which resold the Notes to qualified institutional buyers pursuant to Rule 144A promulgated under the Securities Act. The aggregate offering price of the Notes was $125 million and the aggregate proceeds to Tekelec were approximately $121.2 million, after expenses. The Notes mature on June 15, 2008, and are convertible prior to the close of business on their maturity date into shares of our common stock at a conversion rate of 50.8906 shares per $1,000 principal amount of the Notes, subject to adjustment in certain circumstances. There are no financial covenants related to the Notes, and there are no restrictions on us paying dividends, incurring debt or issuing or repurchasing securities. The Notes carry a cash interest (coupon) rate of 2.25%, payable on June 15 and December 15 of each year, commencing on December 15, 2003. Interest expense was $703,000 for both the three months ended June 30, 2005 and 2004 and $1.4 million for both the six months ended June 30, 2005 and 2004.

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Note J. Commitments and Contingencies

Indemnities, Commitments and Guarantees

     In the normal course of our business, we make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities, commitments and guarantees include, among others, intellectual property indemnities to our customers in connection with the sale of our products and licensing of our technology, indemnities for liabilities associated with the infringement of other parties’ technology based upon our products and technology, guarantees of timely performance of our obligations (including obligations to pay liquidated damages in certain circumstances), indemnities related to the reliability of our equipment, and indemnities to our directors and officers to the maximum extent permitted by law. The duration of these indemnities, commitments and guarantees varies, and, in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that we could be obligated to make. To date, there have been no material payments made under these indemnification provisions, and no material claims are outstanding as of June 30, 2005. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for these indemnities, we cannot determine the amount of potential future payments, if any, related to such indemnification provisions. Accordingly, we have not recorded a liability for these indemnities, commitments or guarantees in the accompanying financial statements.

Litigation

     From time to time, various claims and litigation are asserted or commenced against us arising from or related to contractual matters, intellectual property matters, product warranties and personnel and employment disputes. As to such claims and litigation, we can give no assurance that we will prevail. However, we currently do not believe that the ultimate outcome of any pending matters, other than possibly the Bouygues litigation as described below, will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

     Bouygues Telecom, S.A. vs. Tekelec

     On February 24, 2005, Bouygues Telecom, S.A., a French telecommunications operator, filed a complaint against Tekelec in the United States District Court for the Central District of California seeking damages for economic losses caused by a service interruption Bouygues Telecom experienced in its cellular telephone network in November 2004. The amount of damages sought by Bouygues Telecom is $81 million plus unspecified punitive damages, and attorneys’ fees. In its complaint, Bouygues Telecom alleges that the service interruption was caused by the malfunctioning of certain virtual home location register (HLR) servers (i.e., servers storing information about subscribers to a mobile network) provided by Tekelec to Bouygues Telecom.

     Bouygues Telecom seeks damages against Tekelec based on causes of action for product liability, negligence, breach of express warranty, negligent interference with contract, interference with economic advantage, intentional misrepresentation, negligent misrepresentation, fraudulent concealment, breach of fiduciary duty, equitable indemnity, fraud in the inducement of contract, and unfair competition under California Business & Professionals Code section 17200.

     On April 21, 2005, Tekelec filed a motion to transfer venue of the lawsuit from the Central District of California to the Eastern District of North Carolina and concurrently filed a motion to dismiss six of the twelve claims for relief contained in the Complaint. On June 8, 2005, the District Court entered a written order granting Tekelec’s motion to transfer and deeming the motion to dismiss to be “moot” given the transfer.

     On July 6, 2005, Tekelec filed a motion for an extension of time to file a revised motion to dismiss in North Carolina. The District Court granted that motion in an order dated July 19, 2005, and Tekelec filed a motion to dismiss the claims of Bouygues Telecom for strict product liability, negligence, breach of fiduciary duty, unfair competition, equitable indemnity, interference with prospective economic advantage, and interference with contract. On July 26, 2005, Bouygues Telecom filed a motion to “rescind” the Court’s July 19 order and to strike Tekelec’s motion to dismiss. Tekelec intends to oppose Bouygues Telecom’s most recent motion.

     Although Tekelec is still evaluating the remaining claims asserted by Bouygues Telecom, Tekelec intends to defend vigorously against the action and believes Bouygues Telecom’s claims could not support the damage figures alleged in the complaint. At this stage of the litigation, management cannot assess the likely outcome of this matter and it is possible that

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an unfavorable outcome could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

     Lemelson Medical, Education and Research Foundation, Limited Partnership vs. Tekelec

     In March 2002, the Lemelson Medical, Education & Research Foundation, Limited Partnership (“Lemelson”) filed a complaint against thirty defendants, including Tekelec, in the United States District Court for the District of Arizona. The complaint alleges that all defendants make, offer for sale, sell, import, or have imported products that infringe eighteen patents assigned to Lemelson, and the complaint also alleges that the defendants use processes that infringe the same patents. The patents at issue relate to computer image analysis technology and automatic identification technology.

     Lemelson has not identified the specific Tekelec products or processes that allegedly infringe the patents at issue. Several Arizona lawsuits, including the lawsuit in which Tekelec is a named defendant, involve the same patents and have been stayed pending a non-appealable resolution of a lawsuit involving the same patents in the United States District Court for the District of Nevada. On January 23, 2004, the Court in the District of Nevada case issued an Order finding that certain Lemelson patents covering bar code technology and machine vision technology were: (1) unenforceable under the doctrine of prosecution laches; (2) not infringed by any of the accused products sold by any of the eight accused infringers; and (3) invalid for lack of written description and enablement. In September 2004, Lemelson filed its appeal brief with the Court of Appeals for the Federal Circuit (“CAFC”) for the related Nevada litigation, and in December 2004, the Defendants in the related Nevada litigation filed their reply brief. In June 2005, the CAFC held an oral argument for the appeal. Tekelec currently believes that the ultimate outcome of the lawsuit will not have a material adverse effect on our financial position, results of operations or cash flows.

Note K. Stock-Based Compensation

     As of June 30, 2005, we have six stock-based employee compensation plans. Under five of the stock option plans with maximum terms of ten years there are 45.6 million shares of our common stock authorized and reserved for issuance. The terms of options granted under these option plans are determined at the time of grant, the options generally vest ratably over one- to five-year periods, and in any case the option price may not be less than the fair market value per share on the date of grant. Both incentive stock options and nonstatutory stock options can be issued under the option plans. Two of the plans allow for restricted stock units and restricted stock to be issued.

     During 2004, we issued restricted stock units (“RSUs”) for 116,510 shares to employees of VocalData and Steleus resulting in deferred stock-based compensation of approximately $2.0 million. These RSUs vest over a one-year period and are being accounted for as compensation expense over the vesting period. During the three months ended June 30, 2005, four employees were granted a total of 112,281 restricted stock units (“RSUs”). In connection with these grants, we recorded $1.6 million of deferred stock-based compensation, which is being amortized as compensation expense over the one-year vesting period. These RSU grants were made under Tekelec’s 2004 Equity Incentive Plan for New Employees and met the “employee inducement” exception to the Nasdaq rules requiring shareholder approval of equity-based incentive plans. For the three and six months ended June 30, 2005, we recognized $715,000 and $1.2 million of compensation expense related to the amortization of the deferred stock-based compensation for these RSUs, respectively. As of June 30, 2005, the Company had $1.8 million remaining in deferred stock based compensation relating to these RSUs.

     In connection with the acquisition of Taqua, we assumed unvested options resulting in deferred stock-based compensation of $4.2 million. For the three and six months ended June 30, 2005, we recognized $261,000 and $678,000, respectively, of compensation expense related to the amortization of deferred stock based compensation for the Taqua options. As of June 30, 2005, the Company had $1.1 million remaining in deferred stock based compensation relating to the Taqua options.

     In May 2005, the 2005 Employee Stock Purchase Plan (the “2005 ESPP”), under which one million shares of our common stock have been authorized and reserved for issuance, was approved by our shareholders. The 2005 ESPP provides for an automatic annual increase in the number of shares authorized and reserved for issuance thereunder on each August 1 during its ten-year term. Each such increase is equal to the lesser of (a) 500,000 shares, (b) a number of shares equal to 1% of the number of outstanding shares of our common stock as of the date of the increase and (c) an amount determined by our Board of Directors. Eligible employees may authorize payroll deductions of up to 15% of their compensation to purchase shares of common stock at 85% of the lower of the market price per share at (i) the beginning of

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the 24-month offering period or (ii) the end of each six-month purchase period. The 2005 ESPP replaces the Employee Stock Purchase Plan that was adopted in 1996 (the “1996 ESPP”). The 1996 ESPP was terminated on July 1, 2005.

     The following table illustrates the effect on stock-based compensation, net income and earnings (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(Thousands, except share data)
Stock-based compensation, net of tax:
As reported	$	634		$	52		$	1,244		$	166
Additional stock-based compensation expense determined under the fair value method		4,480			4,025			9,160			7,415
Pro forma	$	5,114		$	4,077		$	10,404		$	7,581
Net income (loss):
As reported	$	5,576		$	(304	)	$	12,232		$	5,545
Less: additional stock-based compensation expense determined under the fair value method, net of tax		(4,480	)		4,025			(9,160	)		7,415
Pro forma	$	1,096		$	(4,329	)	$	3,072		$	(1,870	)
Earnings (loss) per share-basic:
As reported	$	0.08		$	0.00		$	0.19		$	0.09
Less: per share effect of additional stock-based compensation expense determined under the fair value method, net of tax		(0.06	)		0.07			(0.14	)		0.12
Pro forma	$	0.02		$	(0.07	)		0.05			(0.03	)
Earnings (loss) per share-diluted:
As reported	$	0.08		$	0.00		$	0.18		$	0.09
Less: per share effect of additional stock-based compensation expense determined under the fair value method, net of tax		(0.06	)		0.07			(0.13	)		0.12
Pro forma	$	0.02		$	(0.07	)	$	0.05		$	(0.03	)
Weighted average number of shares outstanding:
Basic		65,723			62,458			65,660			62,246
Diluted		66,876			62,458			67,142			62,246

Note L. Operating Segment Information

     Network Signaling Group (formerly Network Signaling). Our Network Signaling Group develops and sells our Tekelec EAGLE(R) 5 Signaling Application System, Tekelec 1000 Application Server, Tekelec 500 Signaling Edge, the Short Message Gateway, and the SIP to SS7 Gateway. During 2004, certain network signaling products, including Sentinel, were combined with the Steleus operations acquired in October 2004 to form our new Communications Software Solutions Group.

     Switching Solutions Group (formerly Next-Generation Switching). Our Switching Solutions Group product portfolio is comprised of our Santera, Taqua, and VocalData switching solutions. Our Switching Solutions Group products include Santera’s product portfolio consisting of the Tekelec 9000 DSS, and the Tekelec 8000 WMG, a carrier-grade, integrated voice and data switching solutions which delivers applications like IXC tandem, Class 4/5, PRI offload, packet/cell switching and Voice over Broadband services. Taqua’s product portfolio includes the Tekelec 700 LAG and Tekelec 7000 C5. VocalData’s IP Centrex application server is being integrated into the Switching Solutions Group business unit.

     Communications Software Solutions Group. Our Communications Software Solutions Group product portfolio is comprised of Steleus products as well as certain business intelligence applications and other products that were formerly included in the network signaling product line.

     IEX Contact Center Group (formerly Contact Center). Our IEX Contact Center Group provides workforce management and intelligent call routing systems for single- and multiple-site contact centers. Our IEX Contact Center product line includes the TotalView Workforce Management and TotalNet Call Routing products and services.

     Transfers between operating segments are made at prices reflecting market conditions. The allocation of revenues from external customers by geographical area is determined by the destination of the sale.

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     Our operating segments and geographical information are as follows (in thousands):

Operating Segments

	Revenues
	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2005			2004		2005			2004
Network Signaling Group	$	81,539		$	68,030	$	155,888		$	128,075
Switching Solutions Group		33,341			12,943		58,186			19,329
Communications Software Solutions Group		7,336			4,293		17,734			7,488
IEX Contact Center Group		11,071			10,352		21,720			19,596
Intercompany Eliminations		(243	)		—		(1,109	)		—
Total net revenues	$	133,044		$	95,618	$	252,419		$	174,488

	Income (Loss) from Operations
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Network Signaling Group	$	36,461		$	32,998		$	70,491		$	58,613
Switching Solutions Group		(11,232	)		(17,529	)		(25,550	)		(29,742	)
Communications Software Solutions Group		(4,970	)		(133	)		(6,052	)		(785	)
IEX Contact Center Group		3,962			4,153			6,968			7,229
General Corporate(1)		(17,979	)		(21,069	)		(32,127	)		(34,838	)
Total income (loss) from operations	$	6,242		$	(1,580	)	$	13,730		$	477

(1) General Corporate includes acquisition-related charges and amortization of $2,379 and $10,609 for the three months ended June 30, 2005 and 2004, respectively, and $5,346 and $13,973 for the six months ended June 30, 2005 and 2004, respectively, as well as other corporate expenses not specifically allocated to operating segments or specifically used by operating segment management to evaluate segment performance.

Enterprise-Wide Disclosures

     The following table sets forth, for the periods indicated, revenues from external customers by principal product line (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Network Signaling Group	$	81,539	$	68,030	$	155,888	$	128,075
Switching Solutions Group		33,341		12,943		58,186		19,329
Communications Software Solutions Group		7,093		4,293		16,625		7,488
IEX Contact Center Group		11,071		10,352		21,720		19,596
Total	$	133,044	$	95,618	$	252,419	$	174,488

     The following table sets forth, for the periods indicated, revenues from external customers by geographic territory (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
North America(1)	$	96,121	$	82,310	$	191,706	$	149,803
Europe Middle East and Africa		16,491		6,501		26,291		9,080
Caribbean and Latin America		11,860		4,437		14,994		10,440
Asia Pacific		8,572		2,370		19,428		5,165
Total	$	133,044	$	95,618	$	252,419	$	174,488

(1) North America includes revenues in the United States of $86,224 and $78,743 for the three months ended June 30, 2005 and 2004, respectively, and $176,623 and $139,197 for the six months ended June 30, 2005 and 2004, respectively.

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     The following table sets forth, for the periods indicated, the Company’s long-lived assets including net property and equipment, investment in privately-held company and other tangible assets by geographic area (in thousands):

	June 30,		December 31,
	2005		2004
United States	$	47,346	$	42,188
Other		3,675		2,509
Total	$	51,021	$	44,697

     For both the three months ended June 30, 2005 and 2004, sales to the combined company formed by the merger of AT&T Wireless and Cingular accounted for 15% of our revenues, and 21% and 16% of our revenues for the six months ended June 30, 2005 and 2004, respectively. Sales to this customer were made from our Network Signaling Group, Communications Software Solutions Group and the IEX Contact Center Group. Sales to Alcatel accounted for 21% and 16% of our revenues for the three and six months ended June 30, 2005, respectively and are recorded as sales from our Switching Solutions Group.

     Sales to Verizon accounted for 14% and 12% of our revenues for the three and six months ended June 30, 2004, respectively, and included sales from our Network Signaling Group, our IEX Contact Center Group and our Switching Solutions Group. In addition, in the three months ended June 30, 2004, sales to Spatial accounted for 12% of our revenues consisting of sales from our Switching Solutions Group.

Note M. Earnings Per Share

     The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and six months ended June 30, 2005 and 2004:

	Net Income (Loss)			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(Thousands, except per share data)
For the Three Months Ended June 30, 2005:
Basic earnings per share	$	5,576			65,723	$	0.08
Effect of Dilutive Securities — Stock Options and Warrants		—			1,535
Diluted earnings per share	$	5,576			67,258	$	0.08
For the Three Months Ended June 30, 2004:
Basic earnings per share	$	(304	)		62,458	$	0.00
Effect of Dilutive Securities — Stock Options and Warrants		—			—
Diluted earnings per share	$	(304	)		62,458	$	0.00
For the Six Months Ended June 30, 2005:
Basic earnings per share	$	12,232			65,660	$	0.19
Effect of Dilutive Securities — Stock Options and Warrants		—			1,992
Diluted earnings per share	$	12,232			67,652	$	0.18
For the Six Months Ended June 30, 2004:
Basic earnings per share	$	5,545			62,246	$	0.09
Effect of Dilutive Securities — Stock Options and Warrants		—			2,928
Diluted earnings per share	$	5,545			65,174	$	0.09

     The computation of diluted number of shares excludes unexercised stock options and warrants and potential shares issuable upon conversion of our 2.25% senior subordinated convertible notes due 2008 that are anti-dilutive. The numbers of such shares excluded were 21.9 million and 19.0 million for the three months ended June 30, 2005 and 2004, respectively, and 20.2 million and 16.7 million for the six months ended June 30, 2005 and 2004, respectively.

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Note N. Subsequent Events

Acquisition of iptelorg GmbH

     On July 13, 2005, we completed the acquisition of iptelorg GmbH (“iptelorg”), a developer of Session Initiation Protocol (SIP) routing software. We purchased all of iptelorg’s outstanding stock for approximately $7.0 million in cash, plus $4.0 million in shares of restricted common stock, which are subject to repurchase for a nominal amount if certain of the former iptelorg shareholders terminate their employment with us within four years. We do not expect the transaction to have a material impact on our financial statements, excluding any potential non-cash, in-process research and development charge.

     The acquisition will be accounted for using the purchase method of accounting. The financial results of iptelorg subsequent to the acquisition date of July 13, 2005 will be included in the operations of our Network Signaling Group.

Acquisition of Minority Interest in Santera Systems, Inc.

     On August 3, 2005, we entered into amendments to certain agreements related to our original investment in Santera Systems Inc. Under the terms of these amended agreements, we have the option to purchase all of Santera’s capital stock owned by Santera’s minority stockholders for cash of $75.6 million. On August 3, 2005, we exercised our option to purchase the shares held by Santera’s minority stockholders. Upon the closing of our purchase of the minority interest, the parties’ indemnification obligations as set forth in the original merger agreement terminate.

     The closing of our purchase is scheduled to occur on October 3, 2005, or as soon thereafter as all conditions to the closing have been satisfied or waived; provided, however, that in the event the closing has not occurred on or before October 11, 2005, either we or the representative of the minority stockholders may elect to terminate the parties’ rights and obligations, in which case the provisions of the original agreements will continue in full force and effect.

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

     The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Conditions and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2004. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Overview

     Tekelec is a developer of next-generation switching and signaling telecommunications products and services, network performance management technology, business intelligence and value-added applications. Tekelec’s products and services are widely deployed in traditional and next-generation wireline and wireless networks and contact centers worldwide. Our corporate headquarters are currently located in Morrisville, North Carolina, with research and development facilities and sales offices throughout the world. For more information, please visit www.tekelec.com.

     Our products are organized according to our four major operating groups: the Network Signaling Group, the Switching Solutions Group, the Communications Software Solutions Group, and the IEX Contact Center Group. These operating groups were organized during the fourth quarter of 2004 principally as a result of a product rebranding initiative, corporate reorganization and integration activities following our acquisitions of Taqua, VocalData and Steleus. First, our network signaling product line became the Network Signaling Group; second, our next-generation switching product line became the Switching Solutions Group; third, a new Communications Software Solutions Group comprised of Steleus products and certain of our business intelligence applications and other network element independent solution products that were formerly included in the network signaling product line was created; and fourth, our contact center product line was renamed the IEX Contact Center Group.

     Network Signaling Group (formerly Network Signaling). Our Network Signaling Group products help direct and control voice and data communications. They enable carriers to control, establish and terminate calls. They also enable carriers to offer intelligent services, which include any services other than the call or data transmission itself. Examples include familiar products such as voice messaging, toll free calls (e.g., “800” calls), prepaid calling cards, text messaging and local number portability.

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     Our Network Signaling Group products include the Tekelec EAGLE(R) 5 Signaling Application System, Tekelec 1000 Application Server, Tekelec 500 Signaling Edge, the Short Message Gateway, and the SIP to SS7 Gateway. During the fourth quarter of 2004, certain network signaling products, including Sentinel, were combined with Steleus resources to become the basis of our new Communications Software Solutions Group.

     Switching Solutions Group (formerly Next-Generation Switching). Our Switching Solutions Group products are focused primarily on creating and enhancing next-generation voice switching products and services for both traditional Time Division Multiplexing (“TDM”), or TDM-based, and new Packet-based Class 4, Class 5 and wireless applications. The switching portion of a network carries and routes the actual voice or data comprising a “call.”

     The Switching Solutions Group is comprised of our Santera, Taqua, and VocalData switching solutions product portfolio. Our switching products and services allow network service providers to migrate their network infrastructure from circuit-based technology to packet-based technology. Circuit-based switching is largely based upon the TDM protocol standard, in which the electronic signals carrying the voice message traverses the network following a dedicated path, or circuit, from one user to the other. Packet-based switching, however, breaks down the voice message into packets. These packets then individually traverse the network, often taking separate paths, and are then reassembled on the other side of the network prior to delivery to the recipient. Packet-based switching may utilize one of many protocols, the most common of which are Asynchronous Transfer Mode (“ATM”) and Internet Protocol (“IP”). Voice transported using the IP protocol is often referred to as Voice over IP ( “VoIP”).

     Over the last two years, a generally improving economy and improved capital market conditions contributed to a broad turnaround in the financial condition of many telecom equipment providers. While wireline service providers generally continued to experience access line losses and flat to declining revenues, wireless service providers experienced strong subscriber growth and increased end-user adoption of wireless data services and applications. In order to improve their competitive position relative to their wireless competitors, and in order to lower operating costs, a number of the world’s largest carriers, commonly referred to as Tier 1 Carriers, or carriers that typically have operations in more than one country and own and operate their own physical networks, announced their intentions or definitive plans to implement packet-switching technology, generally referred to as Voice over Internet Protocol (VoIP). These factors combined to allow equipment suppliers focused on wireless infrastructure and VoIP infrastructure to perform particularly well.

     Our Switching Solutions Group products include the Tekelec 9000 DSS, an integrated voice and data switching solution, the Tekelec 8000 WMG or Wireless Media Gateway, the Tekelec 7000 C5, Tekelec 700 LAG or Line Access Gateway, and the Tekelec 6000 VoIP Application Server. Our Switching Solutions Group products support the portion of a network that carries and routes the actual voice or data comprising a “call.”

     Communications Software Solutions Group. Our communications software products and services provide call monitoring and intelligent network services such as calling name, outbound call management, inbound call management and a service creation environment. These products also enable intelligent network services such as revenue assurance, monitoring, network optimization, quality of service and marketing intelligence applications. The Communications Software Solutions Group includes Steleus products as well as certain business intelligence applications and other products that were formerly included in the Network Signaling Group product line.

     IEX Contact Center Group (formerly Contact Center). Our IEX Contact Center Group provides workforce management and intelligent call routing systems for single- and multiple-site contact centers. We sell our products primarily to customers in industries with significant contact center operations such as financial services, airlines, telecommunications and retail. Our IEX Contact Center product line includes the TotalView Workforce Management.

     Our revenues are currently organized into four distinct geographical territories: North America, EMEA, CALA and Asia/Pacific. North America comprises the United States and Canada. EMEA comprises Europe, the Middle East and Africa. CALA comprises the Caribbean and Latin America including Mexico. Asia/Pacific comprises Asia and the Pacific region, including India and China.

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Results of Operations

     The following table sets forth, for the periods indicated, the percentages that certain income statement items bear to total revenues:

	Percentage of Revenues
	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		29.8			25.1			28.2			24.8
Amortization of purchased technology		1.5			2.5			1.5			3.2
Gross profit		68.7			72.4			70.3			72.0
Research and development		23.3			25.3			24.2			25.6
Selling, general and administrative		38.3			39.9			39.0			40.4
Acquired in-process research and development		—			8.4			—			4.6
Restructuring and other		1.9			0.1			1.1			0.6
Amortization of intangible assets		0.5			0.4			0.6			0.5
Total operating expenses		64.0			74.1			64.9			71.7
Income (loss) from operations		4.7			(1.7	)		5.4			0.3
Other income (expense), net		0.3			(0.3	)		(0.4	)		—
Income (loss) from operations before provision for income taxes		5.0			(2.0	)		5.0			0.3
Provision for income taxes		3.0			7.3			3.8			7.5
Income (loss) before minority interest		2.0			(9.3	)		1.2			(7.2	)
Minority interest		2.2			9.0			3.7			10.4
Net income (loss)		4.2	%		(0.3	)%		4.9	%		3.2	%

     The following table sets forth, for the periods indicated, the revenues by segment as a percentage of total revenues:

	Percentage of Revenues
	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2005			2004			2005			2004
Network Signaling Group		61	%		71	%		62	%		74	%
Switching Solutions Group		25			14			23			11
Communications Software Solutions Group		6			4			7			4
IEX Contact Center Group		8			11			8			11
Total		100	%		100	%		100	%		100	%

     The following table sets forth for the periods indicated, the revenues by geographic territories as a percentage of total revenues:

	Percentage of Revenues
	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2005			2004			2005			2004
North America		72	%		86	%		76	%		86	%
Europe Middle East and Africa		12			7			10			5
Caribbean and Latin America		9			5			6			6
Asia Pacific		7			2			8			3
Total		100	%		100	%		100	%		100	%

Three Months Ended June 30, 2005 Compared with the Three Months Ended June 30, 2004

     Revenues. Our revenues increased by $37.4 million, or 39%, during the second quarter of 2005 due primarily to higher sales in the Switching Solutions and Network Signaling groups.

     Revenues from our Network Signaling Group increased by $13.5 million, or 20%, due to a $23.1 million increase in sales of Eagle STP initial systems, partially offset by a decrease in sales of local number portability products of $9.3 million.

     Revenues from our Switching Solutions Group increased $20.4 million, or 158%, primarily as a result of an increase in sales of our wireless media gateway products of $18.0 million, and an increase of $2.4 million related to products and services obtained from our acquisitions of Taqua and VocalData.

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     Revenues from our Communications Software Solutions Group increased by $2.8 million, or 65%, due primarily to the addition of $4.9 million in revenues from products and services obtained from our acquisition of Steleus, partially offset by a decrease in revenues of $2.1 million from sales from our Sentinel product line.

     Revenues from our IEX Contact Center Group increased by $0.7 million, or 7%, as a result of increased sales of TotalView products.

     Revenues in North America increased by $13.8 million, or 17%, due to a $14.9 million increase in sales of Switching Solutions Group products, partially offset by a decrease in sales of Eagle STP products of $1.0 million. Revenues in the EMEA region increased by $10.0 million, or 154%, due to an increase in Eagle STP product sales of $5.6 million, an increase of $2.1 million in revenues from our Switching Solutions Group and an increase in revenues of $2.7 million from our Communication Software Solutions Group. Revenues in the CALA region increased by $7.4 million, or 167%, due primarily to an increase in Eagle STP product sales of $6.9 million in this region. Revenues in the Asia Pacific region increased $6.2 million, or 262%, due primarily to the addition of $3.3 million in sales from our Switching Solutions Group and secondarily to an increase in Eagle STP product sales of $2.6 million. The percentage of revenues from outside the United States for the three months ended June 30, 2005 and 2004 were 35.2% and 17.6%, respectively.

     A significant portion of our revenues in each quarter results from orders that are received in that quarter, and are difficult to predict. Further, we typically generate a significant portion of our revenues for each quarter in the last month of the quarter. We establish our expenditure levels based on our expectations as to future revenues, and if revenue levels were to fall below expectations, then such shortfall would cause expenses to be disproportionately high. Therefore, a drop in near-term demand would significantly affect revenues, causing a disproportionate reduction in profits or even losses in a quarter.

     We believe that our future revenue growth depends in large part upon a number of factors affecting the demand for our signaling and switching products. For our signaling products, domestically, we derive the majority of our signaling revenue from wireless operators, as wireless networks generate significantly more signaling traffic than wireline networks and, as a result, require significantly more signaling infrastructure. Factors that increase the amount of signaling traffic generated on a wireless network, that we believe result in increased demand for our signaling products include; the growth in the number of subscribers, the number of calls made per subscriber, roaming, and the use of advance features, such as text messaging. Internationally, in addition to the factors affecting our domestic sales growth described above, Eagle signaling product revenue growth depends primarily on our ability to successfully penetrate new international markets, which often involves displacing an incumbent signaling vendor, and our ongoing ability to meet the signaling requirements of the newly acquired customers. For our switching products, future revenue growth, both domestically and internationally, depends on the increasing adoption and deployment of packet-switching technology. As a result of the expansion of our product portfolio and our strategy of providing our customers with integrated products and services, the way that we recognize revenues in the future may be impacted. In the event that we sell integrated products and service that we cannot separate into multiple elements due to the inability to establish vendor-specific objective evidence, we will not be able to recognize revenue until all of the products and services are completely delivered.

     Gross Profit. Gross profit increased to $91.4 million from $69.3 million but decreased as a percentage of revenues to 68.7% in the second quarter of 2005 compared to 72.4% in the second quarter of 2004. While revenues in all of our product lines increased during 2005, the decline in gross profit as a percentage of revenues is due to revenues from our Switching Solutions Group’s products, which traditionally produce lower gross profit margins, growing at a higher rate than revenues from our Network Signaling and other products. To the extent that future revenues from sales of our Switching Solutions Group’s products continue to increase as a percentage of our total revenues, our gross profit as a percentage of revenues may continue to decline. Further, as we enter new markets, particularly international markets, our gross margins as a percentage of revenues may decrease from time to time as the result of our decision to develop new sales channels and customer relationships in these markets.

     Research and Development. Research and development expenses increased overall by $6.8 million, or 28%, and decreased as a percentage of revenues to 23.3% for the three months ended June 30, 2005 from 25.3% for the three months ended June 30, 2004. The dollar increase in 2005 was due primarily to an increase of $3.4 million in compensation and related expenses attributable to additional personnel employed by Tekelec following our acquisitions of Steleus and VocalData in 2004, and secondarily to an increase of $1.5 million in consulting costs incurred on certain research and development projects.

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     We intend to continue to make substantial investments in product and technology development and believe that our future success depends in large part upon our ability to continue to enhance existing products and to develop or acquire new products that maintain our technological competitiveness.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $12.8 million, or 33.5%, but decreased as a percentage of revenues to 38.3% for the three months ended June 30, 2005 from 39.9% for the three months ended June 30, 2004. The increase is primarily due to a $6.9 million increase in compensation and related expenses attributable to additional personnel employed by Tekelec following our acquisitions of Steleus and VocalData in 2004. In addition, the increase is also attributable to a $1.2 million increase in travel expenses incurred as a result of our additional personnel, an increase in audit and Sarbanes-Oxley compliance fees of $0.7 million and an increase in facilities expenses of $1.1 million resulting primarily from (i) the addition of our Steleus and VocalData facilities in 2004 and (ii) expenses related to the lease of additional space in our Plano, Texas facility beginning in December 2004.

     Restructuring and Other Charges. In April 2005, we announced plans to relocate our corporate offices from Calabasas, California to our facilities in Morrisville, North Carolina. We believe the relocation will provide us with a significant opportunity to improve our operations by fully integrating our finance, accounting, corporate and information technology functions into the business units they support. In addition, we announced that our Taqua facility in Hyannis, Massachusetts, will be consolidated into our Plano, Texas facilities during 2005. The relocation of our corporate headquarters and consolidation of our Taqua facility resulted in restructuring charges of $2.5 million in the three months ended June 30, 2005, including a one-time charge of $150,000 related to the termination of our lease in Hyannis (See Note D — Restructuring and Other Costs). We expect these restructuring efforts to reduce our annual expenses from what they otherwise would have been by up to $2.0 million, primarily related to reduced facility and personnel costs.

     In January 2004, we announced a cost reduction initiative that resulted in restructuring charges of $34,000 and $110,000 for the three months ended June 30, 2005 and 2004, respectively. These charges relate to our implementation of a global strategic manufacturing plan which includes outsourcing substantially all of our manufacturing operations and relocating our remaining signaling product manufacturing operations from Calabasas, California to our facilities in Morrisville, North Carolina (See Note D — Restructuring and Other Costs).

     Amortization of Intangible Assets. Amortization of intangible assets was $702,000 for the three months ended June 30, 2005, compared to $409,000 for the three months ended June 30, 2004, and increased slightly as a percentage of revenues from 0.4% for the three months ended June 30, 2004 to 0.5% for the three months ended June 30, 2005. The increase of $293,000 for the three months ended June 30, 2005 is due to the amortization of intangible assets acquired as a result of the acquisitions of VocalData and Steleus during the second half of 2004.

     Other Income (Expense), net. Interest expense decreased by $164,000, or 15.2%, for the three months ended June 30, 2005, compared to the three months ended June 30, 2004 due to the February 2005 repayment of Santera’s notes payable that bore interest at 10%. Interest income increased $643,000, or 59.7%, due to higher average short-term and long-term investment balances during the second quarter of 2005 compared to 2004.

     Acquired In-Process Research and Development. Acquired in-process research and development expense of $8.0 million in the second quarter of 2004 represents the write-off of acquired in-process research and development related to our Taqua acquisition. (See Note B — Acquisitions).

     Income Taxes. The income tax provisions for the three months ended June 30, 2005 and 2004 were $3.9 million and $7.0 million, respectively, and reflected the effect of non-deductible acquisition-related costs and non-deductible losses of Santera. Our provision for income taxes does not include any benefit from the losses generated by Santera because its losses cannot be included on our consolidated federal tax return inasmuch as our majority ownership interest in Santera does not meet the threshold to consolidate under income tax rules and regulations, and a full valuation allowance has been established against Santera’s deferred tax assets due to uncertainties surrounding the timing and realization of the benefits from Santera’s tax attributes in future tax returns. Excluding the effect of acquisition-related items and Santera’s operating results, an effective tax rate of 35% was applied to income from operations for the three months ended June 30, 2005 and 2004, and represented federal, state and foreign taxes on our income, reduced primarily by estimated research and development credits, foreign tax credits, the manufacturing deduction, and other benefits from foreign sourced income.

     Minority Interest. Minority interest represents the losses of Santera allocable to the minority shareholders. See Note C — Minority Interest in Santera.

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Six Months Ended June 30, 2005 Compared with the Six Months Ended June 30, 2004

     Revenues. Our revenues increased by $77.9 million, or 45%, during the six months ended June 30, 2005 due primarily to higher sales in the next-generation switching and network signaling product lines.

     Revenues from our Network Signaling Group increased by $27.8 million, or 22%, due to a $42.9 million increase in sales of Eagle STP initial systems, partially offset by a decrease in sales of local number portability products of $16.4 million.

     Revenues from our Switching Solutions Group increased $38.9 million, or 201%, primarily as a result of an increase in sales of our wireless media gateway products of $31.4 million and an increase in revenues of $7.4 million related to the sales of products and services obtained from our acquisitions of Taqua and VocalData.

     Revenues from our Communications Software Solutions Group increased by $9.1 million, or 122%, due primarily to the addition of revenues from sales of products and services obtained from our acquisition of Steleus.

     Revenues from our IEX Contact Center Group increased by $2.1 million, or 11%, as a result of increased sales of TotalView products.

     Revenues in North America increased by $41.9 million, or 28%, due primarily to a $24.2 million increase in sales of Switching Solutions Group products. Revenues in North America were also higher due to increased sales of Eagle STP network signaling products of $13.4 million and an increase in sales from our Communications Software Solutions Group of $2.6 million. Revenues in the EMEA region increased by $17.2 million, or 190%, due primarily to an increase in Eagle STP product sales of $8.1 million, an increase in revenues of $2.1 million from our Switching Solutions Group and an increase in product sales of $5.6 million from our from our Communication Software Solutions Group. Revenues in the CALA region increased by $4.6 million, or 44%, due primarily to an increase in Eagle STP product sales of $4.0 million in this region. Revenues in the Asia Pacific region increased $14.3 million, or 276%, due primarily to the addition of $11.8 million in sales of our Switching Solutions Group products and secondarily to an increase in Eagle STP product sales of $1.6 million. The percentage of revenues from outside the United States for the six months ended June 30, 2005 and 2004 were 30.0% and 20.2%, respectively.

     Gross Profit. Gross profit increased to $177.4 million from $125.7 million and decreased as a percentage of revenues to 70.3% for the six months ended June 30, 2005 compared to 72.0% for the six months ended June 30, 2004. While revenues in all of our product lines increased during 2005, the decline in gross profit as a percentage of revenues is due to revenues from our Switching Solutions Group’s products, which traditionally produce lower gross profit margins, growing at a higher rate than our Network Signaling and other products. To the extent that future revenues from sales of our Switching Solutions Group’s products continue to increase as a percentage of our total revenues, our gross profit as a percentage of revenues may continue to decline. Further, as we enter new markets, particularly international markets, our gross margins as a percentage of revenues may decrease from time to time as the result of our decision to develop new sales channels and customer relationships in these markets.

     Research and Development. Research and development expenses increased overall by $16.2 million, or 36.1%, and decreased as a percentage of revenues to 24.2% for the six months ended June 30, 2005 from 25.6% for the six months ended June 30, 2004. The dollar increase in 2005 was due primarily to an increase of $8.6 million in compensation and related expenses attributable to additional personnel employed by Tekelec following our acquisitions of Taqua, Steleus and VocalData in 2004, an increase of $4.0 million in consulting costs incurred on certain research and development projects and a $2.6 million increase in facilities costs related to the acquisitions of Steleus and VocalData.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $27.9 million, or 39.6%, and decreased as a percentage of revenues to 39.0% for the six months ended June 30, 2005 from 40.4% for the six months ended June 30, 2004. The increase is primarily due to a $16.6 million increase in compensation and related expenses attributable to additional personnel employed by Tekelec following our acquisitions of Taqua, Steleus and VocalData in 2004. In addition, the increase is also attributable to a $3.2 million increase in travel expenses incurred as a result of our additional personnel, an increase in audit and Sarbanes-Oxley compliance fees of $1.3 million and an increase in facilities expenses of $1.2 million resulting primarily from (i) the addition of our Steleus and VocalData facilities in 2004 and (ii) expenses related to the lease of additional space in our Plano, Texas facility beginning in December 2004.

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     Restructuring and Other Charges. In April 2005, we announced plans to relocate our corporate offices from Calabasas, California to our facilities in Morrisville, North Carolina. We believe the relocation will provide us with a significant opportunity to improve our operations by fully integrating our finance, accounting, corporate and information technology functions into the business units they support. In addition, we announced that our Taqua facility in Hyannis, Massachusetts, will be consolidated into our Plano, Texas facilities during 2005. The relocation of our corporate headquarters and consolidation of our Taqua facility resulted in restructuring charges of $2.7 million in the six months ended June 30, 2005, including a one-time charge of $150,000 related to the termination of our lease in Hyannis (See Note D — Restructuring and Other Costs). We expect these restructuring efforts to reduce our annual expenses from what they otherwise would have been by up to $2.0 million, primarily related to reduced facility and personnel costs.

     In January 2004, we announced a cost reduction initiative that resulted in restructuring charges of $100,000 for the six months ended June 30, 2005 compared to $1.1 million for the six months ended June 30, 2004. These charges relate to our implementation of a global strategic manufacturing plan which includes outsourcing substantially all of our manufacturing operations and relocating our remaining signaling product manufacturing operations from Calabasas, California to our facilities in Morrisville, North Carolina (See Note D — Restructuring and Other Costs).

     Amortization of Intangible Assets. Amortization of intangible assets was $1.6 million for the six months ended June 30, 2005, compared to $941,000 for the six months ended June 30, 2004, and increased slightly as a percentage of revenues to 0.6% for the six months ended June 30, 2005 from 0.5% for the six months ended June 30, 2004. The increase of $640,000 for the six months ended June 30, 2005, is due to the amortization of intangible assets acquired as a result of the acquisitions of Taqua, VocalData, and Steleus during the second half of 2004.

     Other Income (Expense). Interest expense decreased by $284,000, or 12.9%, for the six months ended June 30, 2005, compared to the six months ended June 30, 2004 due to the February 2005 repayment of Santera’s notes payable that bore interest at 10%. Interest income increased $374,000, or 14.3%, due to higher average short-term and long-term investment balances during the six months ended June 30, 2005 compared to the six months ended June 30, 2004.

     Acquired In-Process Research and Development. Acquired in-process research and development expense of $8.0 million in the six months ended June 30, 2004 represents the write-off of acquired in-process research and development related to our Taqua acquisition. (See Note B — Acquisitions).

     Income Taxes. The income tax provisions for the six months ended June 30, 2005 and 2004 were $9.6 million and $13.2 million, respectively, and reflected the effect of non-deductible acquisition-related costs and non-deductible losses of Santera. Our provision for income taxes does not include any benefit from the losses generated by Santera because its losses cannot be included on our consolidated federal tax return inasmuch as our majority ownership interest in Santera does not meet the threshold to consolidate under income tax rules and regulations, and a full valuation allowance has been established against Santera’s deferred tax assets due to uncertainties surrounding the timing and realization of the benefits from Santera’s tax attributes in future tax returns. Excluding the effect of acquisition-related items and Santera’s operating results, an effective tax rate of 35% was applied to income from operations for the six months ended June 30, 2005 and 2004, and represented federal, state and foreign taxes on our income, reduced primarily by estimated research and development credits, foreign tax credits, the manufacturing deduction, and other benefits from foreign sourced income.

     Minority Interest. Minority interest represents the losses of Santera allocable to the minority shareholders. See Note C — Minority Interest in Santera.

Liquidity and Capital Resources

     During the six months ended June 30, 2005, cash, cash equivalents and short-term investments increased by $24.7 million to $208.0 million as of June 30, 2005, primarily due to cash flows from operations of $48.2 million, partially offset by investments in additional fixed assets and technology of $20.3 million.

     Cash flows from operating activities, net of the effects of exchange rate changes on cash, increased $44.1 million during the first six months of 2005 compared to the first six months of 2004. Net cash flows from operating activities for the six months ended June 30, 2005 was provided primarily by net income adjusted for non-cash expenses such as depreciation, amortization and minority interest and net cash inflows from working capital adjustments related primarily to changes in accounts receivable, deferred revenue and inventories. Accounts receivable decreased $7.8 million for the six

23

months ended June 30, 2005, compared to an increase of $15.6 million for the six months ended June 30, 2004, due primarily to higher collections during the first six months of 2005. Deferred revenues increased $37.1 million in the six months ended June 30, 2005 due to an increase in transactions pending completion of acceptance or delivery requirements. Inventories increased by $17.9 million during the six months ended June 30, 2005 in order to meet anticipated shipments of our products in the third quarter of 2005.

     Net cash used in investing activities was $64.6 million for the six months ended June 30, 2005, and included (i) net purchases of short and long-term available-for-sale securities of $44.2 million, (ii) net capital expenditures of $16.3 million during the first six months of 2005 for planned additions of equipment and (iii) an investment of $4.0 million for a prepaid technology license to be used principally for research and development and in manufacturing operations.

     Cash flows from financing activities decreased $4.4 million for the first six months of 2005 compared to the first six months of 2004 due primarily to lower proceeds from the issuance of common stock upon the exercise of employee stock options.

     We believe that our historical sources of cash including existing working capital, funds generated through operations, proceeds from the issuance of stock upon the exercise of options, and our current bank credit facility will be sufficient to satisfy operating requirements for at least the next twelve months, including the expected acquisition of the remaining interest in Santera for $75.6 million discussed in Note N to the accompanying unaudited condensed consolidated financial statements. Nonetheless, we may seek additional sources of capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or operations; however, there can be no assurance that such funds, if needed, will be available on favorable terms, if at all.

     We have a number of credit facilities with various financial institutions. As of June 30, 2005, we had a $30.0 million credit facility collateralized by a pledged account where our investments are held by an intermediary financial institution. This credit facility bears interest at, or in some cases below, the lender’s prime rate (6.25% at June 30, 2005), and expires on December 15, 2005, if not renewed. In the event that we borrow against this facility, we are required to maintain collateral in the amount of the borrowing in the pledged account. As of June 30, 2005, we maintained $7.0 million in this collateral account, reported as long-term investments on the consolidated balance sheet. There have been no borrowings under this facility, however, in the normal course of business, we issue letters of credit under this facility. There were no letters of credit outstanding as of June 30, 2005. The commitment fees paid on the unused line of credit were not significant for the three and six months ended June 30, 2005. Under the terms of this credit facility, we are required to maintain certain financial covenants. We were in compliance with these covenant requirements as of June 30, 2005.

     As of June 30, 2005, Santera had one note payable for $2.0 million that is collateralized by assets purchased under the note and substantially all of Santera’s other assets, bears interest at 6.36%, and matures in November 2005. Under the terms of this note, we are required to maintain certain financial covenants, including a covenant that Santera provide audited financial statements within 120 days of year end.

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (Revised 2004) “Share-Based Payment” (“SFAS 123R”). In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 expresses the views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules. In April 2005, the SEC delayed the implementation of SFAS 123R for public companies until the first annual period beginning after June 15, 2005. We expect to adopt SFAS 123R on January 1, 2006. We are currently in the process of reviewing SFAS 123R, but have not yet determined the fair value model or transition method we will use upon its adoption. However, because we have historically granted a significant number of stock options, the adoption of SFAS 123R is expected to have a material impact on our consolidated results of operations and earnings per share.

     In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 “Accounting Changes and Error Corrections: (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in an accounting principle. This statement is effective for accounting changes and

24

corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 will have a material impact on our financial position, results of operations or cash flows for the current or any prior periods.

     In December 2004, the FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29”. This Statement amended APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 153 will have a material impact on our financial position, results of operations or cash flows.

     In November 2004, FASB issued SFAS No, 151 “Inventory Costs”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 will have a material impact on our financial position, results of operations or cash flows.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

     The statements that are not historical facts contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect the current belief, expectations, estimates, forecasts or intent of our management and are subject to, and involve certain risks and uncertainties. There can be no assurance that the Company’s actual future performance will meet the Company’s expectations. As discussed in our 2004 Annual Report on Form 10-K for the year ended December 31, 2004 and other filings with the SEC, our 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 include, among others:

• overall telecommunications spending,

• changes in general economic conditions,

• unexpected changes in economic, social, or political conditions in the countries in which the Company operates,

• the timing of significant orders and shipments,

• the lengthy sales cycle for the Company’s products,

• the timing of revenue recognition of multiple elements in an arrangement sold as part of a bundled solution,

• the timing of the convergence of voice and data networks,

• the success or failure of strategic alliances or acquisitions including the success or failure of the integration of Santera, Taqua, Steleus, VocalData and iptelorg’s operations with those of the Company,

• litigation or regulatory matters such as the litigation described in Tekelec’s SEC reports and the costs and expenses associated therewith,

• the ability of carriers to utilize excess capacity of signaling infrastructure and related products in their networks,

• the capital spending patterns of customers,

• the dependence on wireless customers for a significant percentage and growth of the Company’s revenues,

• the dependence on a small number of customers for a significant percentage of the Company’s revenues;

• the timely development and introduction of new products and services,

• the product mix and the geographic mix of the Company’s revenues and the associated impact on gross margins,

• market acceptance of new products and technologies,

• carrier deployment of intelligent network services,

• the ability of our customers to obtain financing,

• the level and timing of research and development expenditures, and sales, marketing, and compensation expenses,

• regulatory changes,

25

• the expansion of the Company’s marketing and support organizations, both domestically and internationally, and

• other risks described in this Quarterly Report, our Annual Report on Form 10-K for 2004 and in certain of our other Securities and Exchange Commission filings.

     Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. Actual results may differ materially from those expressed or implied in such forward-looking statements. We are not responsible for updating or revising these forward-looking statements. Undue emphasis should not be placed on any forward-looking statements contained herein or made elsewhere by or on behalf of us.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There have been no material changes in our market risks during the six month period ended June 30, 2005.

     We conduct business in a number of foreign countries, with certain transactions denominated in local currencies. When we have entered into contracts that are denominated in foreign currencies, in certain instances we have obtained foreign currency forward contracts, principally denominated in Euros or British Pounds, to offset the impact of currency rates on accounts receivable. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains on underlying exposures. Changes in the fair value of these forward contracts are recorded immediately in earnings.

     We do not enter into derivative instrument transactions for trading or speculative purposes. The purpose of our foreign currency management policy is to minimize the effect of exchange rate fluctuations on certain foreign denominated anticipated cash flows. The terms of currency instruments used for hedging purposes are consistent with the timing of the transactions being hedged. We may continue to use foreign currency forward contracts to manage foreign currency exchange risks in the future.

     Fixed income securities are subject to interest rate risk. The fair value of our investment portfolio would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of the major portion of our investment portfolio. The portfolio is diversified and consists primarily of investment grade securities to minimize credit risk.

     There have been no borrowings under our variable rate credit facilities. All of our outstanding long-term debt is fixed rate and not subject to interest rate fluctuation. The fair value of the long-term debt will increase or decrease as interest rates decrease or increase, respectively.

Item 4. Controls and Procedures

     (a) Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness, as of the end of the fiscal quarter covered by this report, of the design and operation of our “disclosure controls and procedures” as defined in Exchange Act Rule 13a-15(e) promulgated by the SEC under the Exchange Act. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of such period, were adequate and effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply judgment in evaluating the cost-benefit relationship of those disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

     (b) Changes in Internal Controls over Financial Reporting

     There has not been any change in our internal control over financial reporting during our fiscal quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     The Company is a party to various legal proceedings that are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “Annual Report”). The following information supplements the information concerning the Company’s legal proceedings disclosed in the Annual Report and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005:

Bouygues Telecom, S.A. vs. Tekelec

     On February 24, 2005, Bouygues Telecom, S.A., a French telecommunications operator, filed a complaint against Tekelec in the United States District Court for the Central District of California seeking damages for economic losses caused by a service interruption Bouygues Telecom experienced in its cellular telephone network in November 2004. The amount of damages sought by Bouygues Telecom is $81 million plus unspecified punitive damages, and attorneys’ fees. In its complaint, Bouygues Telecom alleges that the service interruption was caused by the malfunctioning of certain virtual home location register (HLR) servers (i.e., servers storing information about subscribers to a mobile network) provided by Tekelec to Bouygues Telecom.

     Bouygues Telecom seeks damages against Tekelec based on causes of action for product liability, negligence, breach of express warranty, negligent interference with contract, interference with economic advantage, intentional misrepresentation, negligent misrepresentation, fraudulent concealment, breach of fiduciary duty, equitable indemnity, fraud in the inducement of contract, and unfair competition under California Business & Professionals Code section 17200.

     On April 21, 2005, Tekelec filed a motion to transfer venue of the lawsuit from the Central District of California to the Eastern District of North Carolina and concurrently filed a motion to dismiss six of the twelve claims for relief contained in the Complaint. On June 8, 2005, the District Court entered a written order granting Tekelec’s motion to transfer and deeming the motion to dismiss to be “moot” given the transfer.

     On July 6, 2005, Tekelec filed a motion for an extension of time to file a revised motion to dismiss in North Carolina. The District Court granted that motion in an order dated July 19, 2005, and Tekelec filed a motion to dismiss the claims of Bouygues Telecom for strict products liability, negligence, breach of fiduciary duty, unfair competition, equitable indemnity, interference with prospective economic advantage, and interference with contract. On July 26, 2005, Bouygues Telecom filed a motion to “rescind” the Court’s July 19 order and to strike Tekelec’s motion to dismiss. Tekelec intends to oppose Bouygues Telecom’s most recent motion.

     Although Tekelec is still evaluating the remaining claims asserted by Bouygues Telecom, Tekelec intends to defend vigorously against the action and believes Bouygues Telecom’s claims could not support the damage figures alleged in the complaint. At this stage of the litigation, management cannot assess the likely outcome of this matter and it is possible that an unfavorable outcome could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Lemelson Medical, Education and Research Foundation, Limited Partnership vs. Tekelec

     In March 2002, the Lemelson Medical, Education & Research Foundation, Limited Partnership (“Lemelson”) filed a complaint against thirty defendants, including Tekelec, in the United States District Court for the District of Arizona. The complaint alleges that all defendants make, offer for sale, sell, import, or have imported products that infringe eighteen patents assigned to Lemelson, and the complaint also alleges that the defendants use processes that infringe the same patents. The patents at issue relate to computer image analysis technology and automatic identification technology.

     Lemelson has not identified the specific Tekelec products or processes that allegedly infringe the patents at issue. Several Arizona lawsuits, including the lawsuit in which Tekelec is a named defendant, involve the same patents and have been stayed pending a non-appealable resolution of a lawsuit involving the same patents in the United States District Court for the District of Nevada. On January 23, 2004, the Court in the District of Nevada case issued an Order finding that

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certain Lemelson patents covering bar code technology and machine vision technology were: (1) unenforceable under the doctrine of prosecution laches; (2) not infringed by any of the accused products sold by any of the eight accused infringers; and (3) invalid for lack of written description and enablement. In September 2004, Lemelson filed its appeal brief with the Court of Appeals for the Federal Circuit (“CAFC”) for the related Nevada litigation, and in December 2004, the Defendants in the related Nevada litigation filed their reply brief. In June 2005, the CAFC held an oral argument for the appeal. Tekelec currently believes that the ultimate outcome of the lawsuit will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

          (a) On May 13, 2005, we held our 2005 Annual Meeting of Shareholders (the “Annual Meeting”).

          (b) At the Annual Meeting, the following persons were elected as directors of Tekelec. The numbers of votes cast for each director, as well as the number of votes withheld, are listed opposite each director’s name.

Name of Director	Votes Cast for Director		Votes Withheld
Robert V. Adams		51,992,470		9,711,195
Jean-Claude Asscher		54,779,788		6,923,877
Daniel L. Brenner		49,927,706		11,775,959
Mark A. Floyd		53,984,140		7,719,525
Martin A. Kaplan		38,277,845		23,425,820
Frederick M. Lax		55,023,222		6,680,443
Jon F. Rager		49,222,911		12,480,754

          (c) At the Annual Meeting, the shareholders approved, with 39,894,736 votes cast in favor and 7,560,246 votes cast against, the Company’s 2005 Employee Stock Purchase Plan under which an aggregate of 1,000,000 shares of Common Stock is authorized and reserved for issuance. There were 195,289 abstentions and 14,053,394 broker non-votes with respect to this matter.

          (d) At the Annual Meeting, with 60,609,719 votes cast in favor and 1,073,904 votes cast against, the shareholders ratified the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the year ending December 31, 2005. There were 20,042 abstentions with respect to this matter.

Item 5. Other Information.

     Because this Quarterly Report on Form 10-Q is being filed within four business days after the applicable triggering events, the below disclosure is being made under Part II, Item 5 of this Quarterly Report on Form 10-Q instead of under Item 1.01 (Entry into a Material Definitive Agreement) of Form 8-K.

     On August 3, 2005, the Company entered into amendments to each of (i) the Agreement and Plan of Merger dated as of April 30, 2003 (the “Original Merger Agreement”) by and among the Company, Luke Acquisition Corp., certain stockholders of Santera Systems Inc. (“Santera”), and Austin Ventures VI, L.P., as the representative of the minority stockholders of Santera (the “Representative”), (ii) the Stockholders’ Agreement of Santera Systems Inc. dated as of April 30, 2003 (the “Original Stockholders’ Agreement”) by and among the Company, the stockholders of Santera and the Representative, and (iii) the Escrow Agreement dated as of April 30, 2003 (the “Original Escrow Agreement”) by and among the Company, Santera, the minority stockholders of Santera, the Representative, and J.P. Morgan Trust Company, National Association (collectively and as amended, the “Amended Transaction Documents”). The Amended Transaction Documents, provided, among other terms, for the Company to have the right (the “August Call Option”), exercisable on August 3, 2005, to elect to purchase all of the shares of capital stock of Santera owned by Santera’s minority stockholders (the “Santera Shares”) for an aggregate cash purchase price of $75,550,000. On August 3, 2005 pursuant to the terms of the Amended Transaction Documents, the Company exercised the August Call Option. Immediately prior to such exercise, the Company owned 100% of Santera’s Common Stock, 38% of the outstanding shares of Santera’s Series A Preferred Stock and 100% of the outstanding shares of Santera’s Series B Preferred Stock.

     Prior to August 3, 2005 and under the terms of the Original Merger Agreement, the Company has asserted various indemnification claims against the minority stockholders of Santera and had notified them of additional unasserted claims.

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The Representative, on behalf of the minority stockholders, has objected to the validity and amounts of the Company’s asserted claims, and the Representative and the minority stockholders have notified the Company that the Representative and the minority stockholders have various unasserted claims against the Company and its affiliates. Upon the closing of the Company’s acquisition of the Santera Shares pursuant to the exercise of the August Call Option, the Amended Transaction Documents provide for the parties’ indemnification obligations as set forth in the Original Merger Agreement to terminate.

     The closing of the Company’s acquisition of the Santera Shares pursuant to the exercise of the August Call Option is scheduled to occur on October 3, 2005, or as soon thereafter as all conditions to the closing have been satisfied or waived; provided, however, that in the event the closing has not occurred on or before October 11, 2005, the Company or the Representative may elect to terminate the parties’ rights and obligations with respect to the August Call Option. In the event of any such termination, the provisions of the Original Merger Agreement, the Original Stockholders’ Agreement and the Original Escrow Agreement will continue in full force and effect. Those provisions include, but are not limited to, the indemnification obligations of the parties under the Original Merger Agreement and the call and put options held by the Company and the minority stockholders of Santera, respectively, under the Original Stockholders’ Agreement.

Item 6. Exhibits

Exhibit No.	Description
10.1	Employment Offer Letter Agreement dated April 7, 2005 between the Registrant and William Everett, together with employment offer letter agreement effective as of October 14, 2004 between the Registrant and Mr. Everett(1)
10.2	Form of Indemnification Agreement entered into between the Registrant and each of its directors and executive officers
10.3	Amendment No. 3 dated May 2, 2005 to Tekelec 2004 Equity Incentive Plan for New Employees(2)
10.4	Tekelec 2005 Employee Stock Purchase Plan(3)
10.5	Fourth Amendment to Lease, effective as of May 24, 2005, between Arden Realty Limited Partnership, as Landlord, and the Registrant, as Tenant(4)
10.6	Summary of Compensation for the Registrant’s Named Executive Officers
10.7	Summary of Compensation for the Non-Employee Members of the Registrant’s Board of Directors and its Committees
10.8	Amendment dated as of August 3, 2005 to Agreement and Plan of Merger dated as of April 30, 2003, by and among the Registrant, Santera Systems Inc. (“Santera”), certain stockholders of Santera, and Austin Ventures VI, L.P., as Representative
10.9	Amendment dated as of August 3, 2005 to Stockholders’ Agreement of Santera Systems Inc. dated as of April 30, 2003, by and among the Registrant, Santera, the stockholders of Santera and Austin Ventures VI, L.P., as Representative
10.10	Amendment dated as of August 3, 2005 to Escrow Agreement dated as of April 30, 2003, by and among the Registrant, Santera, certain stockholders of Santera, Austin Ventures VI, L.P., as Representative, and J.P. Morgan Trust Company, National Association
31.1	Certification of Chief Executive Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer and Chief financial Officer of Tekelec pursuant to Rule 13a-14(b) under the Exchange Act and U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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(1)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-15135) dated April 7, 2005, as filed with the Commission on April 13, 2005.
(2)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-15135) dated May 2, 2005, as filed with the Commission on May 6, 2005.
(3)	Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (Reg. No. 333-125160) as filed with the Commission on May 23, 2005.
(4)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-15135) dated May 31, 2005, as filed with the Commission on June 1, 2005.

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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 thereunto duly authorized.

	TEKELEC
	/s/ FREDERICK M. LAX
	Frederick M. Lax President and Chief Executive Officer
	/s/ WILLIAM H. EVERETT
	William H. Everett Senior Vice President and Chief Financial Officer
	/s/ GREGORY S. RUSH
	Gregory S. Rush Vice President and Corporate Controller
August 8, 2005

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EXHIBIT INDEX

Exhibit No.	Description
10.2	Form of Indemnification Agreement entered into between the Registrant and each of its directors and executive officers
10.6	Summary of Compensation for the Registrant’s Named Executive Officers
10.7	Summary of Compensation for the Non-Employee Members of the Registrant’s Board of Directors and its Committees
10.8	Amendment dated as of August 3, 2005 to Agreement and Plan of Merger dated as of April 30, 2003, by and among the Registrant, Santera Systems Inc. (“Santera”), certain stockholders of Santera, and Austin Ventures VI, L.P., as Representative
10.9	Amendment dated as of August 3, 2005 to Stockholders’ Agreement of Santera Systems Inc. dated as of April 30, 2003, by and among the Registrant, Santera, the stockholders of Santera and Austin Ventures VI, L.P., as Representative
10.10	Amendment dated as of August 3, 2005 to Escrow Agreement dated as of April 30, 2003, by and among the Registrant, Santera, certain stockholders of Santera, Austin Ventures VI, L.P., as Representative, and J.P. Morgan Trust Company, National Association
31.1	Certification of Chief Executive Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer and Chief financial Officer of Tekelec pursuant to Rule 13a-14(b) under the Exchange Act and U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.2

EXHIBIT 10.2

TEKELEC

INDEMNIFICATION AGREEMENT

     This Indemnification Agreement (“Agreement”) is made as of ___by and between Tekelec, a California corporation (the “Company”), and ___(“Indemnitee”).

RECITALS

     A. The Company desires to attract and retain the services of highly qualified individuals to serve as executive officers, directors and agents of the Company.

     B. The Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors, executive officers and other agents of the Company.

     C. The Company desires to provide indemnification and other rights to Indemnitee in consideration for Indemnitee’s service to the Company.

     In consideration of the covenants and promises set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

     1. Indemnification.

          (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”) (other than an action by or in the right of the Company to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a director, officer, employee or other agent of the Company or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including reasonable attorneys’ fees), judgments, fines, settlements (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) and other amounts actually and reasonably incurred by Indemnitee in connection with the Proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company, and, in the case of any criminal Proceeding, had no reasonable cause to believe Indemnitee’s conduct was unlawful. The termination of any Proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) Indemnitee did not act in good faith and in a manner that Indemnitee reasonably believed to be in the best interests of the Company or (ii) Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

          (b) Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or other agent of the Company or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including reasonable attorneys’ fees) actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action if Indemnitee acted in good faith, in a manner Indemnitee believed to be in the best interests of the Company and its shareholders, except that no indemnification shall be made (i) in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of

Indemnitee’s duty to the Company and its shareholders, unless and only to the extent that the court in which such Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine, (ii) of amounts paid in settling or otherwise disposing of a pending action without court approval or (iii) of expenses incurred in defending a pending action that is settled or otherwise disposed of without court approval.

     2. Expenses; Indemnification Procedure.

          (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in defending any Proceeding referenced in Section 1(a) or (b) hereof prior to the final disposition of the Proceeding (but not amounts actually paid in settlement of any such Proceeding). Indemnitee hereby undertakes to repay such amounts advanced if a court shall ultimately determine that Indemnitee is not entitled to be indemnified by the Company as authorized hereby or by Section 317 of the California General Corporation Law. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company.

          (b) Notice; Cooperation by Indemnitee. Indemnitee shall, as soon as practicable and as a condition precedent to Indemnitee’s right to be indemnified or to receive any advancement of expenses under this Agreement, give the Company written notice of any claim made against Indemnitee for which indemnification or advancement of expenses will or could be sought under this Agreement, specifying the nature of such claim in reasonable detail. Notice to the Company shall be directed to the Chief Executive Officer of the Company, or the Chief Financial Officer if Indemnitee is the Chief Executive Officer, in accordance with Section 14 hereof. Any delay in providing notice will not relieve the Company from its obligations under this Agreement, except to the extent such failure is prejudicial. Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

          (c) Procedure. Any indemnification provided for in Section 1 hereof shall be made after the final disposition (by judgment, settlement, dismissal or otherwise) of the Proceeding with respect to which indemnification is sought and no later than forty five (45) days after written notice by Indemnitee requesting payment. If a claim under this Agreement, under any statute or under any provision of the Company’s Articles of Incorporation or Bylaws providing for indemnification is not paid in full by the Company within forty-five (45) days after such written notice, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 13 hereof, Indemnitee shall also be entitled to be paid for the expenses (including reasonable attorneys’ fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any Proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under this Agreement or applicable law for the Company to indemnify Indemnitee for the amount claimed, and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) hereof unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal

2

counsel or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

          (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of the Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all commercially reasonable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.

          (e) Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any Proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon giving written notice to Indemnitee of its election so to do. After giving such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, provided that (i) Indemnitee shall have the right to employ Indemnitee’s counsel in any such Proceeding at Indemnitee’s expense; and (ii) if (A) the Company has expressly authorized (and continues to authorize) the employment of counsel by Indemnitee at the Company’s expense, (B) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with a conflict of interest or (C) the Company shall not, in fact, have employed counsel reasonably satisfactory to Indemnitee within a reasonable time after notice of the institution of such Proceeding, then Indemnitee shall have the right to employ counsel, and the reasonable fees and expenses of such counsel shall be at the expense of the Company in accordance herewith.

     3. Additional Indemnification Rights; Nonexclusivity.

          (a) Scope. Subject to Section 8 hereof and any other provision of this Agreement that prohibits, limits or conditions indemnification by the Company, the Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law for any acts, omissions or transactions while acting in the capacity of, or that are otherwise related to the fact that Indemnitee was or is serving as, a director, officer, employee or other agent of the Company or, to the extent Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, such other corporation, partnership, joint venture, trust or other enterprise. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule that expands the right of a California corporation to indemnify a member of its Board of Directors, an officer or other corporate agent, such changes shall be, ipso facto, within the purview of Indemnitee’s rights and Company’s obligations, under this Agreement. In the event of any change in any applicable law, statute or rule that narrows the right of a California corporation to indemnify a member of its Board of Directors, an officer or other corporate agent, such changes, to the extent required by such law, statute or rule to be applied to this Agreement, shall have the effect on this Agreement and the parties’ rights and obligations hereunder as is required by such law, statute or rule.

          (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s Articles of Incorporation, its Bylaws, any agreement, any vote of shareholders or disinterested directors, the California General Corporation Law or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for

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any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity at the time of any covered Proceeding.

     4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines, settlements or other amounts actually and reasonably incurred by Indemnitee in connection with any Proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines, settlements or other amounts to which Indemnitee is entitled.

     5. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers and other corporate agents under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Indemnitee.

     6. Directors’ and Officers’ Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to insure the Company’s performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. To the extent the Company maintains an insurance policy or policies providing directors’ and officers’ liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors under such policy or policies, if Indemnitee is a director; or of the Company’s officers under such policy or policies, if Indemnitee is not a director of the Company but is an officer; or of the Company’s key employees under such policy or policies, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain any insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. In the event the Company decides not to obtain or maintain any directors’ and officers’ liability insurance, the Company will notify Indemnitee of such decision in writing within thirty (30) days after such decision.

     7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order or other applicable law, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

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     8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

          (a) Excluded Acts. To indemnify Indemnitee (i) for any acts or omissions or transactions from which a director may not be relieved of liability under the California General Corporation Law or other applicable law or (ii) for breach of duty to the Company or its shareholders as to circumstances in which indemnity is expressly prohibited by Section 317 of the California General Corporation Law; or

          (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings or claims initiated or brought to enforce this Agreement or a right to indemnification under Section 317 of the California General Corporation Law or under any other statute or law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or

          (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to proceedings or claims initiated or brought to enforce this Agreement or a right to indemnification under Section 317 of the California General Corporation Law or under any other statute or law, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or

          (d) Duplicate Payments. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent Indemnitee has otherwise received payment of amounts otherwise indemnifiable under this Agreement pursuant to (i) a policy of directors’ and officers’ liability insurance maintained by the Company, (ii) the Company’s Articles of Incorporation or Bylaws, (iii) Section 317 or any other applicable provisions of the California General Corporation Law or (iv) any other agreement; or

          (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

     9. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page of this Agreement and shall apply to acts or omissions of Indemnitee that occurred prior to such date if Indemnitee was a director, officer, employee or other agent of the Company, or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company’s request for so long thereafter as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Indemnitee was serving in any such capacity.

     10. Construction of Certain Phrases.

     (a) For purposes of this Agreement, references to the “Company” shall also include, in addition to the resulting or surviving corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger that, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such

5

constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

          (b) For purposes of this Agreement, references to “other enterprise” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company that imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries.

     11. Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original.

     12. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee’s estate, heirs, executors, administrators and similar legal representatives.

     13. Attorneys’ Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, a court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action were made in bad faith or were frivolous.

     14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or an agent thereof, on the date of such receipt, (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked or (iii) if sent by other means, on the date such notice is actually received by the relevant party. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice in accordance herewith. Notice to the Company shall be sent with a copy to the Company’s General Counsel and to its outside legal counsel at the addresses set forth below or as subsequently modified by written notice to the Indemnitee:

	Tekelec
	Fax:
	Attn:
with a copy to:
	Fax:
	Attention:

6

     15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California in the County of Los Angeles for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action or proceeding instituted under this Agreement shall be brought only in the County of Los Angeles in the state courts of the State of California.

     16. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of California as applied to contracts between California residents entered into and to be performed entirely within California.

     17. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.

     18. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto.

     19. Integration and Entire Agreement. This Agreement (i) sets forth the entire understanding between the parties with respect to the subject matter hereof, (ii) supersedes all previous written or oral negotiations, commitments, understandings and agreements relating to the subject matter hereof and (iii) merges all prior and contemporaneous discussions between the parties.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

TEKELEC

By:

Name:

Title:

Address:

Agreed to and accepted:

INDEMNITEE:

Address:

7

EX-10.6

Exhibit 10.6

Tekelec

Summary of Compensation Arrangements
for Named Executive Officers

     Set forth below is a summary of the compensation paid by Tekelec (the “Company”) to the executive officers of the Company who were named in the Summary Compensation Table appearing in the Proxy Statement relating to the Company’s 2005 Annual Meeting of Shareholders and who are currently employees of the Company (collectively, the “Named Executive Officers”).

     Base Salaries. As approved on April 7, 2005 by the Compensation Committee of the Company’s Board of Directors (and as recommended by the Compensation Committee and approved by the Board of Directors in the case of the Chief Executive Officer and President), effective January 1, 2005, the Named Executive Officers receive base salaries at the annual rates indicated below:

Name and Position	2005 Annual Base Salary Rate
Frederick M. Lax, Chief Executive Officer and President	$	525,000
Ronald W. Buckly, Senior Vice President, Corporate Affairs and General Counsel	$	305,000
Lori Craven, Executive Vice President, Global Sales, Marketing and Customer Services	$	350,000
Debra May, President and General Manager, IEX Corporation	$	252,500

     The Compensation Committee of the Board of Directors (and the Board of Directors upon recommendation of the Compensation Committee in the case of the Chief Executive Officer and President) may from time to time adjust the foregoing base salaries. Such adjustments are generally made annually.

     Incentive Awards. The Named Executive Officers are eligible to participate in the Company’s cash and equity incentive compensation plans pursuant to the terms of such plans. Such plans are included as exhibits to the Company’s filings with the Securities and Exchange Commission.

     Other Compensation. Named Executive Officers who elect to participate in the Company’s 401(k) Plan are entitled to receive certain Company matching contributions under the 401(k) Plan. The Company also pays premiums for group term life insurance for the benefit of the Named Executive Officers. Named Executive Officers are also eligible to receive such other compensation as may from time to time be determined by the Compensation Committee or by the Board of Directors, as applicable.

* * *

EX-10.7

Exhibit 10.7

Tekelec

Summary of Compensation for Non-Employee Members
of the Board of Directors and its Committees
(Effective April 1, 2005)

1.	Board of Directors
	Quarterly retainer (except Chairman)	$	12,500
	Chairman’s quarterly retainer	$	15,000
	Fee for attending meeting in excess of four hours	$	2,000
	Fee for attending meeting of four hours or less	$	1,000
2.	Compensation Committee
	Quarterly retainer (except Chairman)	$	1,250
	Chairman’s quarterly retainer	$	4,000
	Fee for attending a meeting	$	750
3.	Audit Committee
	Quarterly retainer (except Chairman)	$	2,000
	Chairman’s quarterly retainer	$	5,000
	Fee for attending a meeting	$	800
4.	Nominating and Corporate Governance Committee
	Quarterly retainer (except Chairman)	$	1,000
	Chairman’s quarterly retainer	$	1,500
	Fee for attending a meeting	$	750
5.	Corporate Development Committee
	Quarterly retainer (except Chairman)	$	1,000
	Chairman’s quarterly retainer	$	1,500
	Fee for attending a meeting in excess of four hours	$	1,000
	Fee for attending a meeting of four hours or less	$	750

     In addition to cash compensation, non-employee directors receive under the Company’s Amended and Restated Non-Employee Director Stock Option Plan (the “Director Plan”) (i) a grant of stock options upon their initial election to the Board of Directors and (ii) annual grants of stock options upon their re-election to the Board. The Director Plan is included as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on August 9, 2004.

* * *

EX-10.8

EXHIBIT 10.8

AMENDMENT TO

AGREEMENT AND PLAN OF MERGER

     THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the “Amendment”) is made as of this 3rd day of August 2005, by and among Tekelec, a California corporation (“Tekelec”), Santera Systems Inc., a Delaware corporation (“Santera”), certain stockholders of Santera, and Austin Ventures VI, L.P., a Delaware limited partnership (“Austin Ventures”), as the Representative. Capitalized terms used herein that are not otherwise defined have the meanings set forth in the Agreement and Plan of Merger dated as of April 30, 2003 by and between Tekelec, Luke Acquisition Corp., Santera, the stockholders of Santera (the “Stockholders”), and the Representative (the “Merger Agreement”).

     WHEREAS, Tekelec, Santera, the Stockholders, and the Representative desire to amend the Merger Agreement;

     NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tekelec, Santera, the Stockholders, and the Representative agree as follows:

     Section 1. Amendment. The following Section 12.20 is added to Article XII of the Merger Agreement:

     “Section 12.20 Acknowledgement and Agreement.

          (a) Effective upon the August Call Closing Date (as defined in Section 3.4 of the Stockholders’ Agreement dated as of April 30, 2003, as amended August 2, 2005, Tekelec, Santera, the stockholders of Santera (the “Stockholders”), and the Representative (the “Stockholders’ Agreement”)), Tekelec and Santera hereby acknowledge and agree that neither the Representative nor any Legacy Santera Stockholder which has delivered to the Escrow Agent (for further delivery to Tekelec) a completed and executed copy of the Letter of Transmittal in accordance with the terms of Section 3.4 of the Stockholders’ Agreement shall have any further obligations under this Agreement, including without limitation, any obligations under Article XI hereof, except that the obligations of such Parties under Section 7.2(e) hereof shall continue in full force and effect.

          (b) Effective upon the August Call Closing Date (as defined in the Stockholders’ Agreement), the Legacy Santera Stockholders and the Representative hereby acknowledge and agree that neither Tekelec nor Santera has any further obligations under this Agreement, including without limitation, any obligations under Article XI hereof, except that the obligations of such parties under Section 7.2(e) hereof shall continue in full force and effect.”

     Section 2. Representations. Each of Tekelec and Santera hereby represent and warrant that it has the full right, power and authority to enter into this Amendment and the documents related hereto and upon the execution of this Amendment by Tekelec, Santera, the Representative and the other Legacy Santera Stockholders who are parties to this Amendment, the Merger Agreement, as amended by this Amendment, shall be binding on, and enforceable

against, it. Each of the Representative and each of the Legacy Santera Stockholders who are parties to this Amendment (“Signing Legacy Stockholders”) hereby represents and warrants that it has the full right, power and authority to enter into this Amendment and the documents related hereto and upon the execution by Tekelec, Santera, the Representative and the other Legacy Santera Stockholders who are parties to this Amendment, the Merger Agreement, as amended by this Amendment, shall be binding on, and enforceable against, it.

     Section 3. Governing Law. This Amendment shall be governed by and construed under the laws of the State of Delaware.

     Section 4. Entire Agreement. This Amendment constitutes the entire agreement between Santera, Tekelec, the Stockholders, and the Representative relating to the subject matter hereof, and any previous understanding and/or agreement between Tekelec, Santera, the Legacy Santera Stockholders, and the Representative regarding the subject matter hereof is superseded by this Amendment.

     Section 5. Counterparts. This Amendment may be executed in counterparts, each which shall be deemed an original, and all of which shall constitute one and the same instrument.

* * * * *

2

     IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day first above written.

SANTERA SYSTEMS INC.
By:	/s/ Frederick M. Lax
Name:	Frederick M. Lax
Title:	Chairman of the Board of Directors
TEKELEC
By:	/s/ Frederick M. Lax
Name:	Frederick M. Lax
Title:	President and Chief Executive Officer
By:	/s/ Ronald W. Buckly
Name:	Ronald W. Buckly
Title:	Senior Vice President, Corporate
	Affairs and General Counsel

3

AUSTIN VENTURES VI, L.P., as Representative
By:	AV Partners VI, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
AUSTIN VENTURES VI, L.P.
By:	AV Partners VI, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
AUSTIN VENTURES VI AFFILIATES FUND, L.P.
By:	AV Partners VI, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
AUSTIN VENTURES VIII, L.P.
By:	AV Partners VIII, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
REDPOINT VENTURES II, L.P., by its General Partner, Redpoint Ventures II, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director
REDPOINT ASSOCIATES II, LLC, as nominee
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director

4

REDPOINT TECHNOLOGY PARTNERS Q-I, L.P., by its General Partner, Redpoint Ventures I, LLC
By:	/s/ R. Thomas Dyal
Name:	R. Thomas Dyal
Title:	Managing Director
REDPOINT TECHNOLOGY PARTNERS A-I, L.P., by its General Partner, Redpoint Ventures I, LLC
By:	/s/ R. Thomas Dyal
Name:	R. Thomas Dyal
Title:	Managing Director
MERITECH CAPITAL PARTNERS L.P.
By:	Meritech Capital Associates L.L.C. its General Partner
By:	Meritech Management Associates L.L.C. a managing member
By:	/s/ Michael B. Gordon
Name:	Michael B. Gordon
Title:	Managing Director
MERITECH CAPITAL AFFILIATES L.P.
By:	Meritech Capital Associates L.L.C. its General Partner
By:	Meritech Management Associates L.L.C. a managing member
By:	/s/ Michael B. Gordon
Name:	Michael B. Gordon
Title:	Managing Director

5

SEQUOIA CAPITAL FRANCHISE FUND, L.P.
By: SCFF Management, LLC
A Delaware Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA CAPITAL FRANCHISE PARTNERS, L.P.
By: SCFF Management, LLC
A Delaware Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA CAPITAL VIII, L.P.
By: SC VIII Management, LLC
A California Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS VIII, L.P.
By: SC VIII Management, LLC
A California Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:

6

SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS VIII (Q), L.P.
By: SC VIII Management, LLC A California Limited Liability Company General Partner
By: Name:	/s/ Mark Stevens Mark Stevens
Title:
SEQUOIA 1997
By: Name:	/s/ Mark Stevens Mark Stevens
Title:
CMS PARTNERS LLC
By: Name:	/s/ Mark Stevens Mark Stevens
Title:
INSTITUTIONAL VENTURE PARTNERS VIII, L.P., by its General Partner, Institutional Venture Management VIII, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director
IVM INVESTMENT FUND VIII, LLC, by its
Manager,Institutional Venture Management VIII,
LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director
BROADBAND FUND, L.P., by its General Partner, BBF Management, LLC, by its Manager, Institutional Venture Management VIII, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director

7

EX-10.9

EXHIBIT 10.9

AMENDMENT TO STOCKHOLDERS’ AGREEMENT
OF SANTERA SYSTEMS INC.

     THIS AMENDMENT TO STOCKHOLDERS’ AGREEMENT OF SANTERA SYSTEMS INC. (the “Amendment”) is made as of this 3^rd day of August, 2005, by and among Tekelec, a California corporation (“Tekelec”), Santera Systems Inc., a Delaware corporation (“Santera”), certain stockholders of Santera, and Austin Ventures VI, L.P., a Delaware limited partnership (“Austin Ventures”), as the Representative. Capitalized terms used herein that are not otherwise defined have the meanings set forth in the Stockholders’ Agreement dated as of April 30, 2003 by and between Tekelec, Santera, the stockholders of Santera (the “Legacy Santera Stockholders”), and the Representative (the “Stockholders’ Agreement”).

     WHEREAS, the parties hereto acknowledge that Tekelec has asserted various indemnification claims against the stockholders of Santera under the terms of the Agreement and Plan of Merger by and among Tekelec, Luke Acquisition Corp., certain stockholders of Santera and the Representative dated as of April 30, 2003 (the “Merger Agreement”) and has notified the Representative and the stockholders that Tekelec has additional unasserted claims, including certain claims related to Santera’s intellectual property rights as a result of claims asserted against Santera by certain third parties, all of which, together with other indemnity rights of Tekelec, will be waived by Tekelec under the terms of Section 3(b) of the Letter of Transmittal;

     WHEREAS, the parties hereto acknowledge that (i) the Representative, on behalf of the Legacy Santera Stockholders, has objected to both the validity of the claims asserted by Tekelec and the entire amount of the damages set forth in the Notice of Claim from Tekelec dated June 10, 2005 and (ii) the Representative and the Legacy Santera Stockholders have notified Tekelec that the Representatives and the Legacy Santera Stockholders have various unasserted claims against Tekelec and its affiliates which, together with other indemnity rights of the Legacy Santera Stockholders under the Merger Agreement, will be waived by each Legacy Santera Stockholder under the terms of Section 3(a) of the Letter of Transmittal;

     WHEREAS, Tekelec, Santera, the Legacy Santera Stockholders, and the Representative desire to amend the Stockholders’ Agreement in certain respects, as more fully set forth below;

     WHEREAS, subject to the terms and conditions set forth herein, Tekelec desires to exercise an option to purchase the shares of Series A Preferred Stock of Santera from the Legacy Santera Stockholders and the Legacy Santera Stockholders desire to sell such shares;

     WHEREAS, in connection with such sale and purchase, Tekelec, Santera and the Legacy Santera Stockholders desire to resolve any and all claims the parties may have against each other;

     NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tekelec, Santera, certain stockholders of Santera, and the Representative agree as follows:

- 1 -

     Section 1. Amendment. The following Section 3.4 is added to Article III of the Stockholders’ Agreement:

     “3.4 Tekelec Additional Call Option.

          (a) At any time prior to 3:00 p.m. P.D.T. on August 3, 2005, Tekelec shall have the right, but not the obligation, exercisable upon written notice to the Representative (an “August Call Notice”), to purchase from the Legacy Santera Stockholders all of the Stock owned by such Legacy Santera Stockholders (the “Call Stock”), for an aggregate purchase price of $75,550,000 (the “August Call Price”) in cash in readily available funds. Subject to the execution and delivery of a receipt and mutual release in substantially the form of Exhibit E, the Legacy Santera Stockholders agree to pay, or cause to be paid to, San-qi Li $550,000 of the August Call Price. As of August 2, 2005, the Call Stock consists of 62,000 shares of Series A Preferred Stock and the Legacy Santera Stockholders are identified on Exhibit B attached hereto. The expenses of the Representative incurred in the performance of its duties as Representative shall be paid out of the August Call Price. The amount of the August Call Price remaining after payment of the $550,000 payment to San-qi Li and the expenses of the Representative shall be allocated among the Legacy Santera Stockholders as set forth on Exhibit B attached hereto. Upon delivery of the August Call Notice, this Agreement and the August Call Notice, taken together, shall constitute the legally-binding obligations of Tekelec and the Legacy Santera Stockholders to consummate the purchase and sale of the Call Stock on the terms and subject to the conditions set forth herein. The rights under Section 3.4 shall not be deemed to be an exercise of the call under Section 3.1 of the Agreement.

          (b) The Representative shall, on or before August 15, 2005, provide written notice to the Legacy Santera Stockholders of Tekelec’s exercise of the call right pursuant to this Section 3.4 in a form reasonably acceptable to Tekelec, the Representative and their respective counsel. At the same time as the Representative delivers such written notice, the Representative shall deliver to each such Legacy Santera Stockholder (i) a Letter of Transmittal substantially in the form of Exhibit C attached hereto (with such changes as Tekelec and the Representative may agree upon) (the “Letter of Transmittal”), (ii) a copy of this Agreement and any amendments hereto, and (iii) a request for such Legacy Santera Stockholder to promptly complete, execute and return the Letter of Transmittal to the Representative. Each Legacy Santera Stockholder which has executed the amendment to the Agreement implementing this Section 3.4 shall be required on or prior to September 15, 2005 to comply with the foregoing request and any additional reasonable requests made by the Representative with respect to the exercise of the call contemplated by this Section 3.4. As a condition to the receipt of the Call Price, each Legacy Santera Stockholder which has not executed the amendment to this Agreement implementing this Section 3.4 shall be required on or prior to September 15, 2005 to comply with the foregoing request and any additional reasonable requests made by the Representative with respect to the exercise of the call contemplated by this Section 3.4. The Representative shall hold, or instruct the Escrow Agent to hold, all such completed and executed Letters of Transmittal in escrow until the earlier of (i) October 11, 2005 or (ii) the August Call Closing Date (as defined below). On or prior to the August Call Closing Date, Tekelec, Santera and the Representative agree to take all such action and execute such documents as may be necessary to cause the Escrow Agent under

- 2 -

the Escrow Agreement (the “Escrow Agent”) to facilitate the closing of the purchase and sale of the Call Stock in accordance with the terms hereof.

          (c) The purchase and sale of 100% of the Call Stock pursuant to this Section 3.4 shall close on October 3, 2005, unless all the conditions to the obligations of Tekelec, Santera, the Legacy Santera Stockholders and/or the Representative to cause the closing to occur have not been satisfied or waived on such date, in which case the closing shall occur, if at all, on the first business day thereafter that such conditions have been satisfied or waived (the date that such closing occurs, “August Call Closing Date”). Tekelec or the Representative may terminate this Section 3.4 if the closing is not consummated on or before October 11, 2005; provided, that the termination of this Section 3.4 shall not preclude either party from exercising its rights and remedies under Section 9.2 or any other provision hereof other than Section 3.4 hereof, and all other provisions of the Agreement shall remain in full force and effect, including without limitation, the Put Option set forth in Section 3.2 hereof.

          (d) On or prior to the August Call Closing Date, subject to the terms and conditions hereof, Tekelec shall deliver (i) to the Escrow Agent the August Call Price, by wire transfer of immediately available funds, which the Escrow Agent shall disburse in accordance with the terms and subject to the conditions of the Escrow Agreement, (ii) to the Escrow Agent, a form of the Letter of Transmittal for delivery by the Escrow Agent to each Legacy Santera Stockholder, duly executed by Tekelec and Santera, and (iii) to the Escrow Agent, letters executed by Santera for delivery by the Escrow Agent to Edward Olkkola and Thomas Dyal in the form attached hereto as Exhibit D.

          (e) On or prior to the August Call Closing Date, subject to the terms and conditions hereof, the Representative shall deliver (i) to the Escrow Agent, a written instrument instructing the Escrow Agent to release to Tekelec the original certificate(s) evidencing the Call Stock, duly endorsed for transfer to Tekelec by each of the Legacy Santera Stockholders or the Representative, on behalf of the Legacy Santera Stockholders, (ii) to the Escrow Agent, the executed Letters of Transmittal that the Representative shall have obtained from the Legacy Santera Stockholders on or prior to the August Call Closing Date and (iii) to the Escrow Agent and Tekelec, the Escrow Agreement, duly executed by the Representative.

          (f) The obligation of Tekelec to take the actions described in subsection 3.4(d) above and otherwise consummate the purchase and sale of the Call Stock shall be subject to the satisfaction of the following condition, subject to the right of Tekelec to waive such condition: the Representative and the Legacy Santera Stockholders holding at least 97% of all Call Stock held by the Legacy Santera Stockholders shall have performed all of their respective obligations contained in or contemplated by this Section 3.4, including the delivery by the Legacy Santera Stockholders holding at least 97% of all Call Stock held by the Legacy Santera Stockholders to the Representative of a duly executed and completed Letter of Transmittal. Notwithstanding anything contained herein or elsewhere to the contrary, if such condition has not been satisfied on or prior to October 11, 2005 and (i) Tekelec elects not to waive such condition (i.e., Tekelec elects not to perform the obligations it would otherwise be required to perform on the August Call Closing Date), the parties hereof shall retain all the rights and remedies contemplated by Section 9.2 hereof, including pursuing any claims that it may have against the

- 3 -

party or parties which have failed to perform obligations contemplated by this Section 3.4, or (ii) Tekelec elects to waive such condition and perform its obligations hereunder, it shall nonetheless retain all the rights and remedies contemplated by Section 9.2 with respect to each Legacy Santera Stockholder who fails to deliver a Letter of Transmittal.

          (g) The obligations of the Legacy Santera Stockholders as provided in this Section 3.4 are subject to the following condition: Tekelec and Santera shall have performed all of their respective obligations contained in or contemplated by this Section 3.4, including but not limited to the delivery to the Escrow Agent of the Letters of Transmittal executed by Tekelec and Santera and the payment to the Escrow Agent of the August Call Price as contemplated hereby.

          (h) The obligation of the Representative to take the actions described in subsection 3.4(e) above and to otherwise cause the consummation of the purchase and sale of the Call Stock shall be subject to the satisfaction of the following condition, subject to the right of the Representative to waive such condition: Tekelec and Santera shall have performed all of their respective obligations contained in or contemplated by this Section 3.4, including but not limited to the delivery of the Letters of Transmittal executed by Tekelec and Santera and the payment of the August Call Price as contemplated hereby. Notwithstanding anything contained herein or elsewhere to the contrary, if such condition has not been satisfied on or prior to October 11, 2005 and (i) the Representative elects not to waive such condition (i.e., the Representative elects not to perform the obligations it would otherwise be required to perform on the August Call Closing Date), the parties hereof shall retain all the rights and remedies contemplated by Section 9.2 hereof, including pursuing any claims that any such party may have against Tekelec and Santera, or (ii) the Representative elects to waive such condition and perform its obligations hereunder, it shall nonetheless retain all the rights and remedies contemplated by Section 9.2 as against Tekelec and Santera.

          (i) The parties hereto agree that upon the consummation of the transactions contemplated by this Section 3.4 resulting in the acquisition of 100% of the Call Stock, this Agreement and the obligations hereunder, other than as provided in the last sentence of Article VIII of this Agreement, shall terminate and be of no further force and effect; provided, however, that in the event that one or more the Legacy Santera Stockholders shall not have complied with all of its or their obligations contained herein, the right of Tekelec and Santera to enforce this Section 3.4 and the other provisions of this Agreement shall continue for all purposes only with respect to such Legacy Santera Stockholders who shall not have complied with all of its or their obligations.

     Section 2. Representations. Each of Tekelec and Santera hereby represent and warrant that it has the full right, power and authority to enter into this Amendment and the documents related hereto and upon the execution of this Amendment by Tekelec, Santera, the Representative and the other Legacy Santera Stockholders who are parties to this Amendment (“Signing Legacy Stockholders”), the Stockholders’ Agreement, as amended by this Amendment, shall be binding on, and enforceable against, it. Each of Tekelec and Santera also hereby represent and warrant that upon the execution of this Amendment by Tekelec, Santera, the Representative and the Signing Legacy Stockholders, the Stockholders’ Agreement, as amended by this Amendment, shall be binding on, and enforceable against, the Legacy Santera

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Stockholders which are not parties to this Amendment. Each of the Representative and each of the Signing Legacy Stockholders hereby represent and warrant that it has the full right, power and authority to enter into this Amendment and the documents related hereto and upon the execution by Tekelec, Santera, the Representative and the other Legacy Santera Stockholders who are parties to this Amendment, the Stockholders’ Agreement, as amended by this Amendment, shall be binding on, and enforceable against, it. Each of the Representative and the Signing Legacy Stockholders also hereby represent and warrant that upon the execution of this Amendment by Tekelec, Santera, the Representative and the Signing Legacy Stockholders, the Stockholders’ Agreement, as amended by this Amendment, shall be binding on, and enforceable against, the Legacy Santera Stockholders which are not parties to this Amendment. The Signing Legacy Stockholders further represent and warrant that (i) Edward E. Olkkola and Thomas Dyal are members of the board of directors of Santera who have been appointed to the board of directors of Santera by the Legacy Santera Stockholders, (ii) the Signing Legacy Stockholders have had the opportunity to ask questions of and received information from Santera’s board of directors and management regarding the business, financial condition and prospects of Santera (“Santera Condition”), (iii) the Signing Legacy Stockholders are sophisticated institutional investors who have substantial experience in evaluating the business, financial condition and prospects of businesses, (iv) the Signing Legacy Stockholders believe they have sufficient information necessary in deciding whether to enter into this Amendment and related documents, (v) the Signing Legacy Stockholders have relied upon their own evaluation of the present and future Santera Condition in deciding to enter into this Amendment and related documents, and have not relied upon any representations made by Tekelec or Santera regarding the present prospects or future financial condition of Santera, (vi) the Santera Condition is subject to significant uncertainties, and the Santera Condition may be significantly better or worse over the next few years, including without limitation the next six months, than the Signing Legacy Stockholders currently expect and (vii) depending on other factors, including the timing of the exercise of the put or the call rights in the Stockholders’ Agreement, the Legacy Santera Stockholders could realize more or less than they would realize under the call option under Section 3.4 of the Stockholders’ Agreement. The Signing Legacy Stockholders and the Representative further represent and warrant that the Signing Legacy Stockholders own 95% of the Call Stock. The parties hereto agree that the representations and warranties contained in the second and fourth sentences of this Section 2 shall not survive the closing of the purchase and sale of the Call Stock contemplated by Section 3.4 of the Stockholders’ Agreement, as amended.

     Section 3. August Call Notice. Tekelec hereby elects to purchase all of the Call Stock from the Legacy Santera Stockholders for the August Call Price and agrees that this Amendment shall constitute the August Call Notice pursuant to Section 3.4 of the Stockholders’ Agreement, as amended.

     Section 4. Expenses. Each party hereto will pay its own costs and expenses incurred in connection with the negotiation and execution of, and performance of the transactions contemplated by, this Amendment.

     Section 5. Governing Law. This Amendment shall be governed by and construed under the laws of the state of Delaware.

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     Section 6. Entire Agreement. This Amendment constitutes the entire agreement between the Company, Tekelec, the Legacy Santera Stockholders, and the Representative relating to the subject matter hereof, and any previous understanding and/or agreement between the Company, Tekelec, the Legacy Santera Stockholders, and the Representative regarding the subject matter hereof is superseded by this Amendment.

     Section 7. Counterparts. This Amendment may be executed in counterparts, each which shall be deemed an original, and all of which shall constitute one and the same instrument.

     Section 8. No admission of Liability. The Representative, the Signing Legacy Stockholders and the Representative on behalf of the other Legacy Santera Stockholders understand and acknowledge that this Amendment, the Letters of Transmittal and the other documents entered into by the parties in connection with this Amendment constitute a compromise and settlement of disputed claims. No action taken by the Representative, the Signing Legacy Stockholders and the Representative on behalf of the other Legacy Santera Stockholders, or any of them, either previously or in connection with this Amendment shall be deemed or construed to be (i) an admission of the truth or falsity of any asserted or unasserted claims of Tekelec, (ii) an acknowledgment or admission of any fault or liability whatsoever to Tekelec or to any third party or (iii) a waiver, compromise or settlement of any claims that the Representative or the Legacy Santera Stockholders may have against Tekelec or any third party in the event that the August Call Closing Date does not occur or this Amendment is terminated. Tekelec and Santera understand and acknowledge that this Amendment, the Letters of Transmittal and the other documents entered into by the parties in connection with this Amendment constitute a compromise and settlement of disputed claims. No action taken by Tekelec or Santera either previously or in connection with this Amendment shall be deemed or construed to be (i) an admission of the truth or falsity of any asserted or unasserted claims of the Representative or the Legacy Santera Stockholders, (ii) an acknowledgment or admission of any fault or liability whatsoever to the Representative or the Legacy Santera Stockholders or to any third party or (iii) a waiver, compromise or settlement of any claims that the Representative or the Legacy Santera Stockholders may have against Tekelec or any third party in the event that the August Call Closing Date does not occur or this Amendment is terminated.

* * * * *

[SIGNATURES BEGIN ON FOLLOWING PAGE]

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     IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day first above written.

SANTERA SYSTEMS INC.
By:		/s/ Frederick M. Lax
Name:		Frederick M. Lax
Title:		Chairman of the Board of Directors
TEKELEC
By:		/s/ Frederick M. Lax
Name:		Frederick M. Lax
Title:		President and Chief Executive Officer
By:		/s/ Ronald W. Buckly
Name:		Ronald W. Buckly
Title:		Senior Vice President, Corporate Affairs and General Counsel
AUSTIN VENTURES VI, L.P., as Representative
By:		AV Partners VI, L.P., its General Partner
By:	Edward E. Olkkola
	Edward E. Olkkola, General Partner
AUSTIN VENTURES VI, L.P.
By:		AV Partners VI, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
AUSTIN VENTURES VI AFFILIATES FUND, L.P.
By:		AV Partners VI, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner

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AUSTIN VENTURES VIII, L.P.
By:		AV Partners VIII, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
REDPOINT VENTURES II, L.P., by its General Partner, Redpoint Ventures II, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director
REDPOINT ASSOCIATES II, LLC, as nominee
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director
REDPOINT TECHNOLOGY PARTNERS Q-I, L.P., by its General Partner, Redpoint Ventures I, LLC
By:		/s/ R. Thomas Dyal
Name:		R. Thomas Dyal
Title:		Managing Director
REDPOINT TECHNOLOGY PARTNERS A-I, L.P., by its General Partner, Redpoint Ventures I, LLC
By:		/s/ R. Thomas Dyal
Name:		R. Thomas Dyal
Title:		Managing Director

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MERITECH CAPITAL PARTNERS L.P.
By:	Meritech Capital Associates L.L.C.    its General Partner
By:	Meritech Management Associates L.L.C.    a managing member
By:	/s/ Michael B. Gordon
Name:	Michael B. Gordon
Title:	Managing Director
MERITECH CAPITAL AFFILIATES L.P.
By:	Meritech Capital Associates L.L.C.    its General Partner
By:	Meritech Management Associates L.L.C.    a managing member
By:	/s/ Michael B. Gordon
Name:	Michael B. Gordon
Title:	Managing Director
SEQUOIA CAPITAL FRANCHISE FUND, L.P.
By: SCFF Management, LLC A Delaware Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:

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SEQUOIA CAPITAL FRANCHISE PARTNERS, L.P.
By: SCFF Management, LLC A Delaware Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA CAPITAL VIII, L.P.
By: SC VIII Management, LLC A California Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS VIII, L.P.
By: SC VIII Management, LLC A California Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS VIII (Q), L.P.
By: SC VIII Management, LLC A California Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:

- 10 -

SEQUOIA 1997
By:		/s/ Mark Stevens
Name:		Mark Stevens
Title:
CMS PARTNERS LLC
By:		/s/ Mark Stevens
Name:		Mark Stevens
Title:
INSTITUTIONAL VENTURE PARTNERS VIII, L.P., by its General Partner, Institutional Venture Management VIII, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director
IVM INVESTMENT FUND VIII, LLC, by its Manager, Institutional Venture Management VIII, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director
BROADBAND FUND, L.P., by its General Partner, BBF Management, LLC, by its Manager, Institutional Venture Management VIII, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director

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EXHIBIT C

(Please read the accompanying instructions carefully)

LETTER OF TRANSMITTAL
For Payment For Series A Preferred Stock
of
SANTERA SYSTEMS INC.

Delivery To: The Representative for the benefit of Tekelec
By Mail, Overnight Courier, Hand Delivery or Fax:
Austin Ventures VI, L.P.
300 West 6^th Street, Suite 2300
Austin, TX
Attention: Edward E. Olkkola
Facsimile: (512) 651-8545

Ladies and Gentlemen:

     On August 3, 2005, pursuant to the terms of Section 3.4 of the Stockholders’ Agreement by and among Tekelec, Santera Systems Inc. (the “Company”), the stockholders of the Company and Austin Ventures VI, L.P. (the “Representative”) dated as of April 30, 2003, as amended August 3, 2005 (the “Stockholders’ Agreement”), Tekelec exercised its call right (the “Call”) to purchase all of the shares of Series A Preferred Stock of the Company held by the stockholders of the Company (other than Tekelec or its affiliates) (the “Shares”) for an aggregate purchase price of $75,550,000 (the “Call Price”). You are one of the stockholders subject to this Call (a “Legacy Santera Stockholder” and collectively, the “Legacy Santera Stockholders”). Subject to the execution and delivery of a receipt and mutual release, $550,000 of the purchase price will be paid to San-qi Li, the chief technology officer of the Company. The amount of the Call price remaining after payment of the $550,000 to San-qi Li and the expenses of the Representative will be disbursed to the Legacy Santera Stockholders in accordance with Exhibit B to the Stockholders’ Agreement.

     In connection with the Agreement and Plan of Merger by and among Tekelec, Luke Acquisition Corp., certain stockholders of the Company and the Representative dated as of April 30, 2003, as amended August 3, 2005 (the “Merger Agreement”), a stock certificate representing your Shares was deposited and is currently being held in escrow pursuant to the terms of the Escrow Agreement by and among Tekelec, the Company, the Representative, the Legacy Santera Stockholders and the escrow agent dated as of April 30, 2003, as amended August 3, 2005 (the “Escrow Agreement”). Pursuant to the terms of the Escrow Agreement, you previously provided the Representative with the full power and authority to exclusively act on your behalf in connection with all matters related to the Escrow Agreement, including, without limitation, exercising your rights and powers in respect to your Shares, including executing such stock powers or other instruments of transfer as may be required thereunder.

     [Pursuant to the Stockholders’ Agreement, you are required to] [It is a condition to your receipt of your share of the Call Price that you] complete and execute a copy of this letter of transmittal (“Letter of Transmittal”) in accordance with the instructions herein and return your completed and executed Letter of Transmittal via mail, overnight courier, hand delivery or facsimile to Austin Ventures, c/o Wilson Sonsini Goodrich & Rosati, Professional Corporation, 8911 Capital of Texas Highway N., Suite 3350, Austin, Texas 78759, Facsimile: 512-338-5499, Attention: Alan Bickerstaff by no later than September 15, 2005. You will not receive your portion of the purchase price unless you do so, and the failure by you to do so may result in claims being made against you by Tekelec. [First, bracketed language only applies to Letters of Transmittal sent to Signing Legacy Santera Stockholders.]

NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY

1. Representations of the Stockholder. The undersigned, solely in its capacity as a holder of shares of Series A Preferred Stock of the Company (the “Stockholder”), hereby represents, warrants and agrees that with respect to the Shares set forth opposite the Stockholder’s name on Exhibit A to the Stockholders’ Agreement:

     (a) The Stockholder is the sole record and beneficial owner of such Shares, and owns such Shares free and clear of all liens, rights, options, charges or encumbrances of any kind whatsoever, other than the restrictions contained in the Escrow Agreement, the Stockholders’ Agreement and the Merger Agreement;

     (b) The Stockholder has the full right, power and authority to sell, transfer and deliver such Shares;

     (c) The Stockholder has the full right, power and authority to execute and deliver this Letter of Transmittal, the amendment to the Stockholders’ Agreement, the amendment to the Escrow Agreement and the amendment to the Merger Agreement.

     (d) This Letter of Transmittal, when executed and delivered by the Stockholder, will constitute valid and legally binding obligations of the Stockholder, enforceable against the Stockholder in accordance with the terms hereof;

     (e) [The Stockholder is required by the terms of the Stockholders’ Agreement to execute and deliver this Letter of Transmittal and transfer such Stockholder’s Shares to Tekelec; and] [Only applies to Signing Legacy Stockholders.]

     (f) The Stockholder has received all of the information necessary in deciding whether to comply with its obligations related to the exercise of the Call. The Stockholder has had an opportunity to ask questions and receive answers from Tekelec and the Company regarding the facts and circumstances related to the execution and delivery of this Letter of Transmittal in connection with the exercise of the Call and the Company’s business, financial condition, operating results, properties and prospects.

2. Representations of the Company and Tekelec. Each of the Company and Tekelec, hereby represents, warrants and agrees that:

     (a) Tekelec has the full right, power and authority to purchase the Shares and deliver the Call Price to the Stockholder;

     (b) Each of Tekelec and the Company has the full right, power and authority to execute and deliver this Letter of Transmittal;

     (c) This Letter of Transmittal, when executed and delivered by each of Tekelec and the Company, will constitute valid and legally binding obligations of each of Tekelec and the Company, enforceable against each of Tekelec and the Company in accordance with the terms hereof; and

     (d) Tekelec believes it has received all of the information necessary in deciding whether to purchase the Shares pursuant to the exercise of the Call. Tekelec has had an opportunity to ask questions and receive answers from the Stockholder regarding the facts and circumstances related to the decision to purchase the Shares pursuant to exercise of the Call.

3. Release.

     (a) In consideration of the transactions contemplated by the Stockholder’s Agreement and hereby, the Stockholder, on behalf of himself, herself or itself and any person or entity claiming through or under the Stockholder (the “Seller Releasors”), does hereby release, remise, acquit and forever discharge each other Legacy Santera Stockholder, the Representative, the Company, Tekelec, their subsidiaries, their affiliates, and any director, officer, employee, agent, attorney, representative, successor, heir, executor, administrator, insurer or assign of any of them (the “Seller Released Parties”),

2

of and from any damages, actions, causes of action, debts, dues, claims, penalties, suits, demands, obligations and liabilities of every kind or nature whatsoever, at law, in equity, or otherwise, known or unknown (the “Claims”), which the Seller Releasors or any of them ever had, now have, or may acquire at any time in the future against said Seller Released Parties, or any of them, which arise or have arisen, or the basis for which occurs or has occurred, at or prior to the August Call Closing Date; provided, however, that such release and waiver shall not apply to (i) any failure of Tekelec’s or the Company’s representations or warranties in this Letter of Transmittal or in any of the Current Amendment Applicable Provisions (as defined below) to be true and accurate and (ii) any failure of Tekelec or the Company to perform their respective obligations and abide by their respective agreements and acknowledgements under this Letter of Transmittal, the Escrow Agreement, the Merger Agreement or the Stockholders’ Agreement, including Section 3.4 thereof. [For purposes of this Letter of Transmittal, the “Current Amendment Applicable Provisions” means (1) Section 2 (other than the fourth sentence thereof) of the Amendment to Stockholders’ Agreement of Santera Systems Inc. dated August 2, 2005 by and among Tekelec, the Company, certain of the Legacy Santera Stockholders and the Representative, (2) Section 3 of the Amendment to Escrow Agreement dated August 2, 2005 by and among Tekelec, the Company, certain of the Legacy Santera Stockholders and the Representative and (3) Section 3 of the Amendment to Merger Agreement dated August 2, 2005 by and among Tekelec, the Company, certain of the Legacy Santera Stockholders and the Representative.] [Bracketed language only applies to Letters of Transmittal sent to Signing Legacy Santera Stockholders.]

     (b) In consideration of the transactions contemplated by the Stockholders’ Agreement and hereby, the Company and Tekelec, on behalf of the Company and Tekelec and any person or entity claiming through or under the Company or Tekelec (the “Company Releasors”), do hereby release, remise, acquit and forever discharge the Representative, the Stockholder, its subsidiaries, its affiliates, and any director, officer, employee, agent, attorney, representative, successor, heir, executor, administrator, insurer or assign of any of them (the “Company Released Parties”), of and from any Claims, which the Company Releasors or any of them ever had, now have, or may acquire at any time in the future against said Company Released Parties, or any of them, which arise or have arisen, or the basis for which occurs or has occurred, at or prior to the August Call Closing Date; provided, however, that such release and waiver shall not apply to (i) any failure of any of the Stockholder’s representations or warranties in this Letter of Transmittal or in the Current Amendment Applicable Provisions to be true and accurate or (ii) any failure of any of the Stockholder to perform its obligations and abide by its agreements and acknowledgements under this Letter of Transmittal.

4. Covenant Not to Sue.

     (a) The Stockholder agrees that the Stockholder shall not initiate any litigation against the Seller Released Parties with respect to the Claims released above. If the Stockholder commences any Claim in violation of this Letter of Transmittal, the Seller Released Parties shall be entitled to assert this Letter of Transmittal as a complete bar.

     (b) The Company and Tekelec agree that neither the Company, Tekelec nor any of the Company Releasors shall initiate any litigation against the Company Released Parties with respect to the Claims released above. If either the Company or Tekelec commences any Claim in violation of this Letter of Transmittal, the Company Released Parties shall be entitled to assert this Letter of Transmittal as a complete bar.

     All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the Stockholder, and any obligation of the Stockholder hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the Stockholder.

PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETION.

3

PLEASE SIGN HERE

(Complete Accompanying Substitute Form W-9)

...................................................................................	...................................................................................
...................................................................................	...................................................................................
...................................................................................	...................................................................................
Signature(s) of Owner	Date

          Area Code and Telephone Number...................................................................................

     This Letter of Transmittal must be signed by the holder(s) as the name(s) appear(s) on the certificate(s) for Santera Systems Inc. Series A Preferred Stock or by any person(s) authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 2.

Name(s): ...............................................................................................................................................................................................................

(Please Type or Print)

Capacity: ..............................................................................................................................................................................................................

Address: ..............................................................................................................................................................................................................

(Including Zip Code)

Dated: ....................................................................................................................................................................................................... , 2005

Unless indicated below, you will receive your portion of the purchase price in a check sent via certified mail to the address set forth above.

Wire transfer instructions:................................................................................................................

4

SANTERA SYSTEMS INC.
 

By:  

Name:  

Title:  

TEKELEC
 

By:  

Name:  

Title:  

By:  

Name:  

Title:  

5

INSTRUCTIONS

1. Delivery of this Letter of Transmittal

               The method of delivery of this Letter of Transmittal and all other required documents is at the election and risk of the stockholder. Instead of delivery by mail, it is recommended that holders use an overnight or hand delivery service, properly insured.

2. Signatures on this Letter of Transmittal

               If this Letter of Transmittal is signed by the beneficial holder of the Santera Systems Inc. Series A Preferred Stock, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever.

               If any surrendered Santera Systems Inc. Series A Preferred Stock is owned by two or more joint owners, all of such owners must sign this Letter of Transmittal.

               If any surrendered Santera Systems Inc. Series A Preferred Stock is registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations.

               If this Letter of Transmittal or any certificates are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by Tekelec, proper evidence satisfactory to Tekelec of their authority to so act must be submitted.

3. Tax Identification Number.

               Federal income tax law generally requires that a holder must provide Tekelec (as payor) with such holder’s correct Taxpayer Identification Number (“TIN”) on Substitute Form W-9 below, which, in the case of an individual, is his or her social security number. If Tekelec is not provided with the current TIN or an adequate basis for an exemption, such holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery to such holder of the cash payment for the Santera Systems Inc. Series A Preferred Stock may be subject to backup withholding in an amount equal to 28% of all reportable payments. If withholding results in an overpayment of taxes, a refund may be obtained.

               Exempt holders (including, among others, certain corporations and foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed Guidelines of Certification of Taxpayer Identification Number on Substitute Form W-9 (the “W-9 Guidelines”) for additional instructions.

               To prevent backup withholding, each holder must provide its correct TIN by completing the Substitute Form W-9 set forth below, certifying that the TIN provided is correct (or that such holder is awaiting a TIN), the holder is a U.S. person (including a U.S. resident alien) and that (i) the holder is exempt from backup withholding, (ii) the holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the holder is a nonresident alien or foreign entity not subject to backup withholding, such holder must give Tekelec a completed Form W-8BEN, certificate of foreign status. These forms may be obtained from Tekelec [Need to insert contact person/info]. If the Santera Systems Inc. Series A Preferred Stock is in more than one name or is not in the name of the actual owner, such holder should consult the W-9 Guidelines for information on which TIN to report. If such holder does not have a TIN, such holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write “applied for” in lieu of its TIN. Note: Checking this box and writing “applied for” on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If such holder does not provide

6

its TIN to Tekelec within 60 days, such holder will be subject to backup withholding until such holder furnishes its TIN to Tekelec.

4. Requests for Assistance or Additional Copies.

               Requests for assistance or for additional copies of this Letter of Transmittal may be directed to Representative, at the address and telephone number indicated above.

7

TO BE COMPLETED BY ALL TENDERING HOLDERS

(See Instruction 3)

PAYOR’S NAME: J.P. Morgan Trust Company, National Association

SUBSTITUTE Form W-9 Department of the Treasury Internal Revenue Service Payor’s Request for Taxpayer Identification Number (“TIN”) and Certification	Part 1-PLEASE PROVIDE YOUR TIN (SOCIAL SECURITY NUMBER OR EMPLOYER IDENTIFICATION NUMBER) IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW				Name: _______________________ TIN:_________________________
	Part 2—TIN Applied For [  ]
	CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
		(1	)	the number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me),
		(2	)	I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the “IRS”) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding, and
		(3	)	I am a U.S. person (including a U.S. resident alien).
	SIGNATURE                                                                                  DATE
You must cross out item (2) of the above certification if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting of interest or dividends on your tax return.

YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9

CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER

I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of the exchange I will be subject to back-up withholding at the applicable rate on all reportable payments until I provide my taxpayer identification number.

Signature Date

8

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9

GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER—Social Security Numbers (“SSNs”) have nine digits separated by two hyphens: i.e., 000-00-0000. Employer Identification Numbers (“EINs”) have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer.

							Give the NAME AND
			Give the NAME AND				EMPLOYER
			SOCIAL SECURITY				IDENTIFICATION
For this type of account:			NUMBER of -	For this type of account:			NUMBER of -
1.	Individual		The individual		6.	A valid trust, estate, or pension trust	Legal entity (4)
2.	Two or more individuals (joint account)		The actual owner of the account or, if combined funds, the first individual on the account (1)		7.	Corporation or LLC electing corporate status on Form 8832	The corporation
3.	Custodian account of a minor (Uniform Gift to Minors Act)		The minor (2)		8.	Association, club, religious, charitable, education or other tax-exempt organization	The organization
4.	a.	The usual revocable savings trust (grantor is also trustee)	The grantor-trustee (1)		9.	Partnership or multi-member LLC	The partnership
	b.	The so-called trust account that is not a legal or valid trust under State law	The actual owner (1)		10.	A broker or registered nominee	The broker or nominee
5.	Sole proprietorship or single-owner LLC		The owner (3)		11.	Account with the Department of Agriculture in the name of a public entity (such as State or local government, school district, or prison) that receives agricultural program payments.	The public entity

(1)	List first and circle the name of the person whose number you furnish. If only one person on a joint account has a SSN, that person’s number must be furnished.
(2)	Circle the minor’s name and furnish the minor’s SSN.
(3)	You must show your individual name, but you may also enter your business or “doing business as” name. You may use either your SSN or EIN (if you have one).
(4)	List first and circle the name of the legal trust, estate or pension trust. (Do not furnish the TIN of the personal representative or trustee unless the legal entity itself is not designated in the account title).

NOTE: If no name is circled when more than one name is listed, the number will be considered to be that of the first name listed.

9

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9

How to Get a TIN

          If you do not have a TIN, apply for one immediately. To apply for an SSN, obtain Form SS-5, Application for a Social Security Number Card, at the local office of the Social Security Administration online at www.socialsecurity.gove/online/ss-s.pdf , or by calling 1-800-772-1213. Get Form W-7, Application for IRS Individual Taxpayer Information Number, to apply for an Individual TIN or Form SS-4, Application for Employer Identification Number, to apply for an EIN. You can apply for an EIN online by accessing the IRS website at www.irs.gov/business and clicking on Employer ID Numbers under Related Topics. You can get Forms W-7 and SS-4 from the IRS by calling 1-800-TAX-FORM (1-800-829-3676) or from the IRS web site at www.irs.gov.

          If you do not have a TIN, write, “Applied For” in the space for the TIN, sign and date the substitute Form W-9, sign the Certificate of Authority Taxpayer Identification Number, and give it to the payer. For interest and dividend payments and certain payments made with respect to readily tradable instruments, you will, generally have 60 days to get a TIN and give it to the payer. If the payer does not receive your TIN within 60 days, backup withholding, if applicable, will begin and continue until you furnish your TIN.

          NOTE: Writing, “Applied For” on the form means that you have already applied for a TIN OR that you intend to apply for one soon.

          As soon as you receive your TIN, complete another Form W-9, include your TIN, sign and date the form, and give it to the payer.

          CAUTION: A disregarded domestic entity that has a foreign owner must use the appropriate Form W-8BEN.

Payees Exempt from Backup Withholding

          Individuals (including sole proprietors) are NOT exempt from backup withholding. Corporations are exempt from backup withholding for certain payments, such as interest and dividends.

          If you are exempt from backup withholding, you should still complete Substitute Form W-9 to avoid possible erroneous backup withholding. Enter your name and correct TIN in Part 1, write “Exempt” in Part 2, and sign and date the form. If you are a nonresident alien or a foreign entity not subject to backup withholding, give the requester the appropriate completed Form W-8BEN, Certificate of Foreign Status.

          The following is a list of payees that may be exempt from backup withholding and for which no information reporting is required. For interest and dividends, all listed payees are exempt except item (9). For broker transactions, payees listed in (1) through (13) and a person registered under the Investment Advisers Act of 1940 who regularly acts as a broker are exempt. Payments subject to reporting under sections 6041 and 6041A are generally exempt from backup withholding only if made to payees described in items (1) through (7). However, the following payments made to a corporation (including gross proceeds paid to an attorney under section 6045(f), even if the attorney is a corporation) and reportable on Form 1099-MISC are not exempt from backup withholding: (i) medical and health care payments, (ii) attorneys fees, and (iii) payments for services paid by a federal executive agency.

(1)	An organization exempt from tax under section 501(a), or an individual retirement plan (“IRA”), or a custodial account under section 403(b)(7), if the account satisfies the requirements of section 401(f)(2).
(2)	The United States or any of its agencies or instrumentalities.
(3)	A state, the District of Columbia, a possession of the United States, or any of their subdivisions or instrumentalities.
(4)	A foreign government, a political subdivision of a foreign government, or any of their agencies or instrumentalities.
(5)	An international organization or any of its agencies or instrumentalities.
(6)	A corporation.
(7)	A foreign central bank of issue.
(8)	A dealer in securities or commodities registered in the United States, the District of Columbia, or a possession of the United States.
(9)	A futures commission merchant registered with the Commodity Futures Trading Commission.
(10)	A real estate investment trust.
(11)	An entity registered at all times during the tax year under the Investment Company Act of 1940.
(12)	A common trust fund operated by a bank under section 584(a).
(13)	A financial institution.
(14)	A middleman known in the investment community as a nominee or custodian.
(15)	An exempt charitable remainder trust, or a non-exempt trust described in section 4947.

          The following payments are not generally subject to backup withholding:

Dividends and Patronage Payments

• Payments to nonresident aliens subject to withholding under section 1441.

• Payments to partnerships not engaged in a trade or business in the United States and that have at least one nonresident alien partner.

• Payments of patronage dividends not paid in money.

10

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9

• Payments made by certain foreign organizations.

• Section 404(k) distributions made by an ESOP.

Interest Payments

• Payments of interest or obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer’s trade or business. Backup withholding applies to the reportable payment if the payee has not provided a TIN or provided an incorrect TIN.

• Payments of tax-exempt interest (including exempt-interest dividends under section 852).

• Payments described in section 6049(b)(5) to nonresident aliens.

• Payments on tax-free covenant bonds under section 1451.

• Payments made by certain foreign organizations.

• Mortgage or student loan interest paid to you.

Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR NAME AND TAXPAYER IDENTIFICATION NUMBER. WRITE “EXEMPT” ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER.

          Certain payments that are not subject to information reporting are also not subject to backup withholding. For details, see sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A and 6050N, and their regulations.

          Privacy Act Notice. Section 6109 requires you to give your correct TIN to persons who must file information returns with the IRS to report interest, dividends, and certain other income paid to you, mortgage interest you paid, the acquisition or abandonment of secured property, cancellation of debt, or contributions you made to an IRA or Archer MSA. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. The IRS may also provide this information to the Department of Justice for civil and criminal litigation and to cities, states, and the District of Columbia to carry out their tax laws. The IRS may also disclose this information to other countries under a tax treaty, or to federal and state agencies to enforce federal nontax criminal laws and to combat terrorism.

          You must provide your TIN whether or not you are required to file a tax return. Payers must generally withhold 28% of taxable interest, dividends, and certain other payments to a payee who does not give a TIN to a payer. Certain penalties may also apply.

Penalties

(1) Failure to Furnish TIN. If you fail to furnish your correct TIN to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect.

(2) Civil Penalty for False Information With Respect to Withholding. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500.

(3) Criminal Penalty for Falsifying Information. Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment.

(4) Misuse of TINs. If the payer discloses or uses TINs in violation of Federal law, the payer may be subject to civil and criminal penalties.

FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX ADVISOR OR THE INTERNAL REVENUE SERVICE

11

EXHIBIT D

August 3, 2005

Edward E. Olkkola
300 West 6^th Street, Suite 2300
Austin, TX
Facsimile: (512) 651-8545

Thomas Dyal
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Facsimile: (650) 854-5762

Re:      Director Indemnification

Dear Ed and Tom:

     From and after the August Call Closing Date (as defined in the Stockholders’ Agreement dated as of April 30, 2003, by and between Tekelec, Santera Systems Inc. (“Santera”), the stockholders of Santera, and Austin Ventures VI, L.P. as Representative, as amended on August 2, 2005 (the “Stockholders’ Agreement”)), Santera shall fulfill and honor its indemnification obligations under Article XI of the Amended and Restated Bylaws of Santera and Article VII of the Amended and Restated Articles of Incorporation of Santera existing as in effect on the date hereof with respect to Edward E. Olkkola and Thomas Dyal solely in their capacity as members of the board of directors of Santera and in no event shall such indemnification obligations apply to Edward Olkkola in his capacity as a partner of the Representative of the Legacy Santera Stockholders (each, an “Indemnified Party”). Santera agrees that, for six years from the date hereof, any directors and officers liability insurance policy of Santera or Tekelec that insures Santera’s directors shall also cover, to the same extent, Edward E. Olkkola and Thomas Dyal’s prior service as directors of Santera. Capitalized terms used herein that are not otherwise defined have the meanings set forth in the Stockholders’ Agreement.

     The provisions of this Letter Agreement are intended to be for the benefit of, and shall be enforceable by each Indemnified Party, his or her heirs and representatives and may not be amended, altered or repealed without the prior written consent of the affected Indemnified Party.

Sincerely yours,

SANTERA SYSTEMS INC.
 

By: 

Its: 

AGREED AND ACCEPTED

Thomas Dyal

Edward E. Olkkola

EXHIBIT E

[Form of Receipt and Mutual Release
to be agreed prior to Closing]

EX-10.10

EXHIBIT 10.10

AMENDMENT TO
ESCROW AGREEMENT

     THIS AMENDMENT TO ESCROW AGREEMENT (the “Amendment”) is made as of this 3rd day of August 2005, by and among Tekelec, a California corporation (“Tekelec”), Santera Systems Inc., a Delaware corporation (“Santera”), certain stockholders of Santera (the “Stockholders”), Austin Ventures VI, L.P., a Delaware limited partnership (“Austin Ventures”), as the Representative, and J.P. Morgan Trust Company, National Association (“Escrow Agent”). Capitalized terms used herein that are not otherwise defined have the meanings set forth in the Escrow Agreement dated as of April 30, 2003 by and between Tekelec, Santera, the stockholders of Santera, the Representative and the Escrow Agent (the “Escrow Agreement”).

     WHEREAS, Tekelec, Santera, the Stockholders, the Escrow Agent and the Representative desire to amend the Escrow Agreement effective on the August Call Closing Date (as defined in the Stockholders’ Agreement dated as of April 30, 2003 by and between Tekelec, Santera, the stockholders of Santera and the Representative, as amended on August 2, 2005 (the “Stockholders’Agreement”));

     NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tekelec, Santera, the Stockholders, the Escrow Agent and the Representative agree as follows:

     Section 1. Amendment. The following Section 8.14 is added to Article VIII of the Escrow Agreement:

     “Section 8.14 Acknowledgement and Agreement.

          (a) Effective upon the August Call Closing Date (as defined in the Stockholders’ Agreement), Tekelec, Santera and the Escrow Agent hereby acknowledge and agree that neither the Representative nor any Legacy Santera Stockholder which has delivered a completed and executed copy of the Letter of Transmittal to the Escrow Agent in accordance with the terms of Section 3.4 of the Stockholders’ Agreement that has been delivered to the Escrow Agent shall have any further obligations under this Agreement, except that the obligations of such parties under the first sentence of Section 2.3, Section 2.6 and Section 6.5 hereof shall continue in full force and effect.

          (b) Effective upon the August Call Closing Date (as defined in the Stockholders’ Agreement), the Escrow Agent, the Legacy Santera Stockholders and the Representative hereby acknowledge and agree that neither Tekelec nor Santera has any further obligations under this Agreement, except that the obligations of such parties under Section 2.6 and Section 6.5 hereof shall continue in full force and effect.”

     Section 2. Joint Instruction. Pursuant to Section 4.1(d) of the Escrow Agreement, Tekelec and the Representative hereby notify the Escrow Agent that Tekelec has exercised its August Call Option under Section 3.4 of Article III of the Stockholders’ Agreement and hereby

instruct the Escrow Agent to deliver to Tekelec on the August Call Closing Date upon receipt from Tekelec of the Call Price all of the shares of Series A Preferred Stock held by the Escrow Agent, including the Disputed Shares.

     Section 3. Representations. Each of Tekelec and Santera hereby represent and warrant that it has the full right, power and authority to enter into this Amendment and the documents related hereto and upon the execution of this Amendment by Tekelec, Santera, the Representative and the other Legacy Santera Stockholders who are parties to this Amendment, the Escrow Agreement, as amended by this Amendment, shall be binding on, and enforceable against, it. Each of the Representative and each of the Legacy Santera Stockholders who are parties to this Amendment (“Signing Legacy Stockholders”) hereby represents and warrants that it has the full right, power and authority to enter into this Amendment and the documents related hereto and upon the execution by Tekelec, Santera, the Representative and the other Legacy Santera Stockholders who are parties to this Amendment, the Escrow Agreement, as amended by this Amendment, shall be binding on, and enforceable against, it.

     Section 4. Governing Law. This Amendment shall be governed by and construed under the laws of the State of Delaware.

     Section 5. Entire Agreement. This Amendment constitutes the entire agreement between Santera, Tekelec, the Stockholders, the Escrow Agent and the Representative relating to the subject matter hereof, and any previous understanding and/or agreement between Tekelec, Santera, the Legacy Santera Stockholders, the Escrow Agent and the Representative regarding the subject matter hereof is superseded by this Amendment.

     Section 6. Counterparts. This Amendment may be executed in counterparts, each which shall be deemed an original, and all of which shall constitute one and the same instrument.

* * * * *

2

     IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day first above written.

SANTERA SYSTEMS INC.
By:	/s/ Frederick M. Lax
Name:	Frederick M. Lax
Title:	Chairman of the Board of Directors
TEKELEC
By:	/s/ Frederick M. Lax
Name:	Frederick M. Lax
Title:	President and Chief Executive Officer
By:	/s/ Ronald W. Buckly
Name:	Ronald W. Buckly
Title:	Senior Vice President, Corporate
	Affairs and General Counsel

3

J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION
By:	/s/
Name:
Title:
AUSTIN VENTURES VI, L.P., as Representative
By:	AV Partners VI, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
AUSTIN VENTURES VI, L.P.
By:	AV Partners VI, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
AUSTIN VENTURES VI AFFILIATES FUND, L.P.
By:	AV Partners VI, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
AUSTIN VENTURES VIII, L.P.
By:	AV Partners VIII, L.P., its General Partner
By:	/s/ Edward E. Olkkola
	Edward E. Olkkola, General Partner
REDPOINT VENTURES II, L.P., by its General Partner, Redpoint Ventures II, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director

4

REDPOINT ASSOCIATES II, LLC, as nominee
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal,
	Managing Director
REDPOINT TECHNOLOGY PARTNERS Q-I, L.P., by its General Partner, Redpoint Ventures I, LLC
By:	/s/ R. Thomas Dyal
Name:	R. Thomas Dyal
Title:	Managing Director
REDPOINT TECHNOLOGY PARTNERS A-I, L.P., by its General Partner, Redpoint Ventures I, LLC
By:	/s/ R. Thomas Dyal
Name:	R. Thomas Dyal
Title:	Managing Director
MERITECH CAPITAL PARTNERS L.P.
By:	Meritech Capital Associates L.L.C.
	its General Partner
By:	Meritech Management Associates L.L.C.
	a managing member
By:	/s/ Michael B. Gordon
Name:	Michael B. Gordon
Title:	Managing Director
MERITECH CAPITAL AFFILIATES L.P.
By:	Meritech Capital Associates L.L.C.
	its General Partner
By:	Meritech Management Associates L.L.C.
	a managing member
By:	/s/ Michael B. Gordon
Name:	Michael B. Gordon
Title:	Managing Director

5

SEQUOIA CAPITAL FRANCHISE FUND, L.P.
By: SCFF Management, LLC A Delaware Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA CAPITAL FRANCHISE PARTNERS, L.P.
By: SCFF Management, LLC A Delaware Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA CAPITAL VIII, L.P.
By: SC VIII Management, LLC A California Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS VIII, L.P.
By: SC VIII Management, LLC A California Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:

6

SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS VIII (Q), L.P.
By: SC VIII Management, LLC A California Limited Liability Company General Partner
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
SEQUOIA 1997
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:
CMS PARTNERS LLC
By:	/s/ Mark Stevens
Name:	Mark Stevens
Title:

7

INSTITUTIONAL VENTURE PARTNERS VIII, L.P., by its General Partner, Institutional Venture Management VIII, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal,
	Managing Director
IVM INVESTMENT FUND VIII, LLC, by its Manager, Institutional Venture Management VIII, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal,
	Managing Director
BROADBAND FUND, L.P., by its General Partner, BBF Management, LLC, by its Manager, Institutional Venture Management VIII, LLC
By:	/s/ R. Thomas Dyal
	R. Thomas Dyal, Managing Director

8

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer of Tekelec pursuant to
Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Frederick M. Lax, certify that:

1.	I have reviewed this report on Form 10-Q of Tekelec;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005	/s/ FREDERICK M. LAX
	Frederick M. Lax
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer of Tekelec pursuant to
Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William H. Everett, certify that:

1.	I have reviewed this report on Form 10-Q of Tekelec;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005	/s/ WILLIAM H. EVERETT
	William H. Everett
	Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certifications of Chief Executive Officer and Chief Financial Officer of Tekelec pursuant to
Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

     In connection with the Quarterly Report of Tekelec (the “Company”) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Frederick M. Lax, President and Chief Executive Officer of the Company, and William H. Everett, Senior Vice President and Chief Financial Officer of the Company, certify, to the best of our knowledge, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 8, 2005	/s/ FREDERICK M. LAX
	Frederick M. Lax
	President and Chief Executive Officer
	/s/ WILLIAM H. EVERETT
	William H. Everett
	Senior Vice President and Chief Financial Officer