8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

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

Date of Report (Date of earliest event reported): August 4, 2006

TEKELEC

(Exact name of registrant as specified in its charter)

California	0-15135	95-2746131
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
5200 Paramount Parkway, Morrisville, North Carolina		27560
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

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

TABLE OF CONTENTS

Item 1.01 Entry into a Material Definitive Agreement	1
Item 2.02 Results of Operations and Financial Condition	1
Item 9.01 Financial Statements and Exhibits	1
Exhibit 99.1

i

Item 1.01 Entry into a Material Definitive Agreement

     On August 4, 2006, the Board of Directors of Tekelec (the “Company”) amended and restated the Tekelec 2004 Equity Incentive Plan for New Employees (the “2004 Plan”) principally to: (i) increase the number of shares of the Company’s Common Stock authorized for issuance thereunder by 1,000,000 shares, (ii) authorize the grant of stock appreciation rights thereunder, (iii) make certain changes relating to Section 409 of Internal Revenue Code of 1986, as amended, and (iv) reflect all amendments through the date of such statement. As a result of the amendment, a total of 8,000,000 shares of the Company’s Common Stock has been authorized and reserved for issuance under the 2004 Plan since its inception.

     Under the 2004 Plan, as amended and restated, the Company is authorized to grant nonstatutory stock options, restricted stock units, restricted stock awards and stock appreciation rights to new employees of the Company and its subsidiaries, including individuals who become employed with the Company and its subsidiaries as a result of business acquisitions, as an inducement to their entering into such employment. The 2004 Plan, as amended and restated, has not been approved by the shareholders of the Company based on the exception to the shareholder approval requirements of The Nasdaq Stock Market as set forth in Nasdaq Marketplace Rule 4350(i)(1)(A)(iv).

Item 2.02 Results of Operations and Financial Condition

     On August 7, 2006, the Company issued a press release announcing its financial results for the second quarter ended June 30, 2006. A copy of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K.

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

Item 9.01. Financial Statements and Exhibits

(d) Exhibits

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

Exhibit No.	Description
99.1	Press Release dated August 7, 2006 of the Company

1

SIGNATURES

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

	Tekelec
Dated: August 7, 2006	By:	/s/ Ronald W. Buckly
		Ronald W. Buckly
		Senior Vice President, Corporate Affairs and General Counsel

2

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release dated August 7, 2006 of the Company

3

EX-99.1

EXHIBIT 99.1

R E L E A S E

Tekelec Announces Q2 2006 Results

Morrisville, N.C. August 7 2006 — Tekelec (NASDAQ: TKLC), a leading developer of high-performance network applications for next-generation fixed, mobile and packet networks, today announced its results for the quarter and six months ended June 30, 2006. Results of the Company’s IEX contact center business unit are presented as income from discontinued operations. Results from continuing operations, which exclude IEX, are also referred to as results from the Company’s Telecom business.

Results from Continuing Operations
Revenue from continuing operations for the second quarter of 2006 was $149.9 million, up 34% compared to $111.5 million for the second quarter of 2005. For the second quarter of 2006, the Company had orders for the Telecom business of $100.4 million, down 31% compared to $145.1 million for the second quarter of 2005. Telecom backlog as of June 30, 2006 was $514.9 million compared to $564.4 million as of March 31, 2006.

On a GAAP basis, the Company reported income from continuing operations for the second quarter of 2006 of $4.9 million, or $0.07 per diluted share, compared to a loss from continuing operations of $1.5 million, or $0.02 loss per diluted share, for the second quarter of 2005. On a non-GAAP basis, income from continuing operations for the second quarter of 2006 was $13.8 million, or $0.19 per diluted share, compared to income from continuing operations of $2.1 million, or $0.03 per diluted share, for the second quarter of 2005. Please refer to the attached financial statement schedules for a reconciliation of the Company’s GAAP operating results to its non-GAAP operating results.

Revenue from continuing operations for the first six months of 2006 was $244.0 million, up 2% compared to $239.5 million for the first six months of 2005. For the first six months of 2006, the Company had orders from continuing operations of $226.0 million, down 12% compared to $255.7 million for the first six months of 2005.

On a GAAP basis, the Company reported a loss from continuing operations for the first six months of 2006 of $14.5 million, or $0.22 loss per diluted share, compared to income of $14.2 million, or $0.21 per diluted share, for the first six months of 2005. On a non-GAAP basis, income from continuing operations for the first six months of 2006 was $0.7 million, or $0.01 per diluted share, compared to income from continuing operations of $20.9 million, or $0.30 per diluted share, for the first six months of 2005. Please refer to the attached financial statement schedules for a reconciliation of the Company’s GAAP operating results to its non-GAAP operating results.

Results from Discontinued Operations

The sale of the IEX contact center business to NICE Systems, Inc. closed on July 6, 2006 and the operations of IEX have been presented as a discontinued operation. On a GAAP basis, income from discontinued operations in the second quarter of 2006 was $9.6 million, or $0.14 per diluted share, compared to income from discontinued operations of $2.3 million, or $0.03 per diluted share, in the second quarter of 2005. On a GAAP basis, income from discontinued operations for the first six months of 2006 was $12.6 million, or $0.19 per diluted share, compared to income from discontinued operations of $4.1 million, or $0.05 per diluted share, for the first six months of 2005. Included in the income from discontinued operations for the three and six months ended June 30, 2006 was licensing income resulting from the settlement of the Blue Pumpkin litigation of $8.25 million, which contributed approximately $5.3 million after tax, or $0.07 per diluted share. Tekelec will receive six additional annual payments of $500,000 as part of the settlement agreement, which will be recorded as income in future periods. The Company will also record a gain on the sale of discontinued operations in the third quarter of 2006 to reflect the difference between net proceeds received and the book value of IEX shares.

At June 30, 2006, Tekelec’s consolidated cash, cash equivalents and short-term investments totaled $237.2 million, down from $245.3 million at March 31, 2006. Deferred revenues from continuing operations were $257.1 million at June 30, 2006, down from $282.6 million at March 31, 2006.

Frank Plastina, president and chief executive officer of Tekelec, stated “The Company’s strong backlog at June 30, 2006 and our operating performance for the second quarter of 2006 highlight the strength of the Company’s business. While we continue to expect volatility in our revenue and operating results as a result of applying the residual method of revenue recognition, we currently expect that revenues and operating profits from the Telecom business will grow during the second half of 2006 compared to both the first half of 2006 and the second half of 2005. Orders for the first half of 2006 were lower than anticipated, but we expect an increase in orders for the second half of the year “

Consolidated Results

Net income on a consolidated basis for the three months ended June 30, 2006 was $14.6 million, or $0.20 per diluted share, compared to net income on a consolidated basis for the three months ended June 30, 2005 of $0.8 million, or $0.01 per diluted share. Net loss on a consolidated basis for the six months ended June 30, 2006 was $2.0 million, or $0.03 loss per diluted share, compared to net income on a consolidated basis for the six months ended June 30, 2005 of $18.3 million, or $0.26 per diluted share.

SEC Discussion

During the recently completed restatement process, the staff of the Atlanta, Georgia District Office of the Securities and Exchange Commission (the “Commission”) contacted the Company to request that the Company meet voluntarily with the staff to discuss matters related to the Company’s restatement of its financial statements. The Company recently met informally with the staff to discuss the restatement process and its restated financial statements which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”). The Company intends to continue to fully cooperate with the staff and to furnish additional information if requested to do so.

Conference Call

Tekelec has scheduled a conference call for Monday, August 7, 2006, for management to discuss second quarter 2006 results. The Company also plans to provide on its web site non-GAAP numbers for the second quarter and first six months of 2006 and to discuss during this call certain forward looking information concerning the Company’s prospects for the second half of 2006.

“Live” Webcast and Replay

Tekelec will host a live webcast of its conference call on Monday, August 7, 2006, at 4:45 p.m. EDT. To access the webcast, visit Tekelec’s web site located at www.tekelec.com, enter the Investor Relations section and click on the webcast icon. A webcast replay will be available at approximately 7:45 p.m. on August 7^th and for 90 days thereafter.

Telephone Replay

A telephone replay of the call will also be available for one week after the live webcast by calling either (800) 642-1687 or (706) 645-9291, and entering the conference ID # 3507760.

Non-GAAP Information

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

FORWARD-LOOKING STATEMENTS

Certain statements made in this press release are forward looking, reflect the Company’s current intent, belief or expectations and involve certain risks and uncertainties. The Company’s actual future performance may not meet the Company’s expectations. As discussed in the Company’s Form 10-Q for the 2006 first quarter, its 2005 Form 10-K and its other filings with the Commission, the Company’s future operating results are difficult to predict and subject to significant fluctuations. Factors that may cause future results to differ materially from the Company’s current expectations, in addition to those identified in the Company’s filings with the Commission, include, among others, the impact on future operating results of changes in revenue recognition described in the 2005 Form 10-K, the Form 10-Q for the 2006 first quarter, and in prior reports filed with the Commission and the risk that the Company’s financial results for the full year 2006 and for the second half of 2006 will not meet the Company’s expectations. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

About Tekelec

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

###

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

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Thousands, except per share data)
Revenues	$	149,868		$	111,482		$	243,972		$	239,509
Cost of sales:
Cost of goods sold		57,881			44,426			110,320			84,226
Amortization of purchased technology		1,276			1,487			2,552			2,972
Total cost of sales		59,157			45,913			112,872			87,198
Gross profit		90,711			65,569			131,100			152,311
Operating expenses:
Research and development		37,608			29,925			72,312			58,763
Sales and marketing		23,693			21,690			45,777			42,487
General and administrative		18,143			15,661			33,869			29,298
Restructuring and other (1)		3,255			2,503			3,419			2,760
Amortization of intangible assets		578			702			1,156			1,581
Total operating expenses		83,277			70,481			156,533			134,889
Income (loss) from operations		7,434			(4,912	)		(25,433	)		17,422
Other income (expense):
Interest income		1,878			1,712			3,527			2,971
Interest expense		(859	)		(910	)		(1,781	)		(1,905	)
Loss on sale of investments		—			—			1,794			(1,344	)
Other, net		217			(282	)		(352	)		(682	)
Total other income (expense), net		1,236			520			3,188			(960	)
Income from continuing operations before provision for income taxes		8,670			(4,392	)		(22,245	)		16,462
Provision for income taxes		3,742			(5	)		(7,711	)		9,929
Income (loss) before minority interest		4,928			(4,387	)		(14,534	)		6,533
Minority interest (2)		—			2,864			—			7,646
Income (loss) from continuing operations		4,928			(1,523	)		(14,534	)		14,179
Income from discontinued operations, net of taxes.		9,622			2,308			12,575			4,081
Net income (loss)	$	14,550		$	785		$	(1,959	)	$	18,260
Earnings (loss) per share from continuing operations:
Basic	$	0.07		$	(0.02	)	$	(0.22	)	$	0.22
Diluted		0.07			(0.02	)		(0.22	)		0.21
Earnings per share from discontinued operations:
Basic	$	0.14		$	0.03		$	0.19		$	0.06
Diluted		0.14			0.03			0.19			0.05
Earnings (loss) per share:
Basic	$	0.22		$	0.01		$	(0.03	)	$	0.28
Diluted		0.20			0.01			(0.03	)		0.26
Weighted average number of shares outstanding-continuing operations:
Basic		66,933			65,723			66,883			65,660
Diluted (3)		68,202			65,723			66,883			74,013
Weighted average number of shares outstanding:
Basic		66,933			65,723			66,883			65,660
Diluted (3)		74,563			67,258			66,883			74,013

Notes to Unaudited Condensed Consolidated Statements of Operations (in thousands):

(1)

This amount represents restructuring and other costs related principally to reductions in staff associated with the (i) restructuring of our operations in 2006 (the “2006 Restructuring”), (ii) our corporate headquarters and Taqua relocations in 2005, and (iii) the relocation of our manufacturing operations in 2004. The 2006 Restructuring involved the termination of approximately 60 employees across all of our business units, customer service organization and operations group. The majority of the terminated employees worked directly for or in support of the Switching Solutions Group based in Plano, Texas. The estimated annual operating cost savings resulting from the 2006 Restructuring is expected to be between $8.0 and $8.5 million.

(2)

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

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

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

(3) For the three months ended June 30, 2006, the calculation of consolidated diluted earnings per share (including discontinued operations) includes the add-back to net income of $581 for assumed after-tax interest cost related to the convertible debt using the “if-converted” method of accounting for diluted earnings per share. For the six months ended June 30, 2005 the calculation of diluted earnings per share includes the add-back to net income of $1,162 for assumed after-tax interest cost related to the convertible debt using the “if-converted” method of accounting for diluted earnings per share. The weighted average number of shares outstanding for the three months ended June 30, 2006 and for the six months ended June 30, 2005 includes 6,361 shares related to the convertible debt using the “if-converted” method. For all other periods presented, these adjustments were excluded from the calculation of diluted earnings per share as these adjustments were anti-dilutive.

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

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006		2005			2006			2005
	(Thousands, except per share data)
Revenues	$	149,868	$	111,482		$	243,972		$	239,509
Cost of sales:
Cost of goods sold		56,568		43,862			107,503			83,056
Gross profit		93,300		67,620			136,469			156,453
Operating expenses:
Research and development		34,294		29,942			65,124			58,617
Sales and marketing		22,051		21,690			42,215			42,487
General and administrative		16,206		15,001			29,450			27,866
Total operating expenses		72,551		66,633			136,789			128,970
Income (loss) from operations		20,749		987			(320	)		27,483
Interest and other income (expense), net		1,236		520			1,395			384
Income from continuing operations before provision for income taxes		21,985		1,507			1,075			27,867
Provision for income taxes (2)		8,138		1,796			388			13,025
Income (loss) before minority interest		13,847		(289	)		687			14,842
Minority interest		—		2,397			—			6,070
Net income(loss)	$	13,847	$	2,108		$	687		$	20,912
Earnings (loss) per share from continuing operations:
Basic	$	0.21	$	0.03		$	0.01		$	0.32
Diluted		0.19		0.03			0.01			0.30
Weighted average number of shares outstanding-continuing operations:
Basic		66,933		65,723			66,883			65,660
Diluted		74,563		67,258			68,219			74,013

Notes to Unaudited Non-GAAP Statements of Operations (in thousands):

(1)	Please refer to the attached reconciliation of the GAAP Statements of Operations to the above Non-GAAP Statements of Operations.
(2)	The above Non-GAAP Statements of Operations assume effective income tax rates of 37% and 36% for the three and six months ended June 30, 2006, respectively, and an effective income tax rate of 35% for the three and six months ended June 30, 2005. For the three and six months ended June 30, 2005, there were no income tax benefits associated with the losses generated by Santera.
(3)	For the three months ended June 30, 2006, the calculation of diluted earnings per share includes the add-back to net income of $581 for assumed after-tax interest cost related to the convertible debt using the “if-converted” method of accounting for diluted earnings per share. For the six months ended June 30, 2005, the calculation of diluted earnings per share includes the add-back to net income of $1,162 for assumed after-tax interest cost related to the convertible debt using the “if-converted” method of accounting for diluted earnings per share. The weighted average number of shares outstanding for both the three months ended June 30, 2006 and six months ended June 30, 2005 includes 6,361 shares related to the convertible debt using the “if-converted” method. For all other periods presented, these adjustments were excluded from the calculation of diluted earnings per share as these adjustments were anti-dilutive.

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2006			2005
	(Thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	29,596		$	52,069
Short-term investments, at fair value		207,592			174,260
Total cash, cash equivalents and short-term investments		237,188			226,329
Accounts receivable, net		128,590			115,789
Inventories		65,832			47,512
Income tax receivable		13,254			—
Deferred income taxes		32,889			27,456
Deferred costs and prepaid commissions		84,077			78,190
Prepaid expenses and other current assets		15,354			15,298
Assets of discontinued operations		18,808			18,647
Total current assets		595,992			529,221
Property and equipment, net		45,249			40,474
Investments in privately held companies		7,322			7,322
Deferred income taxes, net		63,004			68,585
Other assets		3,981			6,047
Goodwill		115,828			116,324
Intangible assets, net		52,966			57,214
Total assets	$	884,342		$	825,187
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	32,213		$	32,347
Accrued expenses		44,209			47,960
Accrued payroll and related expenses		28,431			28,156
Short-term notes and current portion of notes payable		11			96
Current portion of deferred revenues		249,688			208,278
Liabilities of discontinued operations		22,752			23,279
Total current liabilities		377,304			340,116
Long-term convertible debt		125,000			125,000
Deferred income taxes		1,582			1,694
Long-term portion of deferred revenues		7,390			5,217
Total liabilities		511,276			472,027
Commitments and Contingencies
Shareholders’ equity:
Common stock, without par value, 200,000,000 shares authorized; 67,169,166 and 66,838,310 shares issued and outstanding, respectively		290,048			274,413
Deferred stock-based compensation		—			(5,680	)
Retained earnings		83,707			85,666
Accumulated other comprehensive income (loss)		(689	)		(1,239	)
Total shareholders’ equity		373,066			353,160
Total liabilities and shareholders’ equity	$	884,342		$	825,187

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

	Six Months Ended
	June 30,
	2006			2005
	(Thousands)
Cash flows from operating activities:
Net income (loss)	$	(1,959	)	$	18,260
Income from discontinued operations		(12,575	)		(4,081	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss (gain) on investments		(1,794	)		1,344
Minority interest		—			(7,646	)
Provision for (recoveries of) doubtful accounts and returns		—			358
Depreciation		11,330			8,658
Amortization of intangibles		4,248			5,347
Amortization, other		2,186			4,110
Deferred income taxes		(11	)		688
Stock-based compensation		16,896			1,666
Tax benefit related to stock options		—			458
Excess tax benefits from stock-based compensation		(341	)		—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(12,586	)		5,879
Inventories		(18,135	)		(17,085	)
Income tax receivable		(12,913	)		—
Prepaid expenses and other current assets		(6,605	)		(6,817	)
Trade accounts payable		(237	)		3,063
Accrued expenses		(4,142	)		(1,606	)
Accrued payroll and related expenses		247			1,852
Deferred revenues		43,346			23,607
Total adjustments		21,489			23,876
Net cash provided by operating activities – continuing operations		6,955			38,055
Net cash provided by operating activities – discontinued operations		12,966			10,136
Net cash provided by operating activities		19,921			48,191
Cash flows from investing activities:
Proceeds from sales and maturities of investments		383,480			104,821
Purchases of investments		(415,817	)		(149,009	)
Purchases of property and equipment		(16,093	)		(16,204	)
Purchase of technology		—			(4,000	)
Change in other assets		1,690			(80	)
Net cash used in investing activities – continuing operations		(46,740	)		(64,472	)
Net cash used in investing activities – discontinued operations		(98	)		(104	)
Net cash used in investing activities		(46,838	)		(64,576	)
Cash flows from financing activities:
Payments on notes payable and capital leases		(85	)		(1,173	)
Proceeds from issuance of common stock		3,904			3,309
Excess tax benefits from stock-based compensation		341			—
Net cash provided by financing activities		4,160			2,136
Effect of exchange rate changes on cash		284			(127	)
Net change in cash and cash equivalents		(22,473	)		(14,376	)
Cash and cash equivalents at beginning of period		52,069			48,925
Cash and cash equivalents at end of period		29,596			34,549
Cash and cash equivalents of discontinued operations at end of period		—			396
Cash and cash equivalents at end of period	$	29,596		$	34,153

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME

	Three Months Ended June 30, 2006
	(thousands, except per share data)
											Non-
	Tekelec		IEX			GAAP					GAAP
	(w/		(Discontinued			Continuing					Continuing
	IEX)		Operations)			Operations		Adjustments			Operations
Revenues	$	172,619	$	(22,751	)	$	149,868	$	—		$	149,868
Costs and expenses:
Cost of sales:
Cost of goods sold		61,181		(3,300	)		57,881		(1,043	)(1)		56,568
									(270	)(2)
Amortization of purchased technology		1,276					1,276		(1,276	)(2)		—
Total cost of sales		62,457		(3,300	)		59,157		(2,589	)		56,568
Gross profit		110,162		(19,451	)		90,711		2,589			93,300
Research and Development		39,169		(1,561	)		37,608		(3,314	)(1)		34,294
Sales and Marketing		26,156		(2,463	)		23,693		(1,642	)(1)		22,051
General and administrative		18,621		(478	)		18,143		(1,614	)(1)		16,206
									(113	)(3)
									(210	)(4)
Restructuring and other		3,255					3,255		(3,255	)(5)		—
Amortization of intangible assets		578					578		(578	)(2)		—
Total operating expenses		87,779		(4,502	)		83,277		(10,726	)		72,551
Income (loss) from operations		22,383		(14,949	)		7,434		13,315			20,749
Interest and other income (expense), net		1,226		10			1,236		—			1,236
Income (loss) from continuing operations before provision for income taxes		23,609		(14,939	)		8,670		13,315			21,985
Provision for income taxes		9,059		(5,317	)		3,742		4,396	(6)		8,138
Net income (loss) from continuing operations	$	14,550	$	(9,622	)	$	4,928	$	8,919		$	13,847
Earnings (loss) per share:
Basic	$	0.22				$	0.07				$	0.21
Diluted (7)		0.20					0.07					0.19
Earnings per share weighted average number of shares outstanding:
Basic		66,933					66,933					66,933
Diluted (7)		74,563					68,202					74,563

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

(1)	The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock, restricted stock units and stock purchase rights granted under our employee stock purchase plans.
(2)	The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, iptelorg and Santera.
(3)	The adjustment represents $113,000 in legal expenses incurred to settle the IEX vs. Blue Pumpkin litigation.
(4)	The adjustment represents $210,000 in costs associated with the 2006 restatement of our consolidated financial statements.
(5)	The adjustment represents restructuring and other costs related to our 2006 restructuring and changes in estimates relating to the restructuring of our manufacturing, corporate headquarters and Taqua relocations in 2005 and 2004.
(6)	The adjustment represents the income tax effect of footnotes (1), (2), (3), (4) and (5) in order to reflect our non-GAAP effective tax rate of 37%
(7)	For the three months ended June 30, 2006, the calculations of diluted earnings per share include a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method.

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME

	Three Months Ended June 30, 2005
	(thousands, except per share data)
													Non-
	Tekelec			IEX			GAAP						GAAP
	(w/			(Discontinued			Continuing						Continuing
	IEX)			Operations)			Operations			Adjustments			Operations
Revenues	$	122,728		$	(11,246	)	$	111,482		$	—		$	111,482
Costs and expenses:
Cost of sales:
Cost of goods sold		47,521			(3,095	)		44,426			(65	)(1)		43,862
											(499	)(2)
Amortization of purchased technology		1,487						1,487			(1,487	)(2)		—
Total cost of sales		49,008			(3,095	)		45,913			(2,051	)		43,862
Gross profit		73,720			(8,151	)		65,569			2,051			67,620
Research and Development		31,429			(1,504	)		29,925			17	(1)		29,942
Sales and Marketing		23,894			(2,204	)		21,690			—			21,690
General and administrative		16,314			(653	)		15,661			(660	)(1)		15,001
Restructuring and other		2,503						2,503			(2,503	)(3)		—
Amortization of intangible assets		702						702			(702	)(2)		—
Total operating expenses		74,842			(4,361	)		70,481			(3,848	)		66,633
Income (loss) from operations		(1,122	)		(3,790	)		(4,912	)		5,899			987
Interest and other income (expense), net		411			109			520			—			520
Income (loss) from continuing operations before provision for income taxes		(711	)		(3,681	)		(4,392	)		5,899			1,507
Provision for income taxes		1,368			(1,373	)		(5	)		1,801	(4)		1,796
Income (loss) before minority interest		(2,079	)		(2,308	)		(4,387	)		4,098			(289	)
Minority Interest		2,864			—			2,864			(467	) (5)		2,397
Net income (loss) from continuing operations	$	785		$	(2,308	)	$	(1,523	)	$	3,631		$	2,108
Earnings (loss) per share:
Basic	$	0.01					$	(0.02	)				$	0.03
Diluted (6)		0.01						(0.02	)					0.03
Earnings per share weighted average number of shares outstanding:
Basic		65,723						65,723						65,723
Diluted (6)		67,258						65,723						67,258

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

(1)	The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock, restricted stock units and stock purchase rights granted under our employee stock purchase plans.
(2)	The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, and Santera.
(3)	The adjustment represents restructuring and other costs related to our manufacturing, corporate headquarters and Taqua relocations.
(4)	The adjustment represents the income tax effect of footnotes (1), (2), and (3) in order to reflect our non-GAAP effective tax rate at 35% for the Tekelec business, excluding Santera.
(5)	The adjustment represents the minority interest impact of footnote (2).
(6)	For the three months ended June 30, 2005, the calculations of diluted earnings per share exclude a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method as the effects of including such amounts are anti-dilutive.

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME

	Six Months Ended June 30, 2006
	(thousands, except per share data)
													Non-
	Tekelec			IEX			GAAP						GAAP
	(w/			(Discontinued			Continuing						Continuing
	IEX)			Operations)			Operations			Adjustments			Operations
Revenues	$	280,085		$	(36,113	)	$	243,972		$	—		$	243,972
Costs and expenses:
Cost of sales:
Cost of goods sold		117,187			(6,867	)		110,320			(2,277	)(1)		107,503
											(540	)(2)
Amortization of purchased technology		2,552			—			2,552			(2,552	)(2)		—
Total cost of sales		119,739			(6,867	)		112,872			(5,369	)		107,503
Gross profit		160,346			(29,246	)		131,100			5,369			136,469
Research and Development		75,719			(3,407	)		72,312			(7,188	)(1)		65,124
Sales and Marketing		50,809			(5,032	)		45,777			(3,562	)(1)		42,215
General and administrative		35,014			(1,145	)		33,869			(3,867	)(1)		29,450
											(342	)(3)
											(210	)(4)
Restructuring and other		3,419			—			3,419			(3,419	)(5)		—
Amortization of intangible assets		1,156			—			1,156			(1,156	)(2)		—
Total operating expenses		166,117			(9,584	)		156,533			(19,744	)		136,789
Income (loss) from operations		(5,771	)		(19,662	)		(25,433	)		25,113			(320	)
Interest and other income (expense), net		3,175			13			3,188			(1,793	)(6)		1,395
Income (loss) from continuing operations before provision for income taxes		(2,596	)		(19,649	)		(22,245	)		23,320			1,075
Provision for income taxes		(637	)		(7,074	)		(7,711	)		8,099	(7)		388
Net income (loss) from continuing operations	$	(1,959	)	$	(12,575	)	$	(14,534	)	$	15,221		$	687
Earnings (loss) per share:
Basic	$	(0.03	)				$	(0.22	)				$	0.01
Diluted (8)		(0.03	)					(0.22	)					0.01
Earnings per share weighted average number of shares outstanding:
Basic		66,883						66,883						66,883
Diluted (8)		66,883						66,883						68,219

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

(1)	The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock, restricted stock units and stock purchase rights granted under our employee stock purchase plans.
(2)	The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, iptelorg and Santera.
(3)	The adjustment represents $342,000 in legal expenses incurred to settle the IEX vs. Blue Pumpkin litigation.
(4)	The adjustment represents $210,000 in costs associated with the 2006 restatement of our consolidated financial statements.
(5)	The adjustment represents restructuring and other costs related to our 2006 restructuring and changes in estimates relating to the restructuring of our manufacturing, corporate headquarters and Taqua relocations in 2005 and 2004.
(6)	The adjustment represents the gain recognized related to our receipt of 642,610 shares of Lucent that were released from escrow.
(7)	The adjustment represents the income tax effect of footnotes (1), (2), (3), (4), (5) and (6) in order to reflect our non-GAAP effective tax rate of 36%.
(8)	For the six months ended June 30, 2006, the calculations of diluted earnings per share exclude a potential add-back to net income of $1,162,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method as the effects of including such amounts are anti-dilutive.

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME

	Six Months Ended June 30, 2005
	(thousands, except per share data)
													Non-
	Tekelec			IEX			GAAP						GAAP
	(w/			(Discontinued			Continuing						Continuing
	IEX)			Operations)			Operations			Adjustments			Operations
Revenues	$	261,591		$	(22,082	)	$	239,509		$	—		$	239,509
Costs and expenses:
Cost of sales:
Cost of goods sold		90,258			(6,032	)		84,226			(68	)(1)		83,056
											(1,102	)(2)
Amortization of purchased technology		2,972			—			2,972			(2,972	)(2)		—
Total cost of sales		93,230			(6,032	)		87,198			(4,142	)		83,056
Gross profit		168,361			(16,050	)		152,311			4,142			156,453
Research and Development		61,858			(3,095	)		58,763			(146	)(1)		58,617
Sales and Marketing		47,252			(4,765	)		42,487			—			42,487
General and administrative		30,829			(1,531	)		29,298			(1,432	)(1)		27,866
Restructuring and other		2,760			—			2,760			(2,760	)(3)		—
Amortization of intangible assets		1,581			—			1,581			(1,581	)(2)		—
Total operating expenses		144,280			(9,391	)		134,889			(5,919	)		128,970
Income (loss) from operations		24,081			(6,659	)		17,422			10,061			27,483
Interest and other income (expense), net		(1,111	)		151			(960	)		1,344	(4)		384
Income (loss) from continuing operations before provision for income taxes		22,970			(6,508	)		16,462			11,405			27,867
Provision for income taxes		12,356			(2,427	)		9,929			3,096	(5)		13,025
Income (loss) before minority interest		10,614			(4,081	)		6,533			8,309			14,842
Minority Interest		7,646			—			7,646			(1,576	)(6)		6,070
Net income (loss) from continuing operations	$	18,260		$	(4,081	)	$	14,179		$	6,733		$	20,912
Earnings (loss) per share:
Basic	$	0.28					$	0.22					$	0.32
Diluted (7)		0.26						0.21						0.30
Earnings per share weighted average number of shares outstanding:
Basic		65,660						65,660						65,660
Diluted (7)		74,013						74,013						74,013

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

(1)	The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock, restricted stock units and stock purchase rights granted under our employee stock purchase plans.
(2)	The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, and Santera.
(3)	The adjustment represents restructuring and other costs related to our manufacturing, corporate headquarters and Taqua relocations.
(4)	The adjustment represents a realized loss on the sale of Santera’s holdings of Alcatel shares received in conjunction with warrants exercised in December 2004.
(5)	The adjustment represents the income tax effect of footnotes (1), (2), (3), and (4) in order to reflect our non-GAAP effective tax rate at 35% for the Tekelec business, excluding Santera.
(6)	The adjustment represents the minority interest impact of footnotes (2) and (4).
(7)	For the six months ended June 30, 2005, calculations of earnings per diluted share on both a GAAP and non-GAAP basis include the add-back to net income of $1,162,000 for assumed after-tax interest cost related to the convertible debt using the “if- converted” method of accounting for earnings per diluted share. The weighted average number of shares outstanding for the six months ended June 30, 2005 includes 6,361,000 shares related to the convertible debt using the “if-converted” method.