8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

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

Date of Report (Date of earliest event reported):  August 1, 2007
 

TEKELEC

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

TABLE OF CONTENTS

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

i

Item 2.02 Results of Operations and Financial Condition

     On August 1, 2007, the Company issued a press release announcing its financial results for the second quarter ended June 30, 2007. A copy of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K.

     The information in this Current Report on Form 8-K and in Exhibit 99.1 furnished herewith shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.

Item 9.01. Financial Statements and Exhibits

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

Exhibit No.	Description
99.1	Press Release dated August 1, 2007 of the Company

1

SIGNATURES

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

	Tekelec
Dated: August 1, 2007	By:	/s/ Franco Plastina
		Franco Plastina
		President and Chief Executive Officer

2

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release dated August 1, 2007 of the Company

3

EX-99.1

EXHIBIT 99.1

Tekelec Announces Q2 2007 Results
Revenues Were $110.0 million; Cash Flow from Operating Activities from Continuing
Operations Was $21.7 Million in Q2 2007; GAAP Net Income from Continuing Operations
Was $3.8 Million; GAAP EPS from Continuing Operations Totaled $0.05

MORRISVILLE, N.C. (Wednesday, August 1, 2007): Tekelec (NASDAQ: TKLC ), a leading developer of high-performance network applications for next-generation fixed, mobile and packet networks, today announced its results for the quarter and six months ended June 30, 2007. Results from continuing operations for all periods presented include the results from the Network Signaling Group (“NSG”) and the Communications Software Solutions Group (“CSSG”). Results of the Company’s Switching Solutions Group (“SSG”) for the quarter and six months ended June 30 of 2007 and 2006 and the results of the IEX contact center (“IEX”) business unit for the quarter and six months ended June 30, 2006 are included in the results from discontinued operations.

Results from Continuing Operations
Revenue from continuing operations for the second quarter of 2007 was $110.0 million, down 8% compared to $119.1 million for the second quarter of 2006. For the second quarter of 2007, the Company had orders of $84.7 million, up 4% compared to $81.8 million for the second quarter of 2006. Backlog as of June 30, 2007 was $334.7 million compared to $360.0 million as of March 31, 2007.

On a GAAP basis, the Company reported income from continuing operations for the second quarter of 2007 of $3.8 million, or $0.05 per diluted share, compared to income from continuing operations of $15.7 million, or $0.22 per diluted share, for the second quarter of 2006. On a Non-GAAP basis, income from continuing operations for the second quarter of 2007 was $9.0 million, or $0.12 per diluted share, compared to income from continuing operations of $20.7 million, or $0.28 per diluted share, for the second quarter of 2006. Please refer to the attached financial statement schedules for a reconciliation of the Company’s GAAP operating results to its Non-GAAP operating results.

Revenue from continuing operations for the first six months of 2007 was $218.8 million, up 19% compared to $184.0 million for the first six months of 2006. For the first six months of 2007, the Company had orders from continuing operations of $163.9 million, down 3% compared to $168.2 million for the first six months of 2006.

On a GAAP basis, the Company reported income from continuing operations for the first six months of 2007 of $6.8 million, or $0.10 per diluted share, compared to income from continuing operations of $5.4 million, or $0.08 per diluted share, for the first six months of 2006. On a Non-GAAP basis, income from continuing operations for the first six months of 2007 was $19.6 million, or $0.27 per diluted share, compared to income from continuing operations of $13.8 million, or $0.20 per diluted share, for the first six months of 2006. Please refer to the attached

Q2 2007 Results
 

financial statement schedules for a reconciliation of the Company’s GAAP operating results to its Non-GAAP operating results.

Results from Discontinued Operations
On April 21, 2007, the Company completed the sale of the SSG business to GENBAND Inc. and the operations of SSG have been presented as a discontinued operation. On a GAAP basis, loss from discontinued operations, including a loss on the sale of discontinued operations, in the second quarter of 2007 was $11.5 million, or $0.16 loss per diluted share, compared to a loss from discontinued operations of $1.1 million, or $0.02 loss per diluted share, in the second quarter of 2006. On a GAAP basis, loss from discontinued operations, including a loss on the sale of discontinued operations, for the first six months of 2007 was $65.0 million, or $0.92 loss per diluted share, compared to a loss from discontinued operations of $7.4 million, or $0.11 loss per diluted share, for the first six months of 2006.

Included in the income from discontinued operations for the three months ended June 30, 2007 is a pretax restructuring charge of $5.8 million associated with certain lease exit and moving costs recorded in connection with our exit of the facilities in Plano, Texas utilized by the SSG business. The Company anticipates an additional charge of $2.0-$3.0 million related to exit of the facilities in Plano, Texas to be recorded in the third quarter of 2007.

Balance Sheet Results
At June 30, 2007, Tekelec’s consolidated cash, cash equivalents and short-term investments totaled $464.8 million, up from $450.0 million at March 31, 2007. Deferred revenues from continuing operations were $158.8 million at June 30, 2007, down from $173.3 million at March 31, 2007.

Frank Plastina, president and chief executive officer of Tekelec, stated, “We are pleased with our operating results from continuing operations and with our strong balance sheet at the end of the June quarter. We were disappointed by our volume of orders; however, we are encouraged by the strength of our EAGLE 5 ISS signaling business internationally, which included seven new customers this quarter.”

Consolidated Results
On a GAAP basis, net loss on a consolidated basis for the three months ended June 30, 2007 was $7.8 million, or $0.11 loss per diluted share, compared to net income on a consolidated basis for the three months ended June 30, 2006 of $14.6 million, or $0.20 per diluted share. On a GAAP basis, net loss on a consolidated basis for the six months ended June 30, 2007 was $58.2 million, or $0.82 loss per diluted share, compared to a net loss on a consolidated basis for the six months ended June 30, 2006 of $2.0 million, or $0.03 loss per diluted share.

Conference Call
Tekelec has scheduled a conference call for Wednesday, August 1, 2007 for management to discuss second quarter 2007 results. The Company also plans to provide on its web site immediately prior to the call both GAAP and Non-GAAP financial measures (including GAAP reconciliations) for the second quarter and to discuss during this call certain forward looking information concerning the Company’s prospects for 2007.

Q2 2007 Results
 

"Live” Webcast and Replay
Tekelec will host a live webcast of its conference call on Wednesday, August 1, 2007, at 8:00 a.m. EDT. To access the webcast, visit Tekelec’s web site located at www.tekelec.com, enter the Investor Relations section and click on the webcast icon. A webcast replay will be available at approximately 10:45 a.m. on August 1^st and for 90 days thereafter.

Telephone Replay
A telephone replay of the call will also be available for one week after the live webcast by calling either (800) 642-1687 or (706) 645-9291, and entering the conference ID #10917724.

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

FORWARD-LOOKING STATEMENTS
Certain statements made in this press release are forward looking, reflect the Company’s current intent, belief or expectations and involve certain risks and uncertainties. The Company’s actual future performance may not meet the Company’s expectations. As discussed in the Company’s Quarterly Reports on Form 10-Q for the 2007 first quarter (the “Q1 2007 Form 10-Q”), its Annual Report on Form 10-K for 2006 (the “2006 Form 10-K”) and its other filings with the Securities and Exchange Commission (the “Commission”), the Company’s future operating results are difficult to predict and subject to significant fluctuations. Factors that may cause future results to differ materially from the Company’s current expectations, in addition to those identified in the Company’s 2006 Form 10-K, the Q1 2007 Form 10-Q and its other filings with the Commission, include, among others, the risk that the Company will not realize all the benefits of its restructuring activities; the risk that the sales cycle will lengthen as customers evaluate current technology and anticipate technology shifts; delays in new product introduction and slower than anticipated customer orders related to such products; the risk that continued service provider consolidation will require additional review of capital expenditures and lengthen their procurement cycle; and the uncertainties related to the timing of revenue recognition due to the increasing percentage of international and new customer orders in the Company’s backlog. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

Q2 2007 Results
 

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

Tekelec Investor Contacts:
Jim Chiafery
Director, Investor Relations
Tel: 919.461.6825
jim.chiafery@tekelec.com

Q2 2007 Results

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
	(Thousands, except per share data)
Revenues	$	109,984		$	119,098		$	218,777		$	183,950
Cost of sales:
Cost of goods sold		46,774			37,763			98,676			70,022
Amortization of purchased technology		592			587			1,179			1,174
Total cost of sales		47,366			38,350			99,855			71,196
Gross profit		62,618			80,748			118,922			112,754
Operating expenses:
Research and development		24,064			19,104			46,271			37,102
Sales and marketing		18,309			19,384			36,974			36,937
General and administrative		14,762			16,039			27,794			30,119
Restructuring and other		2,511			1,920			2,511			2,082
Amortization of intangible assets		48			472			94			944
Total operating expenses		59,694			56,919			113,644			107,184
Income (loss) from operations		2,924			23,829			5,278			5,570
Other income (expense), net:
Interest income		4,355			1,878			8,295			3,527
Interest expense		(956	)		(859	)		(1,851	)		(1,781	)
Gain on sale of investments		85			—			223			1,793
Other income, net		(1,118	)		217			(1,844	)		(351	)
Total other income, net		2,366			1,236			4,823			3,188
Income from continuing operations before provision for income taxes		5,290			25,065			10,101			8,758
Provision for income taxes		1,517			9,374			3,328			3,333
Income from continuing operations		3,773			15,691			6,773			5,425
Loss from discontinued operations, net of taxes (1,2)		(7,084	)		(1,141	)		(23,276	)		(7,384	)
Loss on sale of discontinued operations, net of taxes (3,4)		(4,463	)		—			(41,743	)		—
Net Income (Loss)	$	(7,774	)	$	14,550		$	(58,246	)	$	(1,959	)
Earnings per share from continuing operations:
Basic	$	0.05		$	0.23		$	0.10		$	0.08
Diluted		0.05			0.22			0.10			0.08
Earnings (loss) per share from discontinued operations:
Basic	$	(0.17	)	$	(0.02	)	$	(0.94	)	$	(0.11	)
Diluted		(0.16	)		(0.02	)		(0.92	)		(0.11	)
Earnings (loss) per share:
Basic	$	(0.11	)	$	0.22		$	(0.84	)	$	(0.03	)
Diluted		(0.11	)		0.20			(0.82	)		(0.03	)
Weighted average number of shares outstanding-continuing operations:
Basic		69,938			66,933			69,426			66,883
Diluted		71,151			74,563			70,699			68,219
Weighted average number of shares outstanding:
Basic		69,938			66,933			69,426			66,883
Diluted		71,151			74,563			70,699			68,219

Q2 2007 Results
 

Notes to Unaudited Condensed Consolidated Statements of Operations:

(1)	For the three months ended June 30, 2007, loss from discontinued operations relates to our former SSG business unit, and includes loss from operating activities ($3.4 million) as well as restructuring charges ($3.7 million), net of taxes. For the three months ended June 30, 2006, loss from discontinued operations consists of ($10.7) million loss from operating activities of SSG, and $9.6 million gain from operating activities of IEX, net of taxes.
(2)	For the six months ended June 30, 2007, loss from discontinued operations relates to our former SSG business unit, and includes loss from operating activities ($13.0 million) as well as restructuring charges ($10.3 million), net of taxes. For the six months ended June 30, 2006, loss from discontinued operations consists of ($19.9) million loss from operating activities of SSG, and $12.5 million gain from operating activities of IEX, net of taxes.
(3)	For the three months ended June 30, 2007, the loss on sale of discontinued operations represents the current quarter impact of the final disposition of our former SSG business unit.
(4)	For the six months ended June 30, 2007, the loss on sale of discontinued operations represents the impact of the final disposition of our former SSG business unit.

Q2 2007 Results

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
	(Thousands, except per share data)
Revenues	$	109,984	$	119,098	$	218,777	$	183,950
Cost of sales:
Cost of goods sold		46,370		37,176		92,753		68,729
Gross profit		63,614		81,922		126,024		115,221
Research and development		23,361		18,000		44,554		34,491
Sales and marketing		17,516		18,140		35,164		34,178
General and administrative		12,629		14,221		22,806		26,036
Total operating expenses		53,506		50,361		102,524		94,705
Income from operations		10,108		31,561		23,500		20,516
Interest and other income, net		2,366		1,236		4,823		1,395
Income from continuing operations before provision for income taxes		12,474		32,797		28,323		21,911
Provision for income taxes (2)		3,459		12,134		8,705		8,106
Net income from continuing operations	$	9,015	$	20,663	$	19,618	$	13,805
Earnings per share:
Basic	$	0.13	$	0.31	$	0.28	$	0.21
Diluted (3)		0.12		0.28		0.27		0.20
Earnings per share weighted average number of shares outstanding:
Basic		69,938		66,933		69,426		66,883
Diluted (3)		77,512		74,563		77,060		74,580

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

(1)	Please refer to the attached reconciliations of the GAAP Statements of Operations to the above Non-GAAP Statements of Operations.
(2)	The above Non-GAAP Statements of Operations assume effective income tax rates of 28% and 37% for the three months ended June 30, 2007 and 2006, respectively. The above Non-GAAP Statements of Operations assume effective income tax rates of 31% and 37% for the six months ended June 30, 2007 and 2006, respectively.
(3)	For the three and six months ended June 30, 2007, the calculation of diluted earnings per share includes the add-back to net income of $581,000 and $1,162,000, respectively for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method. For the three and six months ended June 30, 2006, the calculation of diluted earnings per share includes a potential add-back to net income of $581,000 and $1,162,000, respectively for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method.

Q2 2007 Results

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,		December 31,
	2007		2006
	(Thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	46,557	$	45,329
Short-term investments, at fair value		418,227		379,045
Total cash, cash equivalents and short-term investments		464,784		424,374
Accounts receivable, net		89,513		133,050
Inventories		25,322		25,739
Income taxes receivable		25,876		14,665
Deferred income taxes		25,502		27,671
Deferred costs and prepaid commissions		41,427		55,110
Prepaid expenses and other current assets		11,279		26,133
Receivable from GenBand		505		—
Assets of discontinued operations		—		118,341
Total current assets		684,208		825,083
Property and equipment, net		32,942		36,398
Investments in privately-held companies		18,553		7,322
Deferred income taxes, net		75,251		51,496
Other assets		2,380		2,539
Goodwill		26,876		26,876
Intangible assets, net		18,277		19,543
Total assets	$	858,487	$	969,257
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	26,706	$	27,316
Accrued expenses		43,030		55,665
Accrued payroll and related expenses		21,652		28,733
Current portion of deferred revenues		148,661		189,994
Convertible debt		125,000		—
Liabilities associated with SSG		5,330		—
Liabilities of discontinued operations		—		40,991
Total current liabilities		370,379		342,699
Long-term convertible debt		—		125,000
Deferred income taxes		1,381		1,481
Long-term portion of deferred revenues		10,108		5,836
Other long-term liabilities		8,691		—
Total liabilities		390,559		475,016
Commitments and Contingencies
Shareholders’ equity:
Common stock, without par value, 200,000,000 shares authorized; 70,648,940 and 68,728,986 shares issued and outstanding, respectively		353,969		322,620
Retained earnings		113,476		171,722
Accumulated other comprehensive income (loss)		483		(101	)
Total shareholders’ equity		467,928		494,241
Total liabilities and shareholders’ equity	$	858,487	$	969,257

Q2 2007 Results

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months ended June 30,
	2007			2006
	(Thousands)
Cash flows from operating activities:
Net loss	$	(58,246	)	$	(1,959	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss from discontinued operations		65,019			7,384
Gain on sale of investments		(223	)		(1,793	)
Provision for doubtful accounts and returns		192			—
Inventory write downs		5,254			2,696
Depreciation		7,707			6,017
Amortization of intangibles		1,273			2,118
Amortization, other		929			2,186
Deferred income taxes		(2,113	)		(2,714	)
Stock-based compensation		8,726			10,194
Excess tax benefits from stock-based compensation		(2,912	)		(341	)
Changes in operating assets and liabilities, net of business disposal:
Accounts receivable		43,228			(18,958	)
Inventories		(2,616	)		(11,053	)
Deferred costs		13,683			(3,421	)
Prepaid expenses and other current assets		14,589			(1,451	)
Trade accounts payable		(535	)		(1,017	)
Income taxes receivable/payable		11,525			(12,916	)
Accrued expenses		(14,851	)		(518	)
Accrued payroll and related expenses		(7,713	)		(407	)
Deferred revenues		(37,003	)		55,022
Total adjustments		104,159			31,028
Net cash provided by operating activities — continuing operations		45,913			29,069
Net cash used in operating activities — discontinued operations		(16,571	)		(9,148	)
Net cash provided by operating activities		29,342			19,921
Cash flows from investing activities:
Proceeds from sales and maturities of investments		332,918			383,480
Purchases of investments		(372,016	)		(415,817	)
Purchases of property and equipment		(10,087	)		(10,885	)
Change in other assets		(224	)		1,455
Net cash used in investing activities — continuing operations		(49,409	)		(41,767	)
Net cash used in investing activities — discontinued operations		(2,320	)		(5,071	)
Net cash used in investing activities		(51,729	)		(46,838	)
Cash flows from financing activities:
Payments on notes payable		—			(85	)
Proceeds from issuance of common stock		20,234			3,904
Excess tax benefits from stock-based compensation		2,912			341
Net cash provided by financing activities		23,146			4,160
Effect of exchange rate changes on cash		469			284
Net change in cash and cash equivalents		1,228			(22,473	)
Cash and cash equivalents, beginning of period		45,329			52,069
Cash and cash equivalents, end of period		46,557			29,596
Less cash and cash equivalents of discontinued operations		—			504
Cash and cash equivalents of continuing operations at end of period	$	46,557		$	29,092

Q2 2007 Results

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME

	Three Months Ended June 30, 2007
	(Thousands, except per share data)
							GAAP						Non-GAAP
	Tekelec			Discontinued			Continuing						Continuing
	Total			Operations			Operations			Adjustments			Operations
Revenues	$	116,684		$	6,700		$	109,984		$	—		$	109,984
Costs and expenses:
Cost of sales:
Cost of goods sold		51,607			4,833			46,774			(404	)(1)		46,370
Amortization of purchased technology		592			—			592			(592	)(2)		—
Total cost of sales		52,199			4,833			47,366			(996	)		46,370
Gross profit		64,485			1,867			62,618			996			63,614
Research and development		27,038			2,974			24,064			(703	)(1)		23,361
Sales and marketing		20,406			2,097			18,309			(793	)(1)		17,516
General and administrative		17,035			2,273			14,762			(2,090	)(1)		12,629
											(43	)(3)
Restructuring and other		2,511			—			2,511			(2,511	)(4)		—
Amortization of intangible assets		48			—			48			(48	)(2)		—
Total operating expenses		67,038			7,344			59,694			(6,188	)		53,506
Income (Loss) from operations		(2,553	)		(5,477	)		2,924			7,184			10,108
Other discontinued operations		(7,319	)		(7,319	)		—			—			—
Interest and other income, net		2,366			—			2,366			—			2,366
Income (Loss) from continuing operations before provision for income taxes		(7,506	)		(12,796	)		5,290			7,184			12,474
Provision for (benefit from) income taxes		268			(1,249	)		1,517			1,942	(5)		3,459
Income (Loss) from continuing operations		(7,774	)		(11,547	)		3,773			5,242			9,015
Loss from discontinued operations for SSG, net of taxes		—			11,547			(11,547	)		11,547	(6)		—
Net Income (Loss)	$	(7,774	)	$	—		$	(7,774	)	$	16,789		$	9,015
Earnings (Loss) per share from continuing operations:
Basic	$	(0.11	)				$	0.05					$	0.13
Diluted (7)		(0.11	)					0.05						0.12
Earnings (Loss) per share:
Basic	$	(0.11	)				$	(0.11	)				$	0.13
Diluted (7)		(0.11	)					(0.11	)					0.12
Earnings per share weighted average number of shares outstanding:
Basic		69,938						69,938						69,938
Diluted (7)		71,151						71,151						77,512

(1)	The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock appreciation rights granted under our employee stock purchase plans.
(2)	The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.
(3)	The adjustment represents the legal expenses incurred to settle the Bouygues litigation.
(4)	The adjustment represents the impact of the June 2007 restructuring.
(5)	The adjustment represents the income tax effect of footnotes (1), (2), (3) and (4) in order to reflect our Non-GAAP effective tax rate of 28%.
(6)	The adjustment represents the elimination of the results of operations of our discontinued operations.
(7)	For the three months ended June 30, 2007, the calculations of diluted earnings per share related to Tekelec Total and GAAP Continuing Operations exclude a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method as the effect of including such amounts is anti-dilutive. The calculation of diluted earnings per share related to Non-GAAP Continuing Operations includes the add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method.

Q2 2007 Results

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME

	Six Months Ended June 30, 2007
	(Thousands, except per share data)
							GAAP						Non-GAAP
	Tekelec			Discontinued			Continuing						Continuing
	Total			Operations			Operations			Adjustments			Operations
Revenues	$	246,459		$	27,682			218,777		$	—		$	218,777
Costs and expenses:
Cost of sales:
Cost of goods sold		118,234			19,558			98,676			(923	)(1)		92,753
											(5,000	)(2)
Amortization of purchased technology		1,284			105			1,179			(1,179	)(3)		—
Total cost of sales		119,518			19,663			99,855			(7,102	)		92,753
Gross profit		126,941			8,019			118,922			7,102			126,024
Research and development		63,250			16,979			46,271			(1,717	)(1)		44,554
Sales and marketing		42,947			5,973			36,974			(1,810	)(1)		35,164
General and administrative		33,732			5,938			27,794			(4,276	)(1)		22,806
											(712	)(4)
Restructuring and other		2,511			—			2,511			(2,511	)(5)		—
Amortization of intangible assets		164			70			94			(94	)(3)		—
Total operating expenses		142,604			28,960			113,644			(11,120	)		102,524
Income (Loss) from operations		(15,663	)		(20,941	)		5,278			18,222			23,500
Other discontinued operations		(77,323	)		(77,323	)		—			—			—
Interest and other income, net		4,823			—			4,823			—			4,823
Income (Loss) from continuing operations before provision for income taxes		(88,163	)		(98,264	)		10,101			18,222			28,323
Provision for (benefit from) income taxes		(29,917	)		(33,245	)		3,328			5,377	(6)		8,705
Income (Loss) from continuing operations		(58,246	)		(65,019	)		6,773			12,845			19,618
Loss from discontinued operations for SSG, net of taxes		—			65,019			(65,019	)		65,019	(7)		—
Net Income (Loss)	$	(58,246	)	$	—		$	(58,246	)	$	77,864		$	19,618
Earnings (Loss) per share from continuing operations:
Basic	$	(0.84	)				$	0.10					$	0.28
Diluted (8)		(0.82	)					0.10						0.27
Earnings (Loss) per share:
Basic	$	(0.84	)				$	(0.84	)				$	0.28
Diluted (8)		(0.82	)					(0.82	)					0.27
Earnings per share weighted average number of shares outstanding:
Basic		69,426						69,426						69,426
Diluted (8)		70,699						70,699						77,060

(1)	The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock appreciation rights granted under our employee stock purchase plans.
(2)	The adjustments represent the charge associated with product credits issued to Bouygues Telecom, S.A. as part of our settlement of the Bouygues litigation.
(3)	The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.
(4)	The adjustment represents legal expenses incurred to settle the Bouygues litigation.
(5)	In the second quarter of 2007 we initiated a restructuring of our operations to better align with our current organizational requirements. This adjustment represents the elimination of the costs associated with the June restructuring.
(6)	The adjustment represents the income tax effect of footnotes (1), (2), (3), (4) and (5) in order to reflect our Non-GAAP effective tax rate of 31%.
(7)	The adjustment represents the elimination of the results of operations of our discontinued operations.
(8)	For the six months ended June 30, 2007, the calculations of diluted earnings per share related to Tekelec Total and GAAP Continuing Operations exclude a potential add-back to net income of $1,162,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method as the effect of including such amounts is anti-dilutive. The calculation of diluted earnings per share related to Non-GAAP Continuing Operations includes the add-back to net income of $1,162,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method.

Q2 2007 Results

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME

	Three Months Ended June 30, 2006
	(Thousands, except per share data)
						GAAP						Non-GAAP
	Tekelec		Discontinued			Continuing						Continuing
	Total		Operations			Operations			Adjustments			Operations
Revenues	$	149,868	$	30,770		$	119,098		$	—		$	119,098
Costs and expenses:
Cost of sales:
Cost of goods sold		57,881		20,118			37,763			(587	)(1)		37,176
Amortization of purchased technology		1,276		689			587			(587	)(2)		—
Total cost of sales		59,157		20,807			38,350			(1,174	)		37,176
Gross profit		90,711		9,963			80,748			1,174			81,922
Research and Development		37,608		18,504			19,104			(1,104	)(1)		18,000
Sales and Marketing		23,693		4,309			19,384			(1,244	)(1)		18,140
General and administrative		18,143		2,104			16,039			(1,495	)(1)		14,221
										(113	)(3)
										(210	)(4)
Restructuring and other		3,255		1,335			1,920			(1,920	)(5)		—
Amortization of intangible assets		578		106			472			(472	)(2)		—
Total operating expenses		83,277		26,358			56,919			(6,558	)		50,361
Income (Loss) from operations		7,434		(16,395	)		23,829			7,732			31,561
Interest and other income, net		1,236		—			1,236			—			1,236
Income (Loss) from continuing operations before provision for income taxes		8,670		(16,395	)		25,065			7,732			32,797
Provision for (benefit from) income taxes		3,742		(5,632	)		9,374			2,760	(6)		12,134
Income (Loss) from continuing operations		4,928		(10,763	)		15,691			4,972			20,663
Income from discontinued operations for IEX, net of taxes		9,622		—			9,622			(9,622)	(7)		—
Loss from discontinued operations for SSG, net of taxes		—		10,763			(10,763	)		10,763	(7)		—
Net Income	$	14,550	$	—		$	14,550		$	6,113		$	20,663
Earnings per share from continuing operations:
Basic	$	0.07				$	0.23					$	0.31
Diluted (8)		0.07					0.22						0.28
Earnings per share:
Basic	$	0.22				$	0.22					$	0.31
Diluted (8)		0.21					0.20						0.28
Earnings per share weighted average number of shares outstanding:
Basic		66,933					66,933						66,933
Diluted (8)		68,202					74,563						74,563

(1)	The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock purchase rights granted under our employee stock purchase plans.
(2)	The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.
(3)	The adjustment represents legal expenses incurred to settle the IEX vs. Blue Pumpkin litigation.
(4)	The adjustment represents costs associated with the restatement of our consolidated financial statements.
(5)	The adjustment represents restructuring and other costs related to our 2006 restructuring and changes in estimates relating to the restructuring of our manufacturing and corporate headquarters relocations in 2005 and 2004.
(6)	The adjustment represents the income tax effect of footnotes (1), (2), (3), (4) and (5) in order to reflect our Non-GAAP effective tax rate of 37%.
(7)	The adjustment represents the elimination of the results of operations of our discontinued operations.
(8)	For the three months ended June 30, 2006, the calculations of diluted earnings per share for Tekelec Total exclude a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method of accounting for earnings per diluted share as the effects of including such amount is anti-dilutive. GAAP Continuing Operations and Non-GAAP Continuing Operations diluted earnings per share include the potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method.

Q2 2007 Results

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME

	Six Months Ended June 30, 2006
	(Thousands, except per share data)
							GAAP						Non-GAAP
	Tekelec			Discontinued			Continuing						Continuing
	Total			Operations			Operations			Adjustments			Operations
Revenues	$	243,972		$	60,022		$	183,950		$	—		$	183,950
Costs and expenses:
Cost of sales:
Cost of goods sold		110,320			40,298			70,022			(1,293	)(1)		68,729
Amortization of purchased technology		2,552			1,378			1,174			(1,174	)(2)		—
Total cost of sales		112,872			41,676			71,196			(2,467	)		68,729
Gross profit		131,100			18,346			112,754			2,467			115,221
Research and Development		72,312			35,210			37,102			(2,611	)(1)		34,491
Sales and Marketing		45,777			8,840			36,937			(2,759	)(1)		34,178
General and administrative		33,869			3,750			30,119			(3,531	)(1)		26,036
											(342	)(3)
											(210	)(4)
Restructuring and other		3,419			1,337			2,082			(2,082	)(5)		—
Amortization of intangible assets		1,156			212			944			(944	)(2)		—
Total operating expenses		156,533			49,349			107,184			(12,479	)		94,705
Income (Loss) from operations		(25,433	)		(31,003	)		5,570			14,946			20,516
Interest and other income, net		3,188			—			3,188			(1,793	)		1,395
Income (Loss) from continuing operations before provision for income taxes		(22,245	)		(31,003	)		8,758			13,153			21,911
Provision for (benefit from) income taxes		(7,711	)		(11,044	)		3,333			4,773	(6)		8,106
Income (Loss) from continuing operations		(14,534	)		(19,959	)		5,425			8,380			13,805
Income from discontinued operations for IEX, net of taxes		12,575			—			12,575			(12,575)	(7)		—
Loss from discontinued operations for SSG, net of taxes		—			19,959			(19,959	)		19,959	(7)		—
Net Income (Loss)	$	(1,959	)	$	—		$	(1,959	)	$	15,764		$	13,805
Earnings (Loss) per share from continuing operations:
Basic	$	(0.22	)				$	0.08					$	0.21
Diluted (8)		(0.22	)					0.08						0.20
Earnings (Loss) per share:
Basic	$	(0.03	)				$	(0.03	)				$	0.21
Diluted (8)		(0.03	)					(0.03	)					0.20
Earnings per share weighted average number of shares outstanding:
Basic		66,883						66,883						66,883
Diluted (8)		66,883						68,219						74,580

(1)	The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock purchase rights granted under our employee stock purchase plans.
(2)	The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.
(3)	The adjustment represents legal expenses incurred to settle the IEX vs. Blue Pumpkin litigation.
(4)	The adjustment represents costs associated with the restatement of our consolidated financial statements.
(5)	The adjustment represents restructuring and other costs related to our 2006 restructuring and changes in estimates relating to the restructuring of our manufacturing and corporate headquarters relocations in 2005 and 2004.
(6)	The adjustment represents the income tax effect of footnotes (1), (2), (3), (4) and (5) in order to reflect our Non-GAAP effective tax rate of 37%.
(7)	The adjustment represents the elimination of the results of operations of our discontinued operations.
(8)	For the six months ended June 30, 2006, the calculations of diluted earnings per share for Tekelec Total and GAAP Continuing Operations exclude a potential add-back to net income of $1,162,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method of accounting for earnings per diluted share as the effects of including such amount is anti-dilutive. Non-GAAP Continuing Operations diluted earnings per share include the potential add-back to net income of $1,162,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method.