Tekelec

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

Amendment No. 1

(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


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

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


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

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


	Yes o		No þ

As of July 29, 2005, there were 66,006,429 shares of the registrant’s common stock, without par value, outstanding.

EXPLANATORY NOTE

We have restated our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2005 and 2004 in this Amendment No. 1 on Form 10-Q/A (the “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (the “Form 10-Q”). Specifically, we have restated our unaudited consolidated financial statements as a result of certain errors that existed in our previously issued financial statements included in the Form 10-Q, principally related to our application of Statement of Position 97-2 “Software Revenue Recognition” (“SOP 97-2”) and to our accounting, presentation and disclosure of certain financial statement items such as (i) customer service costs, (ii) deferred income taxes in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” and (iii) certain miscellaneous accrued expenses and prior period purchase accounting entries. This restatement (the “Second Quarter Restatement”) is more fully described in Part I herein under Item 1 in our unaudited condensed consolidated financial statements and related notes, including, without limitation, in Note B to such condensed consolidated financial statements, and in Part I herein under Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

All referenced amounts in this report as of June 30, 2005 and December 31, 2004, and for the three and six months ended June 30, 2005 and 2004, reflect balances and amounts on a restated basis.

This Form 10-Q/A is filed as part of the restatement (the “2006 Restatement”) of our previously issued financial statements for (i) the year ended December 31, 2003, (ii) the year ended December 31, 2004 and each of the quarters therein, and (iii) the nine months ended September 30, 2005 and each of the quarters therein. We are also filing with the Securities and Exchange Commission (the “SEC”) substantially contemporaneously herewith amendments on Form 10-Q/A to each of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005 and September 30, 2005. We previously filed with the SEC on May 30, 2006 our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”), which included restated consolidated financial statements for the years ended December 31, 2004 and 2003 and restated unaudited quarterly financial information for each of the quarters in the nine months ended September 30, 2005 and in the year ended December 31, 2004.

The Company has not amended and will not be amending its Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. The financial statements and related financial information contained in that report are, however, superseded by the financial statements and related financial information included in this Form 10-Q/A and in our 2005 Form 10-K.

The following items originally included in the Form 10-Q are amended by this Form 10-Q/A:

	•		Part I, Item 1, Condensed Consolidated Financial Statements;

	•		Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations;

	•		Part I, Item 4, Controls and Procedures; and

	•		Part II, Item 6, Exhibits.

Except as required to reflect the Second Quarter Restatement and certain matters relating to the 2006 Restatement, this Form 10-Q/A does not modify or update other disclosures in the Form 10-Q. Accordingly, this Form 10-Q/A, including the financial statements and the notes thereto included herein, generally does not reflect events occurring after the date of the original filing of the Form 10-Q or modify or update disclosures therein that were affected by subsequent events. For information regarding events subsequent to the original filing of the Form 10-Q, this Form 10-Q/A should be read in conjunction with our 2005 Form 10-K and the other filings we have made with the SEC since the date of the original filing of the Form 10-Q, including the amendments to our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005 and September 30, 2005, which we are filing with the SEC substantially contemporaneously with the filing of this Form 10-Q/A.

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

TEKELEC
Unaudited Condensed Consolidated Balance Sheets


	June 30,			December 31,
	2005			2004
	(Restated)			(Restated)
	(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		102,029			109,536
Inventories		50,165			33,654
Deferred income taxes, net		11,992			15,058
Deferred costs and prepaid commissions		55,183			46,206
Income taxes receivable		5,905			—
Prepaid expenses and other current assets		16,062			15,947

Total current assets		449,363			403,761
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		29,188			26,547
Other assets		5,616			6,757
Goodwill		126,561			126,442
Intangible assets, net		74,568			79,915

Total assets	$	823,994		$	774,983

Liabilities and Shareholders’ Equity
Current liabilities:
Trade accounts payable	$	38,442		$	35,316
Accrued expenses		20,615			17,536
Accrued payroll and related expenses		25,340			23,490
Short-term notes and current portion of notes payable		2,163			3,266
Current portion of deferred revenues		200,732			174,849

Total current liabilities		287,292			254,457
Long-term portion of notes payable		45			78
Long-term convertible debt		125,000			125,000
Long-term portion of deferred revenues		5,822			4,067

Total liabilities		418,159			383,602


Minority interest		9,982			17,628

Commitments and Contingencies (Note K)
Shareholders’ equity:
Common stock, without par value, 200,000,000 shares authorized; 65,921,645 and 65,568,145 issued and outstanding, respectively		262,787			258,656
Deferred stock-based compensation		(3,177	)		(4,480	)
Retained earnings		137,667			119,407
Accumulated other comprehensive income (loss)		(1,424	)		170

Total shareholders’ equity		395,853			373,753

Total liabilities and shareholders’ equity	$	823,994		$	774,983

See notes to condensed consolidated financial statements.

TEKELEC
Unaudited Condensed Consolidated Statements of Operations


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(Restated)			(Restated)			(Restated)			(Restated)
				(Thousands, except per share data)
Revenues	$	122,728		$	95,196		$	261,591		$	171,170
Cost of sales:
Cost of goods sold		47,011			32,561			89,478			57,034
Amortization of purchased technology		1,997			2,392			3,752			5,456

Total cost of sales		49,008			34,953			93,230			62,490

Gross profit		73,720			60,243			168,361			108,680

Operating expenses:
Research and development		31,429			24,552			61,858			45,568
Selling, general and administrative		40,208			30,239			78,081			55,493
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		74,842			63,310			144,280			111,054

Income (loss) from operations		(1,122	)		(3,067	)		24,081			(2,374	)
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		(392	)		(292	)		(836	)		(282	)

Total other income (expense), net		411			(296	)		(1,111	)		129

Income (loss) from operations before provision for income taxes		(711	)		(3,363	)		22,970			(2,245	)
Provision for income taxes		1,368			6,219			12,356			12,558

Income (loss) before minority interest		(2,079	)		(9,582	)		10,614			(14,803	)
Minority interest		2,864			8,142			7,646			18,677

Net income (loss)	$	785		$	(1,440	)	$	18,260		$	3,874

Earnings (loss) per share:
Basic	$	0.01		$	(0.02	)	$	0.28		$	0.06
Diluted		0.01			(0.02	)		0.26			0.06
Weighted average number of shares outstanding:
Basic		65,723			62,458			65,660			62,246
Diluted		67,258			62,458			74,013			65,174

See notes to condensed consolidated financial statements.

TEKELEC
Unaudited Condensed Consolidated Statements of Cash Flows


	Six Months Ended
	June 30,
	2005			2004
	(Restated)			(Restated)
	(Thousands)
Cash flows from operating activities:
Net income	$	18,260		$	3,874
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on investment in publicly-traded company		1,344			—
Minority interest		(7,646	)		(18,677	)
Provision for (recoveries of) 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		837			(2,497	)
Stock-based compensation		1,667			585
Tax benefit related to stock options exercised		458			2,489
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		7,303			(15,618	)
Inventories		(16,690	)		(7,807	)
Prepaid expenses and other current assets		(6,765	)		(7,745	)
Trade accounts payable		3,274			12,305
Accrued expenses		(5,161	)		(4,881	)
Accrued payroll and related expenses		1,964			3,136
Deferred revenues		27,934			13,218
Income taxes payable		3,278			3,531

Total adjustments		29,931			122

Net cash provided by operating activities		48,191			3,996

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		(127	)		2

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 condensed consolidated financial statements.

TEKELEC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A. Basis of Presentation

The condensed consolidated financial statements are unaudited, other than the condensed consolidated balance sheet at December 31, 2004, which was derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. The condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of our financial condition, operating results and cash flows for the interim periods. The condensed consolidated financial statements include the accounts and operating results of Tekelec, our wholly owned subsidiaries, and our majority owned subsidiary, Santera Systems Inc. (“Santera”), less minority interest. All significant intercompany accounts and transactions have been eliminated.

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, however, 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. We expect international sales to account for a significant portion of our revenues in future periods. Accordingly, we have identified four geographic territories for analyzing and reporting sales data. 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 and India.

The consolidated financial statements and the notes thereto in this Form 10-Q/A should be read in conjunction with the consolidated financial statements for the years ended December 31, 2005 and 2004 and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2005.

Product Warranty Costs

Our sales arrangements with our customers typically provide for 12 to 15 months of warranty coverage (the “Standard Warranty”) ending the sooner of one year from installation or 15 months after shipment. Our customers can extend their warranty coverage outside the term of the Standard Warranty through our Customer Extended Warranty Service (“CEWS”) offerings. As discussed further below under revenue recognition, we account for our Standard Warranty and CEWS offerings as separate elements of an arrangement, with the fair value of these elements recognized as revenue ratably over the service period. Accordingly, we expense all costs associated with these elements as incurred.

For purposes of determining when the cost of our warranty offerings has been “incurred,” we follow the guidance of FTB 90-1 “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts” (“FTB 90-1”). Under FTB 90-1, costs must be recognized as “incurred” when a warranty event occurs, which may precede the expenditures to satisfy the warranty claim. While we generally expense all costs as the expenditure is made, we accrue the costs expected to be incurred with a specific product defect, which is generally a defect that is classified as a Class A defect. A Class A defect is a designation that obligates us to correct a pervasive defect in one of our products. In the case of a Class A defect or specific known product defect that we have committed to remedy, we accrue the expected costs to be incurred at the time we determine that it is probable that we have an obligation to repair a product defect and the expected expenditures are estimable. All warranty-related expenses are reflected within cost of sales in the accompanying condensed consolidated statements of operations.

We have historically had few Class A designated warranty events and accordingly have generally expensed the cost of our warranty obligations as incurred. In the event that we have any Class A designated events or other events that obligate us to satisfy specific warranty obligations, we establish a warranty reserve in the accompanying condensed consolidated balance sheets. This warranty reserve is based on our estimates of the associated material costs, technical support labor costs, and associated overhead. Our warranty obligation may be affected by product failure rates, material usage and service delivery costs incurred in correcting product failures. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to any estimated warranty liability would be required. Further, if we experience an increase in warranty claims compared with our historical experience, or if the cost of servicing warranty claims is greater than the expectations on which an accrual has been based, our gross margin could be adversely affected.

Certain of our CEWS agreements include provisions indemnifying customers against liabilities in the event we fail to perform to

specific service level requirements. Arrangements that include these indemnification provisions typically provide for a limit on the amount of damages that we may be obligated to pay our customers. In addition to these indemnification provisions, our agreements typically include warranties that our products will substantially operate as described in the applicable product documentation and that the services we perform will be provided in a manner consistent with industry standards. We do not believe that these warranty or indemnity obligations represent a separate element in the arrangement because fulfillment of these obligations is consistent with our obligations under our standard warranty. To date, we have not incurred any material costs associated with these warranties.

Revenue Recognition

Substantially all of our revenues are derived from sales or licensing of our (i) telecommunications products, (ii) professional services including installation, training, and general support, and (iii) warranty-related support, comprised of telephone support, repair and return of defective products, and product updates (commonly referred to as maintenance and post-contract customer support (“PCS”)). Our customers generally purchase a combination of our products and services as part of a multiple element arrangement.

As the software component of all of our product offerings is generally deemed to be more than incidental to the products being provided, we recognize revenue in accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Software Revenue Recognition with Respect to Certain Arrangements” (collectively, “SOP 97-2”).

When total cost estimates exceed revenues, we accrue for the estimated losses immediately using the estimated cost of the remaining equipment to be delivered and an average fully burdened daily rate applicable to the consulting personnel delivering the services.

The following is a summary of the key areas where we exercise judgment and use estimates in connection with the determination of the amount of revenue to be recognized in each accounting period:

Determining Separate Elements and Allocating Value to Those Elements

For arrangements that involve multiple elements, the entire fee from the arrangement must be allocated to each of the elements based on the individual element’s fair value. Each arrangement requires careful analysis to ensure that all of the individual elements in the arrangement have been identified, along with the fair value of each element. Under SOP 97-2, the determination of fair value must be based on vendor specific objective evidence of the fair value (“VSOE”), which is limited to the price of that element when sold separately.

Sales of our products always include a year of warranty coverage, which we have determined contains post-contract customer support (“PCS”) elements as defined by SOP 97-2. As we do not sell our products separately from this warranty coverage, and we rarely sell our products on a standalone basis, we are unable to establish VSOE for our products. Accordingly, we utilize the residual method as prescribed by SOP 97-2 to allocate revenue to each of the elements in an arrangement. Under the residual method, we allocate the total fee in an arrangement first to the undelivered elements (i.e., typically professional services and warranty offerings) based on the VSOE of those elements and the remaining, or “residual,” portion of the fee to the delivered elements (i.e., typically the product or products).

We allocate revenue to each element in an arrangement (e.g., professional services, and warranty coverage) based on its respective fair value, with the fair value determined by the price charged when the element is sold separately. We determine the fair value of the warranty portion of an arrangement based on the price charged to the customer for extending their warranty coverage. We determine the fair value of the professional services portion of an arrangement based on the rates that we charge for these services when sold independently from our products.

If evidence of fair value cannot be established for the undelivered elements of an arrangement, we defer revenue until the earlier of (i) delivery or (ii) the determination that fair value of the undelivered element exists, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.

Product Revenue

For substantially all of our arrangements, we defer revenue for the fair value of the warranty offering and professional services to be provided to the customer and recognize revenue for all products in an arrangement when persuasive evidence of an arrangement exists and delivery of the last product has occurred, provided the fee is fixed or determinable and collection is deemed probable. We generally evaluate each of these criteria as follows:

•

Persuasive evidence of an arrangement exists. We consider a non-cancelable agreement (such as an irrevocable customer purchase order, contract, etc.) to be evidence of an arrangement.

	•		Delivery has occurred. Delivery is considered to occur when title to our products has passed to the customer, which typically occurs at physical delivery of the products to a common carrier. For arrangements with systems integrators and OEM customers, we recognize revenue when title to the last product in a multiple-element arrangement has passed. For arrangements with resellers, we generally recognize revenue upon evidence of sell-through to the end customer.

	•		The fee is fixed and determinable. We assess whether fees are fixed and determinable at the time of sale. If the arrangement fee is not fixed or determinable, we recognize the revenue as amounts become due and payable.

	•		Collection is probable. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine collection is not probable, we defer the revenue and recognize the revenue upon cash collection.

While many of our arrangements do not include customer acceptance provisions, certain arrangements do include acceptance provisions, which are based on our published specifications. Revenue is recognized upon shipment, assuming all other revenue recognition criteria are met, provided that we have previously demonstrated that the product meets the specified criteria and we have an established history with similar transactions. If an arrangement includes acceptance provisions that are short term in nature, we provide for a sales return allowance in accordance with SFAS No. 48 “Revenue Recognition when Right of Return Exists.” In the event we cannot reasonably estimate the incidence of returns, we defer revenue until the earliest that such estimate can reasonably be made, receipt of written customer acceptance or expiration of the acceptance period. If the acceptance provisions are long term in nature or the acceptance is based upon customer specified criteria for which we cannot reliably demonstrate that the delivered product meets all the specified criteria, revenue is deferred until the earlier of the receipt of written customer acceptance or the expiration of the acceptance period.

Our arrangements may include penalty provisions. If an arrangement includes penalty provisions (e.g., for late delivery or installation of the product), we defer the portion of the arrangement subject to forfeiture under the penalty provision of the arrangement until the earliest of (i) a determination that the penalty was not incurred, (ii) the customer waives its rights to the penalty, or (iii) the customer’s right to assess the penalty lapses.

Warranty/Maintenance Revenue

Our arrangements typically provide for one year of warranty coverage (the “Standard Warranty”) ending the sooner of one year after installation or 15 months after shipment. We typically provide our Standard Warranty coverage at no additional charge to our customer. We allocate a portion of the arrangement fee to the Standard Warranty based on the VSOE of its fair value. The related revenue is deferred and recognized ratably over the term of the Standard Warranty based on the number of days of warranty coverage during each period. Our customers can extend their warranty coverage outside the term of the Standard Warranty through our Customer Extended Warranty Service (“CEWS”) offerings. Renewal rates for CEWS are typically established based upon a specified percentage of net product fees as set forth in the arrangement.

Professional Services Revenue

Professional services revenue primarily consists of implementation services related to the installation of our products and training revenues. Our products are ready to use by the customer upon receipt and, accordingly, our implementation services do not involve significant customization to or development of the product or any underlying software code embedded in the product. Substantially all of our professional service arrangements are related to installation and training services and are billed on a fixed-fee basis. We typically recognize the revenue related to our fixed-fee service arrangements upon completion of the services, as these services are relatively short-term in nature (i.e., typically a matter of days or, in limited cases, several weeks). For arrangements that are billed on a time and materials basis, we recognize revenue as the services are performed. If there exists a significant uncertainty about the project completion or receipt of payment for the professional services, revenue is deferred until the uncertainty is sufficiently resolved.

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 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 — Restatement of Previously Issued Financial Statements

As a result of a comprehensive review during 2006 of our accounting policies and procedures, particularly our policies regarding revenue recognition and the presentation of cost of sales, we independently identified certain errors in our previously issued financial statements, including our previously issued financial statements for the three and six months ended June 30, 2005 and 2004. These errors principally related to (i) our application of SOP 97-2, (ii) the classification of certain customer service costs as cost of sales in accordance with Article 5 of Regulation S-X, and (iii) our accounting, presentation and disclosure of certain financial statement items such as (a) deferred income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” and (b) certain miscellaneous accrued expenses and certain prior period purchase accounting entries. We have corrected these errors with respect to the three and six months ended June 30, 2005 and 2004 through a restatement of our previously issued financial statements for the three and six months ended June 30, 2005 and 2004 (the “Second Quarter Restatement”). The following discussion provides additional information regarding these prior period errors and the resulting adjustments to our previously issued financial statements.

Misclassification of Certain Customer Service Costs

Certain customer service costs had historically been incorrectly classified in our consolidated statements of operations as components of selling, general and administrative (“SG&A”) expenses, rather than as direct components of cost of goods sold and research and development expenses. The expenses involved in the Second Quarter Restatement are associated with (i) customer services ancillary to product sales, such as technical support, extended warranty, customer training, and field installation and (ii) certain quality assurance testing associated with our research and development organization.

The restatement of our consolidated statements of operations to correct this error had no impact on our previously reported revenue, income from operations, net income, or the related earnings per share amounts, nor did it have any impact on our condensed consolidated balance sheets or consolidated statements of cash flows.

The following tables present the impact of this error, by business unit, on our consolidated cost of sales, research and development expenses and SG&A expenses for the three months ended June 30, 2005 and 2004 (in thousands):

Increase (Decrease) in:


			Research and
	Cost of Sales		Development		SG&A			Total
Three Months Ended June 30, 2005:
Network Signaling Group	$	5,827	$	350	$	(6,177	)	$	—
Switching Solutions Group		3,369		113		(3,482	)		—
Communications Software Solutions Group		297		—		(297	)		—
IEX Contact Center Group		259		—		(259	)		—
Corporate		267		—		(267	)		—

Consolidated impact	$	10,019	$	463	$	(10,482	)	$	—

Increase (Decrease) in:


			Research and
	Cost of Sales		Development		SG&A			Total
Three Months Ended June 30, 2004:
Network Signaling Group	$	4,765	$	307	$	(5,072	)	$	—
Switching Solutions Group		2,404		76		(2,480	)		—
Communications Software Solutions Group		—		—		—			—
IEX Contact Center Group		200		—		(200	)		—
Corporate		103		—		(103	)		—

Consolidated impact	$	7,472	$	383	$	(7,855	)	$	—

The following tables present the impact of this error, by business unit, on our consolidated cost of sales, research and development expenses and SG&A expenses for the six months ended June 30, 2005 and 2004:

Increase (Decrease) in:


			Research and
	Cost of Sales		Development		SG&A			Total
Six Months Ended June 30, 2005:
Network Signaling Group	$	10,106	$	669	$	(10,775	)	$	—
Switching Solutions Group		7,776		217		(7,993	)		—
Communications Software Solutions Group		648		—		(648	)		—
IEX Contact Center Group		487		—		(487	)		—
Corporate		425		—		(425	)		—

Consolidated impact	$	19,442	$	886	$	(20,328	)	$	—

Increase (Decrease) in:


			Research and
	Cost of Sales		Development		SG&A			Total
Six Months Ended June 30, 2004:
Network Signaling Group	$	9,546	$	624	$	(10,170	)	$	—
Switching Solutions Group		4,006		156		(4,162	)		—
Communications Software Solutions Group		—		—		—			—
IEX Contact Center Group		360		—		(360	)		—
Corporate		175		—		(175	)		—

Consolidated impact	$	14,087	$	780	$	(14,867	)	$	—

Revenue Recognition

We had prematurely recognized revenue related to certain multiple element customer sales arrangements due to the misapplication of the revenue recognition guidance in SOP 97-2 concerning (i) the establishment of vendor specific objective evidence of fair value (“VSOE”) for certain of our products, along with certain other misapplications of the residual method to multiple element sales arrangements, (ii) the accounting for warranty and maintenance agreements, and (iii) the proper accounting for contract penalty provisions specifically related to product delivery. These misapplications of SOP 97-2 resulted in a misstatement in each period of previously recognized revenue and an equal misstatement of deferred revenues. The following table presents the impact of these errors, by business unit, on our consolidated revenues for the three months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in revenues:
Network Signaling Group	$	(8,409	)	$	(4,016	)
Switching Solutions Group		(880	)		2,260
Communications Software Solutions Group		(1,202	)		1,186
IEX Contact Center Group		175			148

Total	$	(10,316	)	$	(422	)

The following table presents the impact of these errors, by business unit, on our consolidated revenues for the six months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in revenues:
Network Signaling Group	$	11,189		$	(3,446	)
Switching Solutions Group		2,331			(589	)
Communications Software Solutions Group		(4,710	)		571
IEX Contact Center Group		362			146

Total	$	9,172		$	(3,318	)

The following discussion provides additional information regarding these revenue recognition errors and the resulting adjustments to our previously issued financial statements.

Establishment of VSOE in Multiple Element Sales Arrangements and Application of the Residual Method

Under SOP 97-2, for sales arrangements that involve multiple elements, the entire fee from the arrangement must be allocated to

each of the elements based on the individual element’s fair value. As more fully described in Note A, if VSOE of a delivered element within a multiple element sales arrangement cannot be established, SOP 97-2 requires that the residual method be used to allocate value to each of the elements in the arrangement, as long as VSOE exists for all undelivered elements in the arrangement. Under the residual method, the allocated fee for individual products is deferred until all products have been delivered (i.e., no revenue related to partial shipments is recognized).

Historically, our Network Signaling Group (“NSG”) had allocated the arrangement fee in its multiple element sales arrangements to each element (i.e., products, services and warranty) within these arrangements. Accordingly, NSG recognized revenue related to each individual product when title and the risk of loss passed to the customer, including partial shipments. We have determined that our NSG business unit had not sufficiently established VSOE for the product component of its multiple element sales arrangements, principally because we do not sell our product separately from the one year of warranty coverage, which we have determined contains elements of post-contract customer support (“PCS”), as defined by SOP 97-2 (e.g., telephone support and limited upgrades and enhancements). As a result of this misapplication of the guidance of SOP 97-2, revenue was inappropriately recognized in certain of our sales arrangements, typically those that involved partial shipments of the products.

In addition to this error, we also determined during our review that our SSG, CSSG and IEX business units misapplied certain provisions of SOP 97-2, including certain aspects of the residual method. Specifically, as a result of transferring certain NSG product lines to the CSSG business unit in 2004, the error concerning the misapplication of product VSOE discussed above related to NSG, also impacted revenues recorded by our CSSG business unit related to customer sales arrangements that included products from these transferred product lines. With respect to SSG and IEX, we also determined that in certain instances, principally in 2004, we incorrectly allocated a portion of the discount offered to the customer to the undelivered elements (i.e., professional services and maintenance/warranty) rather than allocating the entire discount to the delivered elements (i.e., primarily products) as would be required under the residual method. We also determined that within our SSG business unit, we had inappropriately (i) assumed that we had VSOE for certain specified upgrades, resulting in the premature recognition of revenue associated with the delivered product and (ii) recognized revenue prior to receiving customer acceptance of the product in certain arrangements in which the acceptance was deemed to have been other than perfunctory.

The following table presents the impact of the above errors on our consolidated revenues, by business unit, for the three months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in revenues:
Network Signaling Group	$	(9,225	)	$	(1,617	)
Switching Solutions Group		(851	)		2,503
Communications Software Solutions Group		(993	)		1,580
IEX Contact Center Group		175			148

Total	$	(10,894	)	$	2,614

The following table presents the impact of the above errors on our consolidated revenues, by business unit, for the six months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in revenues:
Network Signaling Group	$	6,320		$	353
Switching Solutions Group		2,726			(160	)
Communications Software Solutions Group		(4,384	)		932
IEX Contact Center Group		362			146

Total	$	5,024		$	1,271

The aforementioned changes in revenue recognition are accompanied by deferrals of related costs of the equipment, installation and sales commissions. The following tables present the impact on our consolidated cost of sales and SG&A expenses, by business unit, for the three months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in cost of sales:
Network Signaling Group	$	(1,632	)	$	(839	)
Switching Solutions Group		(381	)		1,371
Communications Software Solutions Group		(308	)		(104	)
IEX Contact Center Group		—			—

Total	$	(2,321	)	$	428


	2005			2004
	(Thousands)
Increase (Decrease) in SG&A expenses:
Network Signaling Group	$	(146	)	$	(83	)
Switching Solutions Group		(15	)		69
Communications Software Solutions Group		(21	)		—
IEX Contact Center Group		—			—

Total	$	(182	)	$	(14	)

The following tables present the impact on our consolidated cost of sales and SG&A expenses, by business unit, for the six months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in cost of sales:
Network Signaling Group	$	(634	)	$	(1,562	)
Switching Solutions Group		1,177			302
Communications Software Solutions Group		(1,011	)		25
IEX Contact Center Group		—			—

Total	$	(468	)	$	(1,235	)


Increase (Decrease) in SG&A expenses:
Network Signaling Group	$	576		$	(83	)
Switching Solutions Group		104			9
Communications Software Solutions Group		(151	)		—
IEX Contact Center Group		—			—

Total	$	529		$	(74	)

Accounting for Product Warranty

In connection with each product sale, we provide our customers with 12 to 15 months of initial warranty coverage at no additional charge, which includes elements of PCS. Historically, we had determined that this initial warranty met the criteria specified in SOP 97-2 for recognition concurrent with our product sales. However, we have determined that this initial warranty coverage did not meet such criteria, principally due to our historical practice of consistently providing limited software upgrades and enhancements, despite having no contractual obligation to do so. As a result of this error, we inappropriately recognized revenue, along with an estimate of the related costs associated with the initial warranty coverage, rather than appropriately recognizing revenue ratably over the initial warranty term and expensing the related costs as incurred.

The following table presents the impact of this error on our consolidated revenues, by business unit, for the three months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in revenues:
Network Signaling Group	$	1,584		$	(1,941	)
Switching Solutions Group		(29	)		(274	)
Communications Software Solutions Group		(201	)		(359	)
IEX Contact Center Group		—			—

Total	$	1,354		$	(2,574	)

The following table presents the impact of this error on our consolidated revenues, by business unit, for the six months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in revenues:
Network Signaling Group	$	5,457		$	(2,383	)
Switching Solutions Group		(325	)		(460	)
Communications Software Solutions Group		(291	)		(326	)
IEX Contact Center Group		—			—

Total	$	4,841		$	(3,169	)

The aforementioned changes in revenue recognition are accompanied by reversals of previously recorded warranty expenses, which were historically accrued at the date the related revenue was recognized. As a result, we recognized the estimated costs of providing the initial warranty coverage as cost of sales at the time of shipment of the covered products, rather than actual costs when incurred during the warranty term. The following table presents the impact on our consolidated cost of sales, by business unit, for the three months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in cost of sales:
Network Signaling Group	$	49		$	468
Switching Solutions Group		(618	)		240
Communications Software Solutions Group		—			—
IEX Contact Center Group		—			—

Total	$	(569	)	$	708

The following table presents the impact on our consolidated cost of sales, by business unit, for the six months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in cost of sales:
Network Signaling Group	$	34		$	715
Switching Solutions Group		(1,526	)		129
Communications Software Solutions Group		—			—
IEX Contact Center Group		—			—

Total	$	(1,492	)	$	844

Accounting for Contract Penalty Provisions

Certain of our present and past customer sales contracts contain penalty provisions associated with meeting specified delivery dates of our products and services. We had historically deferred certain revenue subject to such penalty provisions based upon a probability assessment as to whether the penalty would ultimately be asserted. Under SOP 97-2, all revenue subject to these penalties is required to be deferred until the customer’s legal right to assert the penalty has expired, irrespective of the probability of an assertion of the penalty. Accordingly, our historical practice had resulted in a misstatement of revenues and a misstatement of deferred revenue relating to these sales arrangements as of June 30, 2005 and 2004.

The following table presents the impact of this error on our consolidated revenues, by business unit, for the three months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in revenues:
Network Signaling Group	$	(768	)	$	(458	)
Switching Solutions Group		—			31
Communications Software Solutions Group		(8	)		(35	)
IEX Contact Center Group		—			—

Total	$	(776	)	$	(462	)

The following table presents the impact of this error on our consolidated revenues, by business unit, for the six months ended June 30, 2005 and 2004:


	2005			2004
	(Thousands)
Increase (Decrease) in revenues:
Network Signaling Group	$	(588	)	$	(1,416	)
Switching Solutions Group		(70	)		31
Communications Software Solutions Group		(35	)		(35	)
IEX Contact Center Group		—			—

Total	$	(693	)	$	(1,420	)

Other Miscellaneous Accounting, Financial Statement Presentation and Disclosure Errors

Certain previously identified errors had been determined to be immaterial both individually and in the aggregate to our consolidated financial statements. We have also corrected these errors in our financial statements in connection with the Second Quarter Restatement. These additional adjustments consist of (i) adjustments to combine certain deferred tax liabilities and deferred tax assets that were previously reported separately, (ii) adjustments to correct certain prior period purchase accounting entries that resulted in a misclassification between accounts receivable and goodwill, and (iii) adjustments to correct certain other accounting and disclosure items primarily associated with the over or under accrual of certain expenses at various reporting dates. The impact of these items is reflected in the Summary of Second Quarter Restatement Adjustments below.

Summary of Second Quarter Restatement Adjustments

The following schedules reconcile the amounts as originally reported in our consolidated balance sheets as of June 30, 2005 and December 31, 2004, the consolidated statements of operations for the three and six months ended June 30, 2005 and 2004 and cash flows for six months ended June 30, 2005 and 2004 to the corresponding restated amounts in each of these statements:


	As of June 30, 2005
	As Previously		Restatement
	Reported		Adjustments			Restated
	(Thousands)
Consolidated Balance Sheet:
ASSETS
Current assets:
Cash and cash equivalents	$	34,549	$	—		$	34,549
Short-term investments, at fair value		173,478		—			173,478
Accounts receivable, net		99,817		1,686	(1)		102,029
				526	(5)
Inventories		51,372		(1,207	) (2)		50,165

Deferred income taxes, net		13,703		(1,711	) (11)		11,992
Deferred costs and prepaid commissions		—		13,874	(3)		55,183
				41,309	(4)
Income taxes receivable		—		5,905	(11)		5,905
Prepaid expense and other current assets		51,482		(41,309	) (4)		16,062
				(72	) (5)
				5,961	(6)

Total current assets		424,401		24,962			449,363
Long-term investments, at fair value		93,293		—			93,293
Property and equipment, net		38,083		—			38,083
Investment in privately-held company		7,322		—			7,322
Deferred income taxes		46,829		(18,026	) (7)		29,188
				385	(11)
Other assets		5,616		—			5,616
Goodwill		128,851		(2,290	) (1)		126,561
Intangible assets, net		80,529		(5,961	) (6)		74,568

Total assets	$	824,924	$	(930	)	$	823,994


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	38,442	$	—		$	38,442
Accrued expenses		25,611		(937	) (1)		20,615
				(3,774	) (3)
				(285	) (5)
Accrued payroll and related expenses		25,696		(356	) (5)		25,340
Short-term notes and current portion of notes payable		2,163		—			2,163
Current portion of deferred revenues		127,328		333	(1)		200,732
				73,071	(3)
Income taxes payable		2,169		(2,169	) (11)		—

Total current liabilities		221,409		65,883			287,292
Notes payable		45		—			45
Long-term convertible debt		125,000		—			125,000
Deferred income taxes		18,026		(18,026	) (7)		—
Long-term portion of deferred revenues		3,852		1,970	(3)		5,822

Total liabilities		368,332		49,827			418,159

Minority interest		11,264		(1,282	) (8)		9,982
Total shareholders’ equity		445,328		(44,437	) (9)		395,853
				(5,038	) (10)

Total liabilities and shareholders’ equity	$	824,924	$	(930	)	$	823,994


(1)		To correct certain clerical errors in the purchase accounting entries relating to our Steleus acquisition and the reversal of $937,000 of accrued liabilities that were improperly recorded upon acquisition.

(2)		To record the allocation of book-to-physical inventory adjustments resulting from our physical inventory in December 2005 in the appropriate interim period.

(3)		To record cumulative adjustments relating to errors in revenue recognition discussed in the section entitled “Revenue


		Recognition” above.

(4)		To present deferred costs and prepaid commissions as a separate line item on our consolidated balance sheets.

(5)		To correct certain other accounting and disclosure items primarily associated with the over or under deferral/accrual of certain assets and liabilities.

(6)		To reclassify certain prepaid royalties from “Intangible assets, net” to “Prepaid expense and other current assets.”

(7)		To combine certain deferred tax liabilities and deferred tax assets that were previously reported separately.

(8)		To correct “minority interest” for the effects of restatement adjustments (2), (3) and (5) above which are related to our then majority-owed subsidiary, Santera Systems Inc.

(9)		To reflect the cumulative effects on shareholders’ equity of the restatement adjustments as of March 31, 2005. The principal adjustment resulted from additional deferred revenues of $65.1 million, offset by related deferred costs and income tax effects.

(10)		To reflect the effects on shareholders’ equity of the adjustments detailed in items (2), (3), (5) and (8) for the three months ended June 30, 2005. These adjustments included (i) an increase in deferred compensation of $247,000 related to certain restricted stock unit awards and (ii) a $4,791,000 decrease in retained earnings resulting from restatement adjustments in the three months ended June 30, 2005.

(11)		To reflect the income tax effects of the adjustments detailed in items (1), (2), (3), (5), and (8) above.


	As of December 31, 2004
	As Previously		Restatement
	Reported		Adjustments			Restated
	(Thousands)
Consolidated Balance Sheet:
ASSETS
Current assets:
Cash and cash equivalents	$	48,925	$	—		$	48,925
Short-term investments, at fair value		134,435		—			134,435
Accounts receivable, net		107,850		1,686	(1)		109,536
Inventories		33,654		—			33,654
Deferred income taxes, net		15,804		(746	) (10)		15,058
Deferred costs and prepaid commissions		—		13,342	(2)		46,206
				32,864	(3)
Prepaid expense and other current assets		44,639		(32,864	) (3)		15,947
				621	(10)
				(72	) (4)
				3,623	(5)

Total current assets		385,307		18,454			403,761
Long-term investments, at fair value		93,622		—			93,622
Property and equipment, net		30,617		—			30,617
Investment in privately-held company		7,322		—			7,322
Deferred income taxes		45,748		(19,586	) (6)		26,547
				385	(10)
Other assets		6,757		—			6,757
Goodwill		128,732		(2,290	) (1)		126,442
Intangible assets, net		83,538		(3,623	) (5)		79,915

Total assets	$	781,643	$	(6,660	)	$	774,983


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	35,316	$	—		$	35,316
Accrued expenses		30,417		(937	) (1)		17,536
				(2,876	) (2)
				(501	) (4)
				(8,567	) (10)
Accrued payroll and related expenses		23,478		12	(4)		23,490
Short-term notes and current portion of notes payable		3,266		—			3,266
Current portion of deferred revenues		92,182		333	(1)		174,849
				82,334	(2)
Income taxes payable		646		(646	) (10)		—

Total current liabilities		185,305		69,152			254,457
Notes payable		78		—			78
Long-term convertible debt		125,000		—			125,000
Deferred income taxes		19,586		(19,586	) (6)		—
Long-term portion of deferred revenues		2,187		1,880	(2)		4,067


	As of December 31, 2004
	As Previously		Restatement
	Reported		Adjustments			Restated
	(Thousands)
Total liabilities		332,156		51,446			383,602

Minority interest		20,489		(2,861	) (7)		17,628
Total shareholders’ equity		428,998		(35,548	) (8)		373,753
				(19,697	) (9)

Total liabilities and shareholders’ equity	$	781,643	$	(6,660	)	$	774,983


(1)		To correct certain clerical errors in the purchase accounting entries relating to our Steleus acquisition and the reversal of $937,000 of accrued liabilities that were improperly recorded upon other acquisitions.

(2)		To record cumulative adjustments relating to errors in revenue recognition discussed in the section entitled “Revenue Recognition” above.

(3)		To present deferred costs and prepaid commissions as a separate line item on our consolidated balance sheets.

(4)		To correct certain other accounting and disclosure items primarily associated with the over or under deferral/accrual of certain assets and liabilities.

(5)		To reclassify certain prepaid royalties from “Intangible assets, net” to “Prepaid expense and other current assets.”

(6)		To combine certain deferred tax liabilities and deferred tax assets that were previously reported separately.

(7)		To correct “minority interest” for the effects of restatement adjustments (2) and (4) above which are related to our then majority-owed subsidiary, Santera Systems Inc.

(8)		To reflect the cumulative effects on shareholders’ equity of the restatement adjustments as of December 31, 2002. The principal adjustment resulted from additional deferred revenues of $45.7 million, offset by related deferred costs and income tax effects.

(9)		To reflect the effects on shareholders’ equity of the adjustments detailed in items (2), (4), (7) and (10) for the years ended December 31, 2003 and 2004.

(10)		To reflect the income tax effects of the adjustments detailed in items (1), (2), (4) and (7) above.


	For the Three Months Ended June 30, 2005
	As Previously		Restatement
	Reported		Adjustments			Restated
	(Thousands, except per-share data)
Consolidated Statement of Operations:
Revenues	$	133,044	$	(10,316	) (1)	$	122,728
Costs of Sales:
Cost of goods sold		39,692		(2,890	) (1)		47,011
				10,019	(2)
				190	(3), (4)
Amortization of purchased technology		1,997		—			1,997

Total cost of sales		41,689		7,319			49,008

Gross profit		91,355		(17,635	)		73,720

Operating expenses:
Research and development		30,966		463	(2)		31,429
Selling, general and administrative		50,942		(182	) (1)		40,208
				(10,482	) (2)
				(70	) (4)
Amortization of intangible assets		702		—			702
Restructuring		2,503		—			2,503

Total operating expenses		85,113		(10,271	)		74,842

Income from operations		6,242		(7,364	)		(1,122	)
Other income (expense), net		426		(15	) (4)		411

Income before provision for income taxes		6,668		(7,379	)		(711	)
Provision for income taxes		3,942		(2,574	) (6)		1,368

Income before minority interest		2,726		(4,805	)		(2,079	)
Minority interest		2,850		14	(5)		2,864

Net income	$	5,576	$	(4,791	)	$	785


Earnings per share:
Basic	$	0.08				$	0.01
Diluted		0.08					0.01


(1)		To record adjustments relating to errors in revenue recognition discussed in the section entitled “Revenue Recognition” above.

(2)		To correct the classification of customer service costs as discussed above under “Misclassification of Certain Customer Service Costs.”

(3)		To record the allocation of book-to-physical inventory adjustments resulting from our physical inventory in December 2005 in the appropriate interim period.

(4)		To correct certain other accounting and disclosure items primarily associated with the over or under deferral/accrual of certain assets and liabilities.

(5)		To correct “minority interest” for the effects of restatement adjustments (1), (3) and (4) above which are related to our then majority-owed subsidiary, Santera Systems Inc.

(6)		To reflect the income tax adjustments related to the adjustments detailed in items (1), (3) and (4) above.


	For the Three Months Ended June 30, 2004
	As Previously			Restatement
	Reported			Adjustments			Restated
	(Thousands, except per-share data)
Consolidated Statement of Operations:
Revenues	$	95,618		$	(422	) (1)	$	95,196
Costs of Sales:
Cost of goods sold		23,953			1,136	(1)		32,561
					7,472	(2)
Amortization of purchased technology		2,392			—			2,392

Total cost of sales		26,345			8,608			34,953

Gross profit		69,273			(9,030	)		60,243

Operating expenses:
Research and development		24,169			383	(2)		24,552
Selling, general and administrative		38,165			(14	) (1)		30,239
					(7,855	) (2)
					(57	) (3)
Acquired in-process research and development		8,000			—			8,000
Amortization of intangible assets		409			—			409
Restructuring		110			—			110

Total operating expenses		70,853			(7,543	)		63,310

Income (loss) from operations		(1,580	)		(1,487	)		(3,067	)
Other income (expense), net		(353	)		57	(4)		(296	)

Income (loss) before provision for income taxes		(1,933	)		(1,430	)		(3,363	)
Provision for income taxes		6,952			(733	) (6)		6,219

Income (loss) before minority interest		(8,885	)		(697	)		(9,582	)
Minority interest		8,581			(439	) (5)		8,142

Net income (loss)	$	(304	)	$	(1,136	)	$	(1,440	)

Earnings per share:
Basic	$	0.00					$	(0.02	)
Diluted		0.00						(0.02	)


(1)		To record adjustments relating to errors in revenue recognition discussed in the section entitled “Revenue Recognition” above.

(2)		To correct the classification of customer service costs as discussed above under “Misclassification of Certain Customer Service Costs.”

(3)		To correct certain other accounting and disclosure items primarily associated with the over or under deferral/accrual of certain assets and liabilities.

(4)		To correct for errors relating to foreign currency translation.

(5)		To correct “minority interest” for the effects of restatement adjustments (1) and (3) above which are related to our then majority-owed subsidiary, Santera Systems Inc.

(6)		To reflect the income tax adjustments related to the adjustments detailed in items (1), (3) and (4) above.


	For the Six Months Ended June 30, 2005
	As Previously			Restatement
	Reported			Adjustments			Restated
	(Thousands, except per-share data)
Consolidated Statement of Operations:
Revenues	$	252,419		$	9,172	(1)	$	261,591
Costs of Sales:
Cost of goods sold		71,294			(1,960	) (1)		89,478
					19,442	(2)
					702	(3), (4)
Amortization of purchased technology		3,752			—			3,752

Total cost of sales		75,046			18,184			93,230

Gross profit		177,373			(9,012	)		168,361

Operating expenses:
Research and development		60,972			886	(2)		61,858
Selling, general and administrative		98,330			529	(1)		78,081
					(20,328	) (2)
					(450	) (4)
Amortization of intangible assets		1,581			—			1,581
Restructuring		2,760			—			2,760

Total operating expenses		163,643			(19,363	)		144,280

Income from operations		13,730			10,351			24,081
Other income (expense), net		(1,092	)		(19	) (4),(5)		(1,111	)

Income before provision for income taxes		12,638			10,332			22,970
Provision for income taxes		9,631			2,725	(7)		12,356

Income before minority interest		3,007			7,607			10,614
Minority interest		9,225			(1,579	) (6)		7,646

Net income	$	12,232		$	6,028		$	18,260


Earnings per share:
Basic	$	0.19					$	0.28
Diluted		0.18						0.26


(1)		To record adjustments relating to errors in revenue recognition discussed in the section entitled “Revenue Recognition” above.

(2)		To correct the classification of customer service costs as discussed above under “Misclassification of Certain Customer Service Costs.”

(3)		To record the allocation of book-to-physical inventory adjustments resulting from our physical inventory in December 2005 in the appropriate interim period.

(4)		To correct certain other accounting and disclosure items primarily associated with the over or under deferral/accrual of certain assets and liabilities.

(5)		To correct for errors relating to foreign currency translation.

(6)		To correct “minority interest” for the effects of restatement adjustments (1), (3) and (4) above which are related to our then majority-owed subsidiary, Santera Systems Inc.

(7)		To reflect the income tax adjustments related to the adjustments detailed in items (1), (3), (4) and (5) above.


	For the Six Months Ended June 30, 2004
	As Previously			Restatement
	Reported			Adjustments			Restated
	(Thousands, except per-share data)
Consolidated Statement of Operations:
Revenues	$	174,488		$	(3,318	) (1)	$	171,170
Costs of Sales:
Cost of goods sold		43,338			(391	) (1)		57,034
					14,087	(2)
Amortization of purchased technology		5,456			—			5,456

Total cost of sales		48,794			13,696			62,490

Gross profit		125,694			(17,014	)		108,680

Operating expenses:
Research and development		44,788			780	(2)		45,568
Selling, general and administrative		70,436			(74	) (1)		55,493
					(14,867	) (2)
					(2	) (3)
Acquired in-process research and development		8,000			—			8,000
Amortization of intangible assets		941			—			941
Restructuring		1,052			—			1,052

Total operating expenses		125,217			(14,163	)		111,054

Income (loss) from operations		477			(2,851	)		(2,374	)
Other income (expense), net		115			14	(4)		129

Income (loss) before provision for income taxes		592			(2,837	)		(2,245	)
Provision for income taxes		13,205			(647	) (6)		12,558

Income (loss) before minority interest		(12,613	)		(2,190	)		(14,803	)
Minority interest		18,158			519	(5)		18,677

Net income	$	5,545		$	(1,671	)	$	3,874


Earnings per share:
Basic	$	0.09					$	0.06
Diluted		0.09						0.06


(1)		To record adjustments relating to errors in revenue recognition discussed in the section entitled “Revenue Recognition” above.

(2)		To correct the classification of customer service costs as discussed above under “Misclassification of Certain Customer Service Costs.”

(3)		To correct certain other accounting and disclosure items primarily associated with the over or under deferral/accrual of certain assets and liabilities.

(4)		To correct for errors relating to foreign currency translation.

(5)		To correct “minority interest” for the effects of restatement adjustments (1) and (3) above which are related to our majority-owed subsidiary, Santera Systems Inc.

(6)		To reflect the income tax adjustments related to the adjustments detailed in items (1), (3) and (4) above.

The restatement adjustments described above did not materially impact our cash flows from operations, investing activities or financing activities within our consolidated statements of cash flows and consequently, schedules reconciling each line item on our consolidated statements of cash flows as previously reported to restated amounts are not presented herein. The effects of the restatement adjustments on cash flows from operations, cash flows from investing and financing activities and the effects of exchange rate changes on cash for the six months ended June 30, 2005 and 2004 are as follows:


	For the Six Months Ended June 30, 2005
	As Previously			Restatement
	Reported			Adjustments			Restated
	(Thousands)
Net cash provided by operating activities	$	48,180		$	11		$	48,191
Net cash used in investing activities		(64,576	)		—			(64,576	)
Net cash provided by financing activities		2,136			—			2,136
Effect of exchange rate changes on cash		(116	)		(11	)		(127	)

Net increase (decrease) in cash and cash equivalents		(14,376	)		—			(14,376	)
Cash and cash equivalents at beginning of the period		48,925			—			48,925

Cash and cash equivalents at end of the period	$	34,549		$	—		$	34,549


	For the Six Months Ended June 30, 2004
	As Previously			Restatement
	Reported			Adjustments			Restated
	(Thousands)
Net cash provided by operating activities	$	3,982		$	14		$	3,996
Net cash used in investing activities		(17,856	)		—			(17,856	)
Net cash provided by financing activities		6,525			—			6,525
Effect of exchange rate changes on cash		16			(14	)		2

Net increase (decrease) in cash and cash equivalents		(7,333	)		—			(7,333	)
Cash and cash equivalents at beginning of the period		45,261			—			45,261

Cash and cash equivalents at end of the period	$	37,928		$	—		$	37,928

Note C. Acquisitions (Restated)

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 became 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
	(Restated)
	(Thousands, except per-
	share amounts)
Revenues	$	174,002
Net income		13,978
Earnings per share:
Basic		0.22
Diluted		0.21

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.

Note D. Minority Interest in Santera Systems Inc. (Restated)

The net income and losses of Santera Systems Inc. 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			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(Restated)			(Restated)			(Restated)			(Restated)
	(Thousands)
Santera net loss (includes amortization of intangibles of $753, $1,057, $1,265 and $2,936, respectively)	$	4,619		$	13,132		$	12,332		$	30,124
Percentage of losses attributable to the minority interest based on capital structure and liquidation preferences		62	%		62	%		62	%		62	%

Minority interest losses	$	2,864		$	8,142		$	7,646		$	18,677

Since our acquisition of a majority interest in Santera, the total net losses that are allocable to the Series A Preferred Stock are $82.3 million as of June 30, 2005, leaving $16.1 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 O, 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 E. 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, accrued payroll and operating expenses in the accompanying financial statements.

Corporate Headquarters Relocation and Taqua Restructuring

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 second 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.

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


			Costs Incurred
			for the		Cumulative
	Total Costs		Three Months		Costs Incurred
	Expected to be		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
	Charges		Payments as of		Balance at
	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
	Total		for the		Cumulative
	Total Costs		Three Months		Costs Incurred
	Expected to be		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
	Charges		Payments as of			Balance at
	Accrued, Net		June 30, 2005			June 30, 2005
			(Thousands)
Severance costs and retention bonuses	$	972	$	(924	)	$	48

Total	$	972	$	(924	)	$	48

Note F. Gain (Loss) on Investment in Alcatel

In December 2004, in connection with the acquisition of Spatial Communications Technologies (“Spatial”) by Alcatel, Santera Systems Inc., 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 G. Certain Balance Sheet Items (Restated)


	June 30,		December 31,
	2005		2004
	(Restated)		(Restated)
	(Thousands)
Inventories consist of the following:
Raw materials	$	30,586	$	20,972
Work in process		6,092		4,147
Finished goods		13,487		8,535

Inventories	$	50,165	$	33,654


	June 30,			December 31,
	2005			2004
	(Restated)			(Restated)
	(Thousands)
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	$	76,900		$	76,900
Other		7,920			10,190

		84,820			87,090
Less accumulated amortization		(10,252	)		(7,175	)

Intangible assets, net	$	74,568		$	79,915

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:


	(Thousands)
For the Years Ending December 31,	(Restated)
2005	$	4,515
2006		7,572
2007		6,270
2008		6,270
2009		6,175
Thereafter		43,766

Total	$	74,568

Note H. 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 as assets or liabilities in the condensed 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 an expiration date 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 $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 I. Income Taxes (Restated)

The income tax provisions for the three months ended June 30, 2005 and 2004 were $1.4 million and $6.2 million, respectively, and for the six months ended June 30, 2005 and 2004 were $12.4 million and $12.6 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 a $93.2 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 $59.2 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 effect of acquisition-related items and Santera’s operating results, an effective rate of 35% was applied to income from operations for the three and six months ended June 30, 2005 and 2004, and represent 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 J. 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. The credit facility was extended to December 2006 in December 2005. 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. However, due to the 2006 Restatement of certain of our previously issued financial statements and the delayed filing of (i) our Annual Report on Form 10-K for the year ended December 31, 2005 and (ii) our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, we breached certain terms and covenants of the credit facility. The lender has granted us a waiver of certain of these breaches providing us, among other things, with an extension of time in which to comply with certain of the terms and covenants of the credit facility.

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. 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.

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. However, the Notes do subject us to certain non-financial covenants. Under Section 7.04 of the Indenture governing the Notes, we are obligated to provide the Trustee, Deutsche Bank Trust Company Americas, such information, documents and reports as are required to be filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, within 15 days after the same are required to be filed with the SEC. From the date of any notice of default relating to a failure to perform this covenant, we have a cure period of 60 days to remedy the default. If the default is not remedied within the 60-day cure period, the Trustee or holders of more than 25% of the outstanding principal amount of the Notes may elect to declare immediately payable all outstanding principal and any accrued interest related to the Notes. Due to our delayed filing of our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) with the SEC, we were not able to provide a copy to the Trustee within the required 15-day period and we received a notice of default on April 1, 2006 from holders of more than 25% of the outstanding principal amount of the Notes. As we filed our 2005 Form 10-K within the 60-day cure period, neither the Trustee nor the holders have the right to accelerate the Notes based on the late filing of our 2005 Form 10-K.

We have also failed to timely deliver our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the “First Quarter 2006 Form 10-Q”) to the Trustee on or before May 25, 2006, which resulted in an additional default under the Indenture. If such default is not cured or waived within 60 days after any notice of such default is delivered to us by the Trustee or by the holders of 25% or more in aggregate principal amount of the Notes, the Trustee or holders of 25% or more in aggregate principal amount of the Notes have the right to accelerate the payment of indebtedness under the Indenture. We currently expect to file our First Quarter 2006 Form 10-Q with the SEC and deliver it to the Trustee on or before July 17, 2006 and, accordingly, we believe will be able to cure this default under the Indenture. Neither the Trustee nor the holders of the Notes have provided us with a notice of default with respect to

the First Quarter 2006 Form 10-Q, which would begin a 60-day cure period under the Indenture.

The Indenture also provides that if our common stock ceases to be listed on the Nasdaq National Market, any holder of Notes may require the Company to redeem the holder’s Notes in accordance with the terms of the Indenture. Although the Company is not currently in compliance with Nasdaq Marketplace Rule 4310(c)(14) as a result of our failure to timely file the First Quarter 2006 Form 10-Q with the SEC, The Nasdaq Stock Market has determined to continue the listing of our Common Stock on the Nasdaq National Market, subject to the condition that we file with the SEC, on or before July 17, 2006, all required restatements and the First Quarter 2006 Form 10-Q. If we fail to meet the requirements of the Nasdaq National Market by July 17, 2006, then the individual holders of the Notes may require repayment of their Notes under the Indenture. We currently expect to meet these conditions.

Note K. 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 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 L. Stock-Based Compensation (Restated)

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. 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 approximately $0.5 million and $1.0 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 approximately $2.0 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 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
	(Restated)			(Restated)			(Restated)			(Restated)
				(Thousands, except per-share data)
Stock-based compensation, net of tax:
As reported	$	473		$	52		$	1,083		$	166
Additional stock-based compensation expense determined under the fair value method		4,480			4,025			9,160			7,415

Pro forma	$	4,953		$	4,077		$	10,243		$	7,581

Net income (loss):
As reported	$	785		$	(1,440	)	$	18,260		$	3,874
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	$	(3,695	)	$	(5,465	)	$	9,100		$	(3,541	)

Earnings (loss) per share-basic:
As reported	$	0.01		$	(0.02	)	$	0.28		$	0.06
Less: per share effect of additional stock-based compensation expense determined under the fair value method, net of tax		(0.07	)		(0.07	)		(0.14	)		(0.12	)

Pro forma	$	(0.06	)	$	(0.09	)		0.14			(0.06	)

Earnings (loss) per share-diluted:
As reported	$	0.01		$	(0.02	)	$	0.27		$	0.06
Less: per share effect of additional stock-based compensation expense determined under the fair value method, net of tax		(0.07	)		(0.07	)		(0.13	)		(0.12	)

Pro forma	$	(0.06	)	$	(0.09	)	$	0.14		$	(0.06	)

Weighted average number of shares outstanding:
Basic		65,723			62,458			65,660			62,246
Diluted		65,723			62,458			67,142			62,246

Note M. Operating Segment Information (Restated)

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.

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
	(Restated)			(Restated)		(Restated)			(Restated)
Network Signaling Group	$	73,130		$	64,014	$	167,078		$	124,629
Switching Solutions Group		32,461			15,203		60,516			18,740
Communications Software Solutions Group		6,576			5,479		12,954			8,059
IEX Contact Center Group		11,246			10,500		22,082			19,742
Intercompany Eliminations		(685	)		—		(1,039	)		—

Total net revenues	$	122,728		$	95,196	$	261,591		$	171,170


	Income (Loss) from Operations
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(Restated)			(Restated)			(Restated)			(Restated)
Network Signaling Group	$	30,036		$	28,753		$	81,706		$	55,380
Switching Solutions Group		(11,575	)		(16,886	)		(23,745	)		(30,645	)
Communications Software Solutions Group		(5,843	)		1,809			(9,600	)		413
IEX Contact Center Group		4,140			4,304			7,336			7,381
General Corporate(1)		(17,880	)		(21,047	)		(31,616	)		(34,903	)

Total income (loss) from operations	$	(1,122	)	$	(3,067	)	$	24,081		$	(2,374	)


(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
	(Restated)		(Restated)		(Restated)		(Restated)
Network Signaling Group	$	73,130	$	64,014	$	167,078	$	124,629
Switching Solutions Group		32,461		15,203		60,516		18,740
Communications Software Solutions Group		5,891		5,479		11,915		8,059
IEX Contact Center Group		11,246		10,500		22,082		19,742

Total	$	122,728	$	95,196	$	261,591	$	171,170

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
	(Restated)		(Restated)		(Restated)		(Restated)
North America(1)	$	91,732	$	86,115	$	209,325	$	148,234
Europe Middle East and Africa		15,878		4,272		26,199		6,697
Caribbean and Latin America		8,339		2,765		12,176		9,959
Asia Pacific		6,779		2,044		13,891		6,280

Total	$	122,728	$	95,196	$	261,591	$	171,170


(1)		North America includes revenues in the United States of $79,912 and $81,748 for the three months ended June 30, 2005 and 2004, respectively, and $195,419 and $136,984 for the six months ended June 30, 2005 and 2004, respectively.

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	$	42,187
Other		3,675		2,509

Total	$	51,021	$	44,696

For the three months ended June 30, 2004, sales to the combined company formed by the merger of AT&T Wireless and Cingular accounted for 14% of our revenues, and 25% and 15% 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 and the IEX Contact Center Group. Sales to Alcatel accounted for 23% and 12% of our revenues for the three months ended June 30, 2005 and 2004, respectively, and 15% of our revenues for the six months ended June 30, 2005. Sales to this customer were made from our Switching Solutions Group.

Sales to Verizon accounted for 15% 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.

Note N. Earnings Per Share (Restated)

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	$	785			65,723	$	0.01
Effect of Dilutive Securities — Stock Options and Warrants		—			1,535

Diluted earnings per share	$	785			67,258	$	0.01


For the Three Months Ended June 30, 2004:
Basic earnings (loss) per share	$	(1,440	)		62,458	$	(0.02	)
Effect of Dilutive Securities — Stock Options and Warrants		—			—

Diluted earnings (loss) per share	$	(1,440	)		62,458	$	(0.02	)


For the Six Months Ended June 30, 2005:
Basic earnings per share	$	18,260			65,660	$	0.28
Effect of Dilutive Securities — Stock Options and Warrants		1,162			8,353

Diluted earnings per share	$	19,422			74,013	$	0.26


For the Six Months Ended June 30, 2004:
Basic earnings per share	$	3,874			62,246	$	0.06
Effect of Dilutive Securities — Stock Options and Warrants		—			2,928

Diluted earnings per share	$	3,874			65,174	$	0.06

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 21.7 million for the three months ended June 30, 2005 and 2004, respectively, and 13.8 million and 16.7 million for the six months ended June 30, 2005 and 2004, respectively.

Note O. 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

Restatement of Previously Issued Financial Statements

As discussed in Note B of the “Notes to Condensed Consolidated Financial Statements” contained in Item 1 of this Form 10-Q/A, we have restated our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2005 and 2004. Specifically, we have restated our condensed consolidated financial statements as the result of certain errors that existed in our previously issued financial statements, principally related to our application of SOP 97-2 and to our accounting, presentation and disclosure of certain financial statement items such as (i) customer service costs, (ii) deferred income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” and (iii) certain miscellaneous accrued expenses and prior period purchase accounting entries. All referenced amounts in this report for the three and six months ended June 30, 2005 and 2004 reflect balances and amounts on a restated basis.

Except for the items identified in the Explanatory Note and as required to reflect the Second Quarter Restatement and certain matters relating to the 2006 Restatement, this Form 10-Q/A does not modify or update other disclosures presented in the original filing of the Form 10-Q. Accordingly, this Form 10-Q/A, including the financial statements and the notes thereto included herein, generally does not reflect events occurring after the date of the original filing of the Form 10-Q or modify or update disclosures therein which were affected by subsequent events. For information regarding events subsequent to the original filing of the Form 10-Q, this Form 10-Q/A should be read in conjunction with our 2005 Form 10-K and our other filings with the SEC since the date of the original filing of the Form 10-Q, including the amendments to our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005 and September 30, 2005, which we are filing with the SEC substantially contemporaneously with the filing of this Form 10-Q/A.

The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Form 10-Q/A and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2005. 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.

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 was created, 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; 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.

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 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 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.

Results of Operations

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


	Percentage of Revenues
	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(Restated)			(Restated)			(Restated)			(Restated)
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		38.3			34.2			34.2			33.3


	Percentage of Revenues
	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(Restated)			(Restated)			(Restated)			(Restated)
Amortization of purchased technology		1.6			2.5			1.4			3.2

Gross profit		60.1			63.3			64.4			63.5

Research and development		25.6			25.8			23.6			26.6
Selling, general and administrative		32.8			31.8			29.8			32.4
Acquired in-process research and development		—			8.4			—			4.7
Restructuring and other		2.0			0.1			1.1			0.6
Amortization of intangible assets		0.6			0.4			0.6			0.5

Total operating expenses		61.0			66.5			55.1			64.8

Income (loss) from operations		(0.9	)		(3.2	)		9.3			(1.3	)
Other income (expense), net		0.3			(0.3	)		(0.4	)		0.1

Income (loss) from operations before provision for income taxes		(0.6	)		(3.5	)		8.9			(1.2	)
Provision for income taxes		1.1			6.5			4.7			7.3

Income (loss) before minority interest		(1.7	)		(10.0	)		4.2			(8.5	)
Minority interest		2.3			8.6			2.9			10.9

Net income (loss)		0.6	%		(1.4	)%		7.1	%		2.4	%

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
	(Restated)			(Restated)			(Restated)			(Restated)
Network Signaling Group		60	%		67	%		64	%		73	%
Switching Solutions Group		26			16			23			11
Communications Software Solutions Group		5			6			5			5
IEX Contact Center Group		9			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
	(Restated)			(Restated)			(Restated)			(Restated)
North America		75	%		91	%		80	%		87	%
Europe Middle East and Africa		13			4			10			4
Caribbean and Latin America		7			3			5			6
Asia Pacific		5			2			5			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 $27.5 million, or 29%, 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 (“NSG”) increased by $9.1 million, or 14%, due primarily to an increase of $9.6 million in sales of EAGLE STP initial systems and an increase of $9.2 million in sales of EAGLE STP extensions, partially offset by a $9.2 million decrease in sales of local number portability products. As discussed in Notes A and B to our unaudited condensed consolidated financial statements, NSG recognized revenue prior to the 2006 Restatement based on the timing of shipments of its products, including partial shipments, but post-2006 Restatement, NSG recognizes revenue under the residual method of accounting, which results in the deferral of all of our product revenue until all products within an order are shipped. Accordingly, the timing of revenue recognition in our NSG business unit could vary significantly from quarter to quarter depending on the timing of completion of the shipment of all products in an order.

Revenues from our Switching Solutions Group increased $17.3 million, or 114%, primarily as a result of an increase of $15.3 million in sales of our wireless media gateway products, and an increase of approximately $2.0 million related to products and services obtained from our 2004 acquisitions of Taqua and VocalData.

Revenues from our Communications Software Solutions Group increased by $0.4 million, or 8%, due primarily to the addition of revenues from products and services obtained from our acquisition of Steleus.

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

In addition, 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 could adversely 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, minutes of use, roaming, and the use of advance features, such as text messaging. Internationally, in addition to the factors affecting our domestic sales growth described above, 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 $73.7 million from $60.2 million, but decreased as a percentage of revenues to 60.1% in the second quarter of 2005 compared to 63.3% in the second quarter of 2004. While revenues in all of our product lines increased during the second quarter of 2005, the decline in gross profit as a percentage of revenues is due primarily to revenues from sales of our Switching Solutions Group’s products, which traditionally produce lower gross profit margins, growing at a higher rate than revenues from our Network Signaling Group 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 $6.9 million, or 28%, but decreased slightly as a percentage of revenues to 25.6% for the three months ended June 30, 2005 from 25.8% 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 as a result of our acquisitions of Steleus and VocalData in the second half of 2004, and secondarily to an increase of $1.5 million in consulting costs incurred on certain research and development projects.

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 $10.0 million, or 33.0%, and increased as a percentage of revenues to 32.8% for the three months ended June 30, 2005 from 31.8% for the three months ended June 30, 2004. The increases are primarily due to a $6.9 million increase in compensation and related expenses attributable to additional personnel employed by Tekelec as a result of our acquisitions of Steleus and VocalData in 2004. In addition, the increases are 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 E — Restructuring and Other Costs — to our condensed consolidated financial statements). 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 lower 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 E — Restructuring and Other Costs – to our condensed consolidated financial statements).

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 0.6% 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 C — Acquisitions – to our condensed consolidated financial statements).

Income Taxes. The income tax provisions for the three months ended June 30, 2005 and 2004 were $1.4 million and $6.2 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 since 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 rate of 35% was applied to income from operations for the three months ended June 30, 2005 and 2004, and represent 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 stockholders. See Note D — Minority Interest in Santera – to our condensed consolidated financial statements.

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

Revenues. Our revenues increased by $90.4 million, or 53%, 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 $42.4 million, or 34%, due to increases in sales of EAGLE STP initial systems and EAGLE STP extensions, partially offset by a decrease in sales of local number portability products.

Revenues from our Switching Solutions Group increased $41.8 million, or 223%, primarily as a result of an increase in sales of our wireless media gateway products of $34.6 million and an increase in revenues of $7.2 million related to the sales of products and services acquired in our acquisitions of Taqua and VocalData.

Revenues from our Communications Software Solutions Group increased by $3.9 million, or 48%, due primarily to the addition of revenues from sales of products and services acquired in our acquisition of Steleus.

Revenues from our IEX Contact Center Group increased by $2.3 million, or 12%, as a result of increased sales of TotalView products.

Gross Profit. Gross profit increased to $168.4 million from $108.7 million and increased as a percentage of revenues to 64.4% for the six months ended June 30, 2005 compared to 63.5% for the six months ended June 30, 2004. While revenues in all of our product lines increased during the first six months of 2005, the largest increase was in our Switching Solutions Group’s products, which traditionally produce lower gross profit margins. 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 $16.3 million, or 35.7%, and decreased as a percentage of revenues to 23.6% for the six months ended June 30, 2005 from 26.6% 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 as a result of 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 $22.6 million, or 40.7%, and decreased as a percentage of revenues to 29.8% for the six months ended June 30, 2005 from 32.4% 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 as a result of 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.

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 E — Restructuring and Other Costs – to our condensed consolidated financial statements). 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 E — Restructuring and Other Costs – to our condensed consolidated financial statements).

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 in the acquisitions of Taqua, VocalData and Steleus during 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 C — Acquisitions – to our condensed consolidated financial statements).

Income Taxes. The income tax provisions for the six months ended June 30, 2005 and 2004 were $12.4 million and $12.6 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 since 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 rate of 35% was applied to income from operations for the six months ended June 30, 2005 and 2004, and represent 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 stockholders. See Note D — Minority

Interest in Santera – to our condensed consolidated financial statements.

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 $7.3 million for the six 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 $27.9 million in the six months ended June 30, 2005 due to an increase in transactions that were subject to completion of acceptance or delivery requirements. Inventories increased by $16.7 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 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 12 months, including the expected acquisition of the remaining interest in Santera for $75.6 million discussed in Note O 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. The credit facility was extended to December 2006 in December 2005. 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. However, due to the 2006 Restatement of certain of our previously issued financial statements and the delayed filing of (i) our Annual Report on Form 10-K for the year ended December 31, 2005 and (ii) our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, we breached certain terms and covenants of the credit facility. The lender has granted us a waiver of certain of these breaches providing us, among other things, with an extension of time in which to comply with certain of the terms and covenants of the credit facility.

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. We furnished the audited financial statements of Santera to the noteholder in June 2005 in order to comply with this covenant.

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 “Securities Act”). 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. 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 and $1,406,000 for each of the three and six months ended June 30, 2005 and 2004.

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. However, the Notes do subject us to certain non-financial covenants. Under Section 7.04 of the Indenture governing the Notes, we are obligated to provide the Trustee, Deutsche Bank Trust Company Americas, such information, documents and reports as are required to be filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 15 days after the same are required to be filed with the SEC. From the date of any notice of default relating to a failure to perform this covenant, we have a cure period of 60 days to remedy the default. If the default is not remedied within the 60-day cure period, the Trustee or holders of more than 25% of the outstanding principal amount of the Notes may elect to declare immediately payable all outstanding principal and any accrued interest related to the Notes. Due to our delayed filing of our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) with the SEC, we were not able to provide a copy to the Trustee within the required 15-day period and we received a notice of default on April 1, 2006 from holders of more than 25% of the outstanding principal amount of the Notes. As we filed our 2005 Form 10-K within the 60-day cure period, neither the Trustee nor the holders have the right to accelerate the Notes based on the late filing of our 2005 Form 10-K.

We have also failed to timely deliver our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the “First Quarter 2006 Form 10-Q”) to the Trustee on or before May 25, 2006, which resulted in an additional default under the Indenture. If such default is not cured or waived within 60 days after any notice of such default is delivered to us by the Trustee or by the holders of 25% or more in aggregate principal amount of the Notes, the Trustee or holders of 25% or more in aggregate principal amount of the Notes have the right to accelerate the payment of indebtedness under the Indenture. We currently expect to file our First Quarter 2006 Form 10-Q with the SEC and deliver it to the Trustee on or before July 17, 2006 and, accordingly, believe we will be able to cure this default under the Indenture. Neither the Trustee nor the holders of the Notes have provided us with a notice of default with respect to the First Quarter 2006 Form 10-Q, which would begin a 60-day cure period under the Indenture.

Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS 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 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” (“SFAS 151“). 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 Form 10-Q/A 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 our actual future performance will meet management’s expectations. As discussed in our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) 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 management’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 we operate, the timing of significant orders and shipments, timing of revenue recognition under the residual method, the lengthy sales cycle for our products, 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’s, Taqua’s, Steleus’ and VocalData’s operations with those of the Company, litigation or regulatory matters such as the litigation described in our 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 our revenues, the timely development and introduction of new products and services, product mix, the geographic mix of our 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 timing of revenue recognition of multiple elements in an arrangement sold as part of a bundled solution, the level and timing of research and development expenditures and sales, marketing, and compensation expenses, regulatory changes, the expansion of our marketing and support organizations, both domestically and internationally, and other risks described in this Form 10-Q/A, our 2005 Form 10-K and in certain of our other SEC 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 do not assume any responsibility 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.

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

As discussed in Note B of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q/A, we have restated our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2005 and 2004 (the “Second Quarter Restatement”). This Item 4 has been updated to reflect the Second Quarter Restatement as well as for certain events and developments subsequent to June 30, 2005, including the 2006 Restatement described in the Explanatory Note included in this filing.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), in connection with the original filing of the Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our then President and Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as of the end of the quarter covered by that 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 CEO and CFO originally 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 SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Subsequent to the original evaluation discussed above, the results of which were disclosed in Item 4 in our Form 10-Q, we reevaluated the effectiveness and design of our disclosure controls and procedures as of June 30, 2005, primarily as a result of the 2006 Restatement, including the Second Quarter Restatement, and the identification of certain material weaknesses in our internal control over financial reporting as of December 31, 2004 as discussed further below. Based upon this reevaluation, our current CEO and CFO have concluded that our disclosure controls and procedures, as of June 30, 2005, were not 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 SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

In making this reevaluation of our disclosure controls and procedures, the CEO and CFO considered, among other matters:

	•		the need for the 2006 Restatement, including the filing of this Form 10-Q/A to amend our original filing of the Form 10-Q;

	•		the material weaknesses in our internal control over financial reporting that, as discussed below and as reported in Item 9A of our 2005 Form 10-K, existed as of December 31, 2004 and that, as discussed below, continued to exist at June 30, 2005; and

	•		management’s conclusion, as reported in Item 9A of our 2005 Form 10-K and as discussed below, that our internal control over financial reporting was not effective as of December 31, 2004; and the conclusion of our CEO and CFO, as reported in Item 9A of our 2005 Form 10-K, that our disclosure controls and procedures as of December 31, 2004 were not effective.

In connection with the reevaluation of our disclosure controls and procedures as of June 30, 2005 and as part of our 2006 Restatement of our annual consolidated financial statements for the years ended December 31, 2003 and 2004 and each of the interim periods of the year ended December 31, 2004 and the first three quarters of the year ended December 31, 2005, we have applied significant complementary and compensating procedures and processes as necessary to ensure the reliability of our financial reporting. Notwithstanding the material weaknesses in our internal control over financial reporting that existed as of June 30, 2005, management believes, based on its knowledge, that (i) this Form 10-Q/A does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the periods covered by this report and (ii) the financial statements, and other financial information included in this report, fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the dates and periods presented in this report.

2006 Restatement and Impact on Internal Control over Financial Reporting

In connection with the relocation of our corporate headquarters from Calabasas, California to Morrisville, North Carolina in 2005, we reorganized our finance and accounting organization and replaced substantially all of our corporate finance and accounting personnel. In addition, we appointed William H. Everett as our Chief Financial Officer in April 2005 and Gregory S. Rush as our Corporate Controller and principal accounting officer in May 2005. During the third quarter of 2005, in connection with transitioning the responsibility for the preparation and review of our consolidated financial statements for the period ended September 30, 2005 to the new finance organization, our new financial management initiated a comprehensive review of our accounting policies and procedures, particularly our policies regarding revenue recognition and the presentation of cost of sales. In October 2005, based on the information ascertained at that time, we reached the conclusion that our financial statements were fairly presented based on the application of these accounting policies. In February 2006, we concluded that a restatement was required due to the misclassification of certain customer service costs within operating expenses versus properly including such costs as components of cost of sales in accordance with Article 5 of Regulation S-X. Additionally, in February 2006, based upon an enhanced understanding of our business practices, including the historical application of our accounting policies to such practices, gained by our new finance and accounting personnel, we determined that certain of our accounting policies should be reevaluated.

We completed our reevaluation of certain other accounting policies and procedures in April 2006. As a result of this reevaluation,

we independently determined that certain other errors existed in our previously issued financial statements, principally related to our application of Statement of Position 97-2 “Software Revenue Recognition” and related interpretations thereof (“SOP 97-2”) and to our accounting, presentation and disclosure of certain financial statement items such as (i) deferred income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” and (ii) certain prior period purchase accounting entries.

In connection with our reevaluation and the 2006 Restatement described above, management has concluded, as disclosed in Item 9A of our 2005 Form 10-K, that the 2006 Restatement was a result of material weaknesses in our internal control over financial reporting that existed as of December 31, 2004. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has now concluded that our disclosure controls and procedures were ineffective as of June 30, 2005 as a result the following material weaknesses:

	(1)		The lack of sufficient personnel with appropriate knowledge, experience and training in the application of accounting principles generally accepted in the U.S. (“GAAP”), commensurate with our financial reporting requirements.

	(2)		The lack of effective controls to ensure the proper presentation and disclosure of certain customer service costs and deferred tax assets and liabilities in our consolidated financial statements in accordance with GAAP.

	(3)		The lack of effective controls over the establishment, review and evaluation of the adequacy of our accounting policies and procedures related to revenue recognition, particularly SOP 97-2. Specifically, we did not have adequate controls relating to the appropriate application of GAAP pertaining to the complete and accurate recognition of revenue concerning vendor specific objective evidence of fair value, post-contract customer support and contract penalty clauses, affecting revenues, deferred revenues and related cost of sales.

These material weaknesses resulted in the restatement of our annual consolidated financial statements for the years ended December 31, 2003 and 2004 and each of the interim periods of the year ended December 31, 2004 and the first three quarters of the year ended December 31, 2005. Additionally, these control deficiencies could result in a misstatement of the aforementioned accounts or disclosures that would result in a material misstatement of our unaudited interim consolidated financial statements that would not be prevented or detected.

Changes in Internal Control over Financial Reporting

There were no material changes in our internal control over financial reporting during our quarter ended June 30, 2005, that significantly affected, or were reasonably likely to significantly affect, our internal control over financial reporting. As such, the three material weaknesses in our internal control over financial reporting that existed as of December 31, 2004, as described above and as disclosed in Item 9A of our 2005 Form 10-K, continued to exist as of June 30, 2005.

Inherent Limitations on Effectiveness of Controls

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 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.

As used in this Item 4, the term “material weakness” means a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is a more than a remote likelihood that a misstatement of a company’s annual or interim financial statements, that is more than inconsequential, will not be prevented or detected. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

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 “2004 Annual Report”). The following information supplements the information concerning the Company’s legal proceedings disclosed in the 2004 Annual Report:

Bouygues Telecom, S.A. vs. Tekelec

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

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


Name of Director	Votes Cast for Director		Votes Withheld
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 the Quarterly Report on Form 10-Q was originally filed within four business days after the applicable triggering events, the below disclosure was made under Part II, Item 5 instead of under Item 1.01 (Entry into a Material Definitive Agreement) of a Current Report on 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. 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(2)

10.3		Amendment No. 3 dated May 2, 2005 to Tekelec 2004 Equity Incentive Plan for New Employees(3)


Exhibit No.		Description
10.4		Tekelec 2005 Employee Stock Purchase Plan(4)

10.5		Fourth Amendment to Lease, effective as of May 24, 2005, between Arden Realty Limited Partnership, as Landlord, and the Registrant, as Tenant(5)

10.6		Summary of Compensation for the Registrant’s Named Executive Officers(2)

10.7		Summary of Compensation for the Non-Employee Members of the Registrant’s Board of Directors and its Committees(2)

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(2)

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(2)

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(2)

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.


(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)		Previously filed as an exhibit to the Form 10-Q, which was filed with the SEC on August 8, 2005.

(3)		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.

(4)		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.

(5)		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.


		Page
Part I — Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Unaudited Condensed Consolidated Balance Sheets at June 30, 2005 (Restated) and December 31, 2004 (Restated)		1
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2005 and 2004 (Restated)		2
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2005 and 2004 (Restated)		3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2005 and 2004 (Restated)		4
	Notes to Unaudited Condensed Consolidated Financial Statements (Restated)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		38
Item 4.	Controls and Procedures		38
Part II — Other Information
Item 1.	Legal Proceedings		40
Item 4.	Submission of Matters to a Vote of Security Holders		41
Item 5.	Other Information		42
Item 6.	Exhibits		42
Signatures			44
Exhibits


		TEKELEC

Date: June 26, 2006		/s/ FRANCO PLASTINA
		Franco Plastina
		President and Chief Executive Officer

Date: June 26, 2006		/s/ WILLIAM H. EVERETT

		William H. Everett
		Senior Vice President and Chief Financial Officer

	1.		I have reviewed this report on Form 10-Q/A 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

	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.

(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.