UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001       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 Number)

               26580 West Agoura Road, Calabasas, California 91302
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (818) 880-5656
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, without par value

     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 [X] No [_]

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant,  based upon the last reported sale price of the Common Stock on
March  1,  2002 as  reported  on The  Nasdaq  Stock  Market,  was  approximately
$564,582,428.

     The number of shares outstanding of the registrant's  Common Stock on March
1, 2002 was 60,154,372.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's  definitive Proxy Statement to be delivered to
shareholders  in connection with their Annual Meeting of Shareholders to be held
on May 10,  2002 are  incorporated  by  reference  into Part III of this  Annual
Report.

<PAGE>


                                     TEKELEC

                       INDEX TO ANNUAL REPORT ON FORM 10-K

                   For the fiscal year ended December 31, 2001

                                                                            Page
                                                                            ----
                                     PART I

Item 1.   Business...........................................................  3
Item 2.   Properties......................................................... 32
Item 3.   Legal Proceedings.................................................. 32
Item 4.   Submission of Matters to a Vote of Security Holders................ 33

                                     PART II

Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters................................................ 34
Item 6.   Selected Consolidated Financial Data............................... 35
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations.......................................... 35
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk......... 48
Item 8.   Financial Statements and Supplementary Data........................ 48
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure........................................... 48

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant................. 48
Item 11.  Executive Compensation............................................. 49
Item 12.  Security Ownership of Certain Beneficial Owners and Management..... 49
Item 13.  Certain Relationships and Related Transactions..................... 49

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 50


                                       2
<PAGE>

                                     PART I

Item 1. BUSINESS

Overview

     Tekelec (the "Company") designs, manufactures, markets and supports network
systems  products,  diagnostics  systems and selected  service  applications for
telecommunications networks and contact centers. The Company's customers include
telecommunications carriers, network service providers,  equipment manufacturers
and contact center operators.

     The Company's  network  systems  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 call waiting,  caller ID, voice messaging,  toll free
calls (e.g.,  "800" calls),  prepaid  calling  cards,  text  messaging and local
number  portability.  Some of the Company's  network systems products also allow
the  monitoring  and  surveillance  of network  elements while the network is in
operation and deliver revenue assurance features such as fraud protection.

     The  Company  believes  that  voice  and data  networks  will  increasingly
interoperate,  or converge. Network convergence should provide opportunities for
the  Company  to  expand  sales of its  network  systems  products  and  service
applications, several of which are designed specifically for converged networks.

     The  Company's   diagnostics   products   simulate  a  controlled   network
environment,  which allows telecommunications equipment manufacturers,  and to a
lesser  extent,  carriers,  to test products to ensure that products  conform to
specifications and to evaluate network  performance  without risking the failure
or outage of an in-service network.

     The Company's  contact center  products  provide  workforce  management and
intelligent  call routing systems for single and multiple site contact  centers.
The  Company  sells its  contact  center  products  primarily  to  customers  in
industries  with  significant   contact  center  operations  such  as  financial
services, telecommunications and retail.

Industry Background

     Usage of  communications  networks  has expanded  rapidly in recent  years.
Driving  this trend has been the growth in demand  for data  communications  and
wireless  connectivity,  deregulation  and  the  emergence  of new  competitors,
services and technologies.

     Growth in data traffic has been most visibly  driven by the increase in the
number  of  businesses  and  consumers  that  use  the  Internet.  According  to
International  Data Corp.,  an independent  market  research firm, the number of
people  accessing  the  Internet  was  approximately  142 million in 1998 and is
expected to grow to 502 million by 2003. The number of wireless  subscribers has
also grown  rapidly in recent  years,  doubling  from 1998 levels to 650 million
subscribers worldwide in 2000, according to Dataquest.


                                       3
<PAGE>

     The increase in data  traffic,  combined  with the inherent  efficiency  of
packet  switched  networks,  have led many carriers to build new packet networks
and to seek ways to enable  existing  circuit  switched  networks  to  interface
reliably and efficiently with these new packet switched networks.

     Deregulation  has  played a key role in the  emergence  of new  competitive
service providers in recent years. In addition,  technological developments such
as DSL,  cable modems and  broadband  wireless have enabled  alternative  access
technologies and fostered new types of service providers.

     As  competition  has grown in recent years,  per-minute  revenue from basic
telephony service has declined significantly.  As a result, intelligent services
have  become  core  competitive  features  of a network,  providing  incremental
revenues to service  providers and offering more service choices to subscribers.
As these  services  have  become  less  expensive  and more  widely  accessible,
customer demand for them has grown.

     Deregulation  has also spurred the offering of  intelligent  services.  The
Telecommunications  Act of 1996  mandates  that  subscribers  of U.S.  telephone
service be given the option of  changing  their  local  service  provider  while
retaining  their local phone number.  Several  European and Asian countries have
also recently  adopted or are considering  adopting  similar number  portability
requirements  to allow  subscribers  to retain  their  telephone  numbers  while
changing  service  providers.  Current FCC  regulations  require  that  wireless
customers in the U.S. be offered this same option in November 2002.

Recent Changes in Telecommunications Operating Environment

     Throughout  the  late  1990's,  capital  investment  in  telecommunications
equipment grew rapidly before experiencing  moderating growth in the second half
of 2000.  In 2001,  telecom  capital  investment  declined for the first time in
several years as  telecommunications  industry  fundamentals  deteriorated.  The
industry's  growth  prior to the second half of 2000 was driven  principally  by
significant  capital  investment  by new  types of  service  providers,  such as
competitive local exchange carriers (CLECs) formed after industry  deregulation,
and by substantial growth in capital spending from wireless operators to support
the expansion of mobile networks. In addition, capital investment from incumbent
carriers,  such as Regional  Bell  Operating  Companies  (RBOCs),  increased  in
response  to the new threat of  competition  from CLECs and other new  entrants.
Adding to the favorable  environment  for telecom  capital  investment  prior to
mid-2000, capital markets were extremely active and institutional investors were
willing to fund many new and established  telecommunications  service  providers
alike.   The   healthy   capital   markets   and   favorable    valuations   for
telecommunications  service  providers  led  carriers to  re-invest  higher than
normal percentages of their revenue into capital equipment purchases because new
capital was perceived to be readily available.

     Beginning in 2000 and increasingly in 2001,  capital  available from equity
markets declined  significantly and the emerging  competitive  carriers began to
experience  difficulty  attracting  new  funding.  In many cases,  the  emerging
carriers had  accumulated  considerable  debt loads that required new capital to
service their interest payments. In addition, economic weakness, particularly in
the  US,  also  impacted  the  market  for   telecommunications   services,  and
particularly impacted the competitive carriers, many of which had been targeting
businesses.  As a result of these  trends,  competitive  carriers  have  sharply
reduced their capital spending, and several have filed for bankruptcy protection
as a means to restructure their debt obligations. In


                                       4
<PAGE>

addition,  while the capital spending by wireless service providers continued to
increase in 2001 given the continuing rapid growth of their businesses,  capital
investment  by  incumbent  carriers  declined in 2001 in part due to the reduced
threat  from  competitive  carriers.  Across  all  carrier  types,  the  limited
availability  in the  capital  markets  and  reduced  valuations  in the  equity
markets,  has created a new focus on operating measures such as cash flow, which
has led  service  providers  to  conserve  cash and  reduce  capital  investment
whenever possible.

     While future  capital  spending  trends are difficult to predict,  industry
analysts expect capital spending on  telecommunications  equipment to decline in
2002 from 2001 levels across virtually every type of service  provider  segment;
however capital  spending on wireless  equipment is expected to outperform other
communications  sectors,  on a relative basis, due to expectations for increased
traffic on mobile networks.

Challenges Service Providers Face

     To  compete in  today's  competitive  environment,  service  providers  are
seeking to differentiate their products and services while lowering their costs.
This has increased  demand for  technologies  that enable the rapid creation and
delivery of innovative services on existing and converged networks.  Some of the
key challenges  that service  providers face in expanding  their network systems
include:

o    expanding and/or  upgrading their signaling  network systems to support new
     and enhanced services,  and  rapidly-growing  volumes of signaling traffic,
     particularly  on  signaling-intensive   wireless  networks  which  generate
     several times the amount of signaling traffic as wireline networks;

o    building and managing  networks that can  cost-effectively  support circuit
     and packet network convergence; and

o    testing new network elements and monitoring increasingly complex networks.

     Similarly, telecommunications equipment manufacturers and network operators
need  advanced and flexible  ways to test and monitor  equipment in existing and
converged networks in a cost efficient manner.

Signaling and Intelligent Services

     Traditional  voice  telephone  networks  consist of two basic  elements  --
switching and signaling.  The switching  portion of a network carries and routes
the actual voice or data comprising a "call." The signaling portion of a network
instructs  the  switching  portion  how to do its job.  Signaling  messages  are
carried on a different  logical  transmission  path than the actual call itself.
Signaling is responsible for  establishing and terminating a call. The signaling
portion of the network  also  enables  service  providers  to offer  intelligent
services such as call waiting, caller ID and voice messaging.

     The signaling  portions of existing voice telephone networks in most of the
world are based upon a set of complex standards known as Signaling System #7, or
SS7.  The  primary  network  elements  within  a  traditional   circuit  network
architecture based on SS7 are as follows:


                                       5
<PAGE>

     Signal  Transfer Point (STP) -- A signal  transfer point is a packet switch
for the signaling portion of the network.  It controls and directs the signaling
messages used to establish and terminate  telephone  calls and to coordinate the
provision of intelligent services.

     Service  Switching Point (SSP) -- A service switching point (often called a
Class 4 or Class 5  switch,  depending  on its  location  in the  network)  is a
carrier's  switch that connects to the SS7 network and serves as the origination
and termination points for the SS7 messages in a network. In this capacity,  the
service switching point, via signaling transfer points,  sends and processes the
signaling  messages  used to establish  and terminate  telephone  calls.  When a
service switching point identifies a call requiring instructions for intelligent
services,  it sends a signaling  message to a signal  transfer  point and awaits
further routing or call processing instructions.

     Service  Control  Point (SCP) -- A service  control  point is a specialized
database containing network and customer  information.  It is queried by service
switching points via signaling transfer points for information  required for the
delivery of intelligent  services.  Different service control points contain the
information used by the SS7 network to perform different types of functions.

     Signaling Links -- A signaling link is a physical or logical  connection or
channel between any two different parts of the signaling portion of the network,
or a connection  or channel  between the  signaling  part of the network and the
switching  part  of the  network.  To  create  additional  network  capacity  to
accommodate  increases in signaling  traffic,  additional links must be added to
signal  transfer   points,   or  new  signal  transfer  points  must  be  added.
Traditionally,  signaling links have operated on dedicated  circuit  facilities.
New  network   architectures   support   signaling   over  packet   transmission
technologies such as IP or ATM.

     The market for SS7 equipment is driven by growth in network  traffic and by
demand for intelligent  services.  Carriers and service  providers must increase
the performance  and capacity of their  signaling  networks in order to increase
call processing capacity or to offer intelligent  services.  Because of its role
in providing reliability and features to a voice network, STPs must deliver high
performance   and   reliability.   Typically,   STPs  need  to  deliver  99.999%
reliability,  or less than  three  minutes  of  unscheduled  downtime  per year.
Service  providers  also require an SS7 solution  that is scalable -- that is, a
solution that can initially be matched to support a carrier's  current  capacity
but with the capability to have its capacity  increased to support the carrier's
growth without requiring the replacement of certain network elements.

Unique Signaling Requirements of Wireless Networks

     Wireless networks generate  substantially more signaling traffic than fixed
line networks due to additional SS7 features inherent in wireless telephony such
as mobile registrations,  roaming, and handoffs between cellular equipment. As a
result,  wireless operators  generally invest in SS7 related equipment,  such as
signal transfer points,  more frequently than fixed line carriers to accommodate
the unique signaling demands of mobile telephony.  In addition,  rapid growth in
wireless minutes of use and increased popularity of wireless services enabled by
signaling  networks  such  as  voice  mail  and  text  messaging  have  led to a
significant  increase in SS7 traffic on mobile  networks in recent years,  which
has  created a need for high  capacity  signaling  infrastructure.  Driving  the
higher usage in wireless  networks,  particularly in the United States, are flat
rate pricing plans that feature no additional  charges for long distance  calls.
Wireless  usage is expected to continue to increase in the coming  years,  which
will create further demand for signaling  infrastructure.  According to a recent
report issued by The Yankee Group, a


                                       6
<PAGE>

research  consultancy firm, wireless telephony is expected to account for 40% of
total conversation minutes in the United States by 2005, up from 10% in 2000, as
additional  subscribers are added and existing  subscribers continue to increase
their usage of wireless phones.

Supporting Voice and Data Convergence

     Currently,   virtually  all  networks  which  carry  both  voice  and  data
communications   rely  on  a  technology  called  circuit   switching.   Another
technology,  packet  switching,  has been used almost  exclusively for data-only
networks.  Circuit  switching and packet switching are  fundamentally  different
technologies.  While  circuit  switching  has offered  reliable and high quality
voice  communications,  packet  switching is inherently  more efficient and cost
effective.  Industry sources estimate that the cost of a transmission  minute is
as much as 25% to 50% less for a packet network than for a circuit network.

     The cost and  performance  superiority  of  packet  switching  has led many
incumbent and new carriers to build packet  networks to handle data traffic.  It
has also led carriers to explore the transmission of voice  communications  over
packet  networks.   This  requires  circuit  networks  and  packet  networks  to
seamlessly interconnect.

     To support voice and data communications, packet networks need signaling to
provide the same  reliability and quality of  transmissions  as circuit networks
and to  provide  the  intelligent  services  consumers  have come to expect  and
demand.  Because SS7 is the global  industry  standard for voice  networks,  the
Company  believes that signaling for the converged  circuit and packet  networks
will be based upon SS7 or its derivatives as well. This allows new carriers with
packet networks to more easily  interconnect  with existing circuit networks and
would allow  incumbent  carriers to leverage their  investment in their existing
networks even as they build out their data networks.

     Tekelec believes that the primary network elements of converged circuit and
packet networks,  including signaling,  call control and switching technologies,
are as follows:

     Signal  Transfer  Point -- As in the  present  circuit  networks,  a signal
transfer point relays messages needed to establish and terminate telephone calls
and to coordinate the provision of intelligent  services.  It can relay messages
within the circuit network,  between circuit and packet  networks,  and possibly
within some forms of packet networks.

     Service  Control  Point-- As in the  present  circuit  networks,  a service
control point is a specialized  database containing  information used to deliver
intelligent  services.  Service control points in converged networks may support
packet-based signaling interfaces.

     Signaling Gateway -- A signaling gateway receives  signaling  messages from
signal  transfer  points,  reformats  these messages and presents them to one or
more media gateway controllers.

     Media Gateway Controller-- A media gateway controller,  frequently called a
softswitch  or  call  agent,  is  a  specialized   computer  that  provides  the
intelligence,  or call  control to direct  switching.  It  controls  one or more
voice/data switches called media gateways.


                                       7
<PAGE>

     Media Gateway -- A media  gateway is a voice/data  switch that receives the
message  part of a call and  redirects  it as  specified  by the  media  gateway
controller to a single destination or to multiple destinations.  If necessary, a
media gateway can translate the actual call from a packet  switching format to a
circuit switching format and vice versa.

     Application  Server -- Similar to a service  control point,  an application
server is a specialized  database that contains  information to deliver  certain
intelligent  services in packet  networks,  interacting  with the Media  Gateway
Controller via IP-based protocols such as Session Initiation Protocol (SIP).

     SIP  Server  --  A  SIP   server  is  a  session   control   platform   for
voice-over-packet networks.  Interoperating with media gateway controllers,  the
SIP server  provides the foundation for initiating and  terminating  sessions as
well as service delivery within a pure-packet, signaling network.

     The primary difference  between the converged  architecture and the circuit
architecture  described above is the use of the signaling gateway, media gateway
controller  and media  gateway  to  perform  the same  switch  functions  as are
currently  performed by certain service  switching  points in circuit  networks.
However,  industry  experts  believe it will take  decades to replace all of the
existing service  switching points with packet  switching  technologies.  In the
Company's view of the converged  architecture,  these three switch components do
not all have to be made and sold in one integrated product by a single equipment
manufacturer.  Instead,  any of these switch  components can be bundled and sold
with switch components made by different manufacturers generally with one vendor
serving as the primary  supplier  responsible  for  delivering,  integrating and
servicing the comprehensive packet telephony solution. The Company has developed
partnerships  with  several  vendors of media  gateways  and feature  servers to
enable Tekelec to offer a complete solution for packet telephony deployments.

     The Company  believes  carriers are seeking fully featured packet telephony
solutions that can facilitate  the  convergence of circuit and packet  networks,
without  compromising  functionality,   reliability,  scalability,  support  and
flexibility. The Company also believes that other equipment manufacturers may be
looking for signaling  and/or call control products which they can easily bundle
and sell with their own switch components.

The Tekelec Solution

     The  Company is a leading  designer  and  developer  of  telecommunications
signaling  infrastructure,  packet  telephony  solutions,  diagnostic  tools and
service applications. The Company's solutions are widely deployed in traditional
and  next-generation,  or "converged" wireline and wireless networks and contact
centers  worldwide.  The Company's  systems and diagnostics  products assist its
customers   in   meeting   their   primary   challenges   in   the   competitive
telecommunications  environment:  differentiating  their  offerings and lowering
network costs.  The Company offers  signaling and packet  telephony  systems and
services  to  enable  the  delivery  of  intelligent   services  and  facilitate
convergence  of voice and data  networks.  The Company  believes  that its open,
standards-based  solutions  are highly  reliable  and enable  operators  to more
cost-effectively manage their networks and offer intelligent services.

     The  Company's  Eagle  5 SAS  (the  latest  release  of the  Company's  STP
product), and previous versions of the Eagle STP, have been widely deployed and,
according to market research firms,  has achieved  leading market share in North
America.  The Company is expanding


                                       8
<PAGE>

its  international  operations  to increase  its market  share in  international
markets within Europe, Latin America,  Asia and in other parts of the world. The
Eagle 5 SAS offers high capacity and throughput, reliability and efficiency that
support  the growth of traffic  and demand for  intelligent  services in service
provider networks. The reliability of the Company's products enables it to offer
service providers product solutions that reduce their total cost of ownership of
network  systems  products.  The Company's  Eagle and IP7 products meet industry
standards  for  99.999%  reliability  and less  than 3  minutes  of  unscheduled
downtime per year.  The Company also offers a feature of Eagle that allows Eagle
5 that  allows  support of SS7  signaling  into  Internet  Protocol  networks to
realize substantial efficiencies inherent in IP networks.

     During the past few years, the Company has developed and introduced a suite
of products  created  specifically  for converged  circuit and packet  networks.
These  products  include  the IP7  Secure  Gateway  and the  VXi  Media  Gateway
Controller, two of the three components comprising a switch in converged circuit
and packet  networks.  The  Company's  products are designed so that they may be
purchased in combination with switch components made by other manufacturers,  or
purchased separately,  depending on the customer's preference.  In the Company's
effort to offer its customers a complete  switching  solution,  it has become an
established  reseller  of  media  gateways  manufactured  by Cisco  Systems  and
Alcatel,  and  applications  servers  manufactured by BroadSoft,  with which the
Company's solutions are interoperable.

     Use  of  the  Company's  SS7-over-IP  solutions  results  in a  substantial
increase in signaling  efficiency  by enabling SS7  signaling  over IP at faster
rates than  traditional  SS7  signaling.  Customers may choose to deploy the IP7
Secure  Gateway  or the  Eagle 5 ("SAS")  with  SS7-over-IP  capability  to gain
signaling  efficiencies,  among other  benefits,  as a precursor  to deploying a
complete packet telephony switch as a circuit switch  replacement.  In addition,
customers of the Company's SS7 products may upgrade their existing  solutions to
enable SS7 signaling over IP. The upgrade  enables them to preserve the value of
their existing SS7 infrastructure and makes them fully capable of functioning in
converged networks.

     The Company's  approach to packet telephony  solutions offers carriers more
flexibility and lower costs than a fully integrated switch.  Carriers can choose
to purchase  from among  multiple  vendors  each of the switch  components  that
offers  the  optimal  performance  for their  needs.  They can also  potentially
upgrade or expand a packet telephony switch by selectively replacing components,
instead of having to replace the entire  switch.  The  ability to upgrade  media
gateways without changing the signaling and call control elements of a converged
switch is  especially  relevant  due to  continuous  gains in  packet  switching
efficiency, which by some estimates, doubles in performance every 18 months. The
Company also believes that its approach is more scalable than a fully integrated
packet telephony switch.


                                       9
<PAGE>


Business Strategy

     The Company's objective is to be the premier supplier of signaling and call
control  network  systems and selected  service  applications,  and  diagnostics
products, to existing and emerging  communications  markets. Key elements of the
Company's strategy to achieve this objective include:

     Maintaining  Technology  Leadership.  The Company  believes that one of its
core  competitive  strengths is the breadth of its  knowledge  and  expertise in
communications   technologies,   particularly  in  SS7  and  related   signaling
technologies.  The  Company  has  developed  this  expertise  over more than two
decades. The Company intends to enhance its existing products and to develop new
products  by  continuing  to  make  significant   investments  in  research  and
development. As part of its commitment to technology leadership, the Company has
developed the Transport  Adapter Layer Interface  (TALI),  an Internet  Protocol
signaling  interface which enables the transport of signaling messages using the
Internet  Protocol.  The Company has made available the TALI source code free of
charge to the industry, and has entered into TALI licensing agreements with more
than 200  companies,  several of which are using the interface in live networks.
Tekelec also  supports  other IP  signaling  protocols,  including  the Internet
Engineering Task Force SIGTRAN suite of signaling  protocols for next-generation
network connectivity.  The Company has also assumed a leadership role within the
Softswitch  Consortium,  an industry organization created for global cooperation
and coordination in the development of open standards and  interoperability  for
packet networks.

     Targeting  the  Convergence  of Voice and Data  Networks.  The  Company  is
continuing  to  invest  significantly  to  develop  signaling  and call  control
products  and  features  that  enable  the  convergence  of  circuit  and packet
networks.  The Company  introduced  the IP7 product line,  the VXi Media Gateway
Controller  and the SXi 500 SIP Server to target  this  convergence  market.  In
addition,  the Company has  established  reseller  partnerships  with vendors of
media gateways and  application  servers,  complementary  products for converged
voice and data  networks.  The Company  believes  its pursuit of this new market
opportunity  leverages  its  expertise  in  signaling  and call control and will
enhance the market potential for the Company's traditional solutions by ensuring
customers that  investments  in Tekelec  equipment can be upgraded to perform in
converged networks.

     Expanding   Internationally.   The   Company   is   increasingly   pursuing
international  opportunities,  primarily  through its European sales and support
office in the United Kingdom and through the Company's Japanese subsidiary.  The
Company also intends to open a sales office in Latin  America  during 2002.  The
Company's  European sales efforts have resulted in significant  expansion in the
customer  base,  including  Orange  Personal  Communications  Systems,  Bouygues
Telecom and France Telecom,  Cable & Wireless,  British  Telecom,  and Vodafone.
Recent mandates in certain  European  countries,  including  Spain,  Holland and
France,  and a similar  mandate in  Australia  provide  that  telecommunications
service providers should offer number portability. The increasing implementation
of number  portability  in Europe  and other  regions is  expected  to result in
increasing  demand for SS7 network  elements such as signal  transfer  points to
accommodate the increase in signaling traffic, and number portability solutions,
such as those  offered by the Company,  to facilitate  the  deployment of number
portability.

     Pursuing Additional Strategic Relationships, OEM Partners and Acquisitions.
The  Company  intends  to seek  additional  strategic  relationships,  including
original equipment


                                       10
<PAGE>

manufacturer  partners,  referral  arrangements,   distribution  agreements  and
acquisition  candidates.  The Company's existing strategic relationships include
technology  development  and OEM  relationships  with Davox  Corporation,  Cisco
Systems,   Alcatel  and  BroadSoft,   a  technology  development  and  marketing
relationships  with Telcordia and Nortel,  collaboration  agreements  with Cisco
Systems,  Alcatel and  Illuminet  and  distribution  relationships  with Lucent,
Mercury (formerly Daewoo),  Unisys and numerous other product distributors.  See
"Customers".

     Pursuing New Market Segments.  The Company intends to continue its strategy
of internally  developing  and  acquiring  products in order to enter new market
segments.  A number of  products  currently  under  development  will enable the
Company to serve new markets,  including packet switching for wireless  networks
and diagnostics for packet networks using voice over Internet  protocols and new
mobile technologies.

     Seeking  Additional  Opportunities  to  Provide  Upgrades,  Extensions  and
Service  Agreements.  The  Company  intends  to  leverage  its  strong  customer
relationships to seek  opportunities to better serve its customers' needs in the
future. In particular,  the Company will continue to develop and market software
upgrades, link extensions, extended service agreements and other enhancements as
a means to pursue  repeat  business  opportunities.  Such  products and services
accounted for  approximately  50% of revenues in its Network Systems Division in
2001.

Products

     The Company  currently offers products in three broad  categories:  network
systems products, network diagnostics products and contact center products.

Network Systems Products

     The Company's  network systems products enable  telecommunications  service
providers to create,  enhance and customize the intelligent services they offer.
The Company's principal network systems products are described below:

Product                                         Description

Eagle 5 Signaling             The Company's Eagle 5 Signaling Application System
Application System .......... ("SAS") is a highly reliable signal transfer point
                              which is  tailored to the SS7  switching  needs of
                              carriers,  network service  providers and wireless
                              operators,  among others.  It offers high capacity
                              and  throughput,  features  a  fully  distributed,
                              standards-based, open architecture and is scalable
                              from 2 to 2000  links.  It is sold  in  pairs  for
                              redundancy.  It offers several  optional  features
                              not typically  available on signal transfer points
                              including  support  for  SS7  over  IP  signaling,
                              integrated  Sentinel for surveillance,  monitoring
                              and  revenue  assurance   capabilities,   and  the
                              delivery of service applications that are commonly
                              hosted on service control points.


                                       11
<PAGE>

ASi 4000 Service Control      The Company's ASi 4000 Service  Control Point is a
Point ....................... specialized  database  that  contains  network and
                              customer   information  needed  to  process  calls
                              requiring special  treatment,  such as credit card
                              calls or other intelligent services.  This product
                              supports  interfaces to the products of most major
                              switch  vendors.   Its  graphical  user  interface
                              enables the development, testing and deployment of
                              intelligent services.

IP7 Secure Gateway .......... The  Company's  IP7  Secure  Gateway  is a  highly
                              scalable   signaling   gateway  that  can  provide
                              signaling information to media gateway controllers
                              and   IP-signaling   enabled   SCPs  in   multiple
                              locations.   It  can  deliver  these  services  in
                              multi-protocol, multi-vendor converged networks or
                              in circuit switched networks that deploy signaling
                              over IP primarily to realize economic benefits.

VXi Media Gateway             The Company's  VXi Media  Gateway  Controller is a
Controller .................. media gateway  controller  that is highly scalable
                              and  can  control   media   gateways  in  multiple
                              locations.  It  interfaces  to  both  asynchronous
                              transfer mode and Internet  protocol  networks via
                              proprietary and standards-based interfaces.

SXi 500 SIP Server .......... The  Company's  SXi 500  product  establishes  and
                              terminates  sessions,  and  enables  services in a
                              packet switching network environment. Interworking
                              with Media Gateway Controllers,  the SXi 500 is an
                              IP signaling  foundation  for service  delivery in
                              packet networks.

Sentinel .................... The  Company's   Sentinel  product  is  a  network
                              maintenance,  surveillance  and revenue  assurance
                              solution that enables service  providers to ensure
                              the reliability of telecommunication  products and
                              services implemented across their SS7/IP networks.
                              Sentinel also enables revenue  assurance  features
                              such as fraud prevention and billing verification.
                              Sentinel can be deployed on a standalone  basis or
                              as an integrated feature of the Eagle 5 SAS.

Network Diagnostics Products

     Equipment manufacturers,  and to a lesser extent, network service providers
utilize the  Company's  diagnostics  products to perform a wide  variety of test
applications that simulate and analyze network  communications  network systems.
The Company's customers use its diagnostics products for:

     o    Designing   Communications   Equipment.  By  simulating  existing  and
          emerging  communications  devices, nodes and protocols,  the Company's
          products  enable  engineers to quickly design  communications  devices
          that  will  transition  into  emerging  network  systems,   minimizing
          potential  breakdowns of network  components  deployed  throughout the
          network.


                                       12
<PAGE>

     o    Ensuring Product Reliability.  By simulating actual network conditions
          within an operating  environment,  including protocol errors and other
          network  failures,   the  Company's  products  can  help  ensure  that
          communications  equipment  manufacturers  produce  devices  that  will
          operate  error-free,  thus accelerating time to market and potentially
          reducing costly failures after installation.

     o    Verifying Certification. By executing conformance and performance test
          suites, network operators and manufacturers use the Company's products
          to rapidly verify that communication devices meet specified standards.

     o    Load generation.  By simulating a traffic "load" of many  simultaneous
          users of  advanced  features  within  a  controlled  environment,  the
          Company's  diagnostic  products  allow  engineers  to submit a product
          under  development  to stress  testing to ensure that it can withstand
          the traffic demands of live networks.

     The Company's principal network diagnostics products are described below:

Product                                             Description
-------                                             -----------

MGTS ........................ The  Company's  MGTS  is a  signaling  diagnostics
                              system  designed to provide a diagnostics and test
                              platform for research and development,  laboratory
                              and     telecommunications     service    provider
                              environments. The MGTS supports various protocols,
                              including SS7 and personal communications systems,
                              permits the design of customized testing scenarios
                              and can be used  with  multiple  user  groups  and
                              geographic locations.

MGTS i3000 .................. The Company's MGTS i3000 is a complete diagnostics
                              system for  converged  network  technologies.  The
                              diagnostics  applications  built on the  Company's
                              i3000  platform   address  wireline  and  wireless
                              communications       equipment      manufacturers'
                              convergence  test  and  verification  needs.  MGTS
                              i3000  enables  users  to  build  and  reuse  test
                              scenarios    spanning    multiple    technologies,
                              including SS7, GPRS, UMTS and IP.

Contact Center Products

     The Company's contact center products provide planning, management and call
routing and control tools for single contact  centers and for complex,  multiple
site  contact  center  environments.  These tools help contact  center  managers
maximize contact center  productivity,  achieve service level targets and reduce
costs. The Company's principal contact center products are described below:


                                       13
<PAGE>


Product                                           Description
-------                                           -----------

TotalView ................... The  Company's  TotalView   Workforce   Management
                              Solution  for single  and  multiple  site  contact
                              centers generates staff schedules based on contact
                              center workload and the availability and skills of
                              contact  center  staff.   It  performs   real-time
                              monitoring   and   analysis   of  contact   center
                              operations.   TotalView  also  provides  detailed,
                              customized reports to assist in optimizing contact
                              center performance and forecasting  contact center
                              staffing requirements.

TotalNet .................... The Company's  TotalNet Call Routing  Solution for
                              multiple  site  contact  centers  routes  calls to
                              multiple  locations  as  if  they  were  a  single
                              contact  center  and  balances   workload   across
                              contact  center  sites based on  staffing  levels,
                              call volume and caller requirements. TotalNet also
                              maintains  contact center  statistics and analyzes
                              contact center operations.

Product Development

     The communications  market is characterized by rapidly changing technology,
evolving industry  standards and frequent new product  introductions.  Standards
for  new  technologies   and  services  such  as  third   generation   wireless,
softswitching, signaling for packet networks, internet protocol and asynchronous
transfer mode are still evolving.  As these standards  evolve and the demand for
services and  applications  increases,  the Company intends to adapt and enhance
its products and develop and support new products.  The Company solicits product
development  input through  discussions with its customers and  participation in
various  industry   organizations   and  standards   committees,   such  as  the
Telecommunications  Industry  Association,  the Internet Engineering Task Force,
the  Softswitch  Consortium  and the  Asynchronous  Transfer Mode Forum,  and by
closely monitoring the activities of the International Telecommunications Union,
the  European   Telecommunications   Standards   Institute,   the  International
Organization for Standardization and Telcordia.

     The Company's  network  systems  product  development  group is principally
focused on addressing the  requirements of the converged voice and data networks
and on the release of new software  versions to incorporate  enhancements or new
features  or  functionality  desired by  customers.  This group also  focuses on
compliance  with standards to enable the Eagle  solutions to address  additional
domestic and  international  markets.  In addition,  the Company plans continued
improvement   of  hardware   components   to  improve  their   performance   and
capabilities.

     The Company's  diagnostics product  development  activities are principally
focused on expanding  the  capabilities  of the MGTS,  and MGTS i3000  products,
including  their  interfaces,  software  modules and protocol  capabilities  for
emerging  technologies  such as  broadband  wireless and packet  telephony,  and
adapting these products for the network operations market. From time to time the
Company engages in development  projects for special  applications  requested by
its  customers.  The Company  typically  retains the right to use the  developed
technology  in  future  products  that are not  competitive  with  the  specific
application for which the development work was performed.


                                       14
<PAGE>

     The Company's contact center product development activities are principally
focused on expanding the capabilities of the contact center products,  including
the skills and multimedia  scheduling  capabilities  of the TotalView  Workforce
Management product and the functionality of the TotalNet Call Routing product.

Sales and Marketing

     The Company's  sales and marketing  strategies  include selling through the
Company's  direct  sales  forces,  indirectly  through  distributors  and  other
resellers,  entering into strategic  alliances and targeting certain markets and
customers.  To promote  awareness  of Tekelec and the  Company's  products,  the
Company also advertises in trade journals,  exhibits at trade shows, maintains a
presence on the  Internet,  uses direct mail and many of its  employees  author,
from time to time, articles for trade journals.

     Distribution.  The Company sells its network systems,  network  diagnostics
and contact  center  products  in the U.S.  principally  through  the  Company's
separate  direct sales forces and, for the Eagle 5 SAS and certain other network
systems products  indirectly through strategic  relationships with various third
parties.  The  Company's  direct  sales  forces  operate  out of  the  Company's
headquarters in Calabasas, California and the Company's regional offices located
in Colorado,  Georgia, Illinois, New Jersey, North Carolina, Virginia and Texas.
The  Company  sells its network  systems  products  internationally  through the
Company's direct sales force and distribution relationships with Mercury, Lucent
and Unisys and the Company's wholly owned subsidiary in the United Kingdom.  The
Company  sells its  diagnostics  products  internationally  through a network of
approximately  21 distributors  and the Company's  wholly owned  subsidiaries in
Japan and the United Kingdom. The Company's Japanese subsidiary, which presently
primarily sells diagnostics products,  generated approximately 9% of the Company
revenues for 2001, 8% for 2000 and 10% for 1999.

     Independent  companies  distribute the Company's  products in other Western
European countries, the Far East (other than Japan),  Australia,  Mexico, Puerto
Rico, New Zealand, Latin America, the Middle East and South Africa. Distributors
typically  purchase  products  directly from Tekelec pursuant to agreements that
are exclusive for a particular territory and are cancelable by either party upon
90 days notice.  Export sales through international  distributors  accounted for
approximately  7% of the  Company's  revenues  for 2001,  5% for 2000 and 6% for
1999.

     Strategic  Relationships.  The Company believes that its current and future
strategic  relationships with leading  communications  equipment  suppliers will
improve market  penetration  and acceptance  for the Company's  network  systems
products.   These  suppliers  have   long-standing   relationships  with  public
telecommunications  carriers  and  provide a broad  range of  services  to these
carriers  through  their  existing  sales and support  networks.  Tekelec  seeks
strategic relationships that:

     o    enhance  the   Company's   presence  and   strengthen   the  Company's
          competitive position in its target markets;

     o    offer products that complement the Company's network systems solutions
          to provide value-added networking solutions; and


                                       15
<PAGE>

     o    leverage the  Company's  core  technologies  to enable  communications
          equipment   suppliers  to  develop   enhanced   products  with  market
          differentiation that can be integrated with Tekelec's solutions.

     The Company's strategic relationships include:

     o    an  agreement  with Cisco  Systems,  whereby  Tekelec  will market and
          resell  certain of Cisco's  media  gateways with its VXi Media Gateway
          Controller and IP7 Secure Gateway.

     o    an  agreement  with  Alcatel,  whereby  Tekelec will market and resell
          certain  of  Alcatel's  media  gateways  with  its VXi  Media  Gateway
          Controller and IP7 Secure Gateway.

     o    an agreement with  BroadSoft,  whereby  Tekelec will market and resell
          BroadSoft's  application  server  product  with its VXi Media  Gateway
          Controller and IP7 Secure Gateway.

     o    a non-exclusive  distribution agreement with Lucent under which Lucent
          distributes the Company's Eagle STP;

     o    a non-exclusive international distribution agreement with Unisys under
          which Unisys distributes the Company's network systems products;

     o    an exclusive  distribution  and OEM agreement with Mercury under which
          Mercury distributes the Company's Eagle STP in South Korea;

     o    an OEM and distribution  agreement with Davox  Corporation under which
          Davox will sell on an OEM basis the  Company's  TotalNet  Call Routing
          products and the Company will distribute  Davox's Ensemble call center
          solution;

     o    an alliance with Nortel  Networks in which Tekelec and Nortel Networks
          cooperatively  market Nortel  Networks'  Symposium  Call Center Server
          with TotalNet Call Routing and TotalView Workforce Management.

     The Company believes that its strategic third party  relationships  provide
the Company  with  additional  opportunities  to penetrate  the network  systems
markets and demonstrate  the Company's  strategic  partners'  recognition of the
technical  advantages of the Company's network  products.  Through the Company's
relationships with, among others,  Cisco Systems,  Alcatel,  BroadSoft,  Lucent,
Unisys,  and  Mercury,  the Company is  enhancing  its market  presence  and the
ability  to  access  leading  network  service  providers.   In  general,  these
agreements can be terminated by either party on limited  notice and,  except for
the Company's  agreement with Mercury,  do not require minimum purchases.  Cisco
Systems, Unisys, and Davox also are not precluded from selling products that are
competitive with the Company's  products.  Although the Company's  current sales
through these relationships are not significant,  a termination of the Company's
relationship  with, or the sale of competing products by, any of these strategic
partners could adversely affect the Company's business and operating results.


                                       16
<PAGE>


Service, Support and Warranty

     The Company  believes  that  customer  service,  support and  training  are
important to building and maintaining strong customer relationships. The Company
services,  repairs and provides  technical  support for the Company's  products.
Support services include 24-hour technical  support,  remote access  diagnostics
and  servicing   capabilities,   extended   maintenance  and  support  programs,
comprehensive  technical  customer training,  extensive customer  documentation,
field  installation  and emergency  replacement.  The Company also offers to its
customers and certain resellers of the Company's  products training with respect
to the proper use, support and maintenance of the Company's products.

     The Company  maintains an in-house  repair  facility  and provides  ongoing
training and telephone  assistance to customers and  international  distributors
and other  resellers  from the Company  headquarters  in Calabasas,  California,
certain  U.S.  regional  offices  and the  Company's  Japanese  subsidiary.  The
Company's technical assistance centers in Morrisville, North Carolina and Egham,
United  Kingdom,  support  the  Company's  network  systems  products  on  a  24
hour-a-day, seven day-a-week basis. The Company's technical assistance center in
Richardson, Texas, supports the Company's contact center products and certain of
the Company's network systems products.

     The Company also offers network implementation  services in connection with
its  effort to supply a complete  solution  for  packet  telephony  deployments,
including products from its vendor partners. In such instances, the Company will
offer specific service  contracts to support the needs of its carrier  customers
that choose to migrate their network to packet technologies.

     The Company  typically  warrants its products  against defects in materials
and  workmanship  for one year  after the sale and  thereafter  offers  extended
service warranties.

Customers

     The Company's customers include end users and marketing intermediaries. End
users for the Company  network  systems  products  consist  primarily of network
service   providers,   wireless  network  operators,   interexchange   carriers,
competitive  access  providers,   local  exchange  carriers  and  Regional  Bell
Operating  Companies.  Wireless service providers accounted for more than 50% of
the  Company's  Network  Systems  revenue in 2001.  End users for the  Company's
diagnostic products primarily include  communications  equipment  manufacturers,
and to a lesser extent,  network service providers and government agencies.  The
Company's  contact  center  solutions  have been sold  primarily  to Fortune 500
companies,  financial services companies and  telecommunications  carriers.  The
Company anticipates that its operating results in any given period will continue
to depend to a significant  extent upon revenues from a small  percentage of the
Company's customers.

Backlog

     Backlog for the Company's  network systems products  typically  consists of
contracts or purchase orders for both product delivery scheduled within the next
12 months and  extended  service  warranty to be provided  over periods of up to
three years.  Backlog for the Company's  diagnostic and contact center  products
typically consists of products and services ordered for delivery within the next
12 months. Primarily because of variations in the size and duration of


                                       17
<PAGE>

orders  received by Tekelec and  customer  delivery  requirements,  which may be
subject to cancellation or rescheduling by the customer,  the Company's  backlog
at any  particular  date may not be a meaningful  indicator of future  financial
results.

     At December 31,  2001,  the  Company's  backlog  amounted to  approximately
$189.3  million,  of which  $85.8  million  related to network  systems  service
warranties.  This  compared  to a backlog  of  approximately  $197.2  million at
December 31, 2000, of which $71.1  million  related to network  systems  service
warranties.

     The Company  regularly  reviews  its  backlog to ensure that its  customers
continue to honor their  purchase  commitments  and have the financial  means to
purchase and deploy the Company's products and services in connection with their
purchase contracts.

Competition

     Network  Systems  Products.  The market for the Company's  network  systems
products  is  intensely  competitive  and has been highly  concentrated  among a
limited  number of dominant  suppliers.  The Company  presently  competes in the
network  systems  market with,  among others,  Alcatel,  Nortel,  Cisco Systems,
Telcordia, Sonus Networks, Ericsson, Lucent Technologies,  Inet and Siemens. The
Company  expects  competition  to increase in the future from  existing  and new
competitors.

     The Company believes that the principal  competitive factors in the network
systems products market are product performance,  scalability and functionality,
product quality and  reliability,  customer  service and support,  price and the
supplier's  financial resources and marketing and distribution  capability.  The
Company anticipates that responsiveness in adding new features and functionality
will become an  increasingly  important  competitive  factor.  While some of the
Company's  competitors have greater  financial  resources,  the Company believes
that it competes  favorably  in other  respects.  New  entrants  or  established
competitors  may,  however,  offer  products which are superior to the Company's
products in  performance,  quality,  service and support and/or are priced lower
than the Company's products.

     Some of the  Company's  competitors,  including  Lucent,  Nortel  and Sonus
Networks  manufacture and offer fully  integrated  network systems  products for
converged  networks.  These products include an SS7 signaling  gateway,  a media
gateway controller and a media gateway.  The Company's strategy,  however, is to
develop and provide the SS7 signaling  gateway and the media gateway  controller
elements of network systems solutions for converged circuit and packet networks.
This means that it will be necessary for the  Company's  products to be combined
with the media  gateways  of other  vendors to  constitute  a  complete  network
systems switch for a converged  network.  To date,  the Company has  established
relationships  with Cisco Systems and Alcatel to offer a complete  switch.  Some
customers may prefer to purchase fully integrated  network systems switches from
the Company's  competitors  rather than purchase the Company's  network  systems
products because they may conclude that the fully integrated switch is superior.
The Company's ability to compete in the market for network systems switches will
also be limited if media gateway manufacturers develop fully integrated switches
and cease selling media gateways on a  non-integrated  basis or bundled with the
Company's convergence products.

     The  Company  believes  that its  ability  to compete  successfully  in the
network  systems market also depends in part on the Company's  distribution  and
marketing  relationships  with leading  communications  equipment  suppliers and
resellers.  If the Company cannot successfully enter into


                                       18
<PAGE>

these relationships on terms that are favorable to the Company or if the Company
cannot maintain these relationships, the Company's business may suffer.

     Diagnostics  Products.  The communications  diagnostics market is intensely
competitive  and subject to rapid  technological  change and  evolving  industry
standards.  The Company competes  primarily in the high  performance  segment of
this market, and the Company's principal competitors are Catapult Communications
and Acterna.  The Company also  competes  with a number of other  manufacturers,
some of which have greater financial, marketing, manufacturing and technological
resources  than Tekelec.  The Company  believes that its long-term  success will
depend in part on its  ability to be a leader in offering  diagnostics  products
that address new emerging industry standards.

     The  Company  believes  that  the  principal  competitive  factors  in  the
communications  diagnostics  market in which it  competes  are product and price
performance, functionality and reliability, timely introduction of new products,
marketing and distribution capability and customer service and support. Although
the Company believes that it competes favorably,  new or established competitors
could  offer  products  which are  superior  to or cost less than the  Company's
products.

     Contact  Center  Products.  The  market  for  contact  center  products  is
extremely   competitive.   The   Company   competes   principally   with  Aspect
Communications and Blue Pumpkin Software in the market for workforce  management
solutions  and with Cisco and Alcatel in the market for call routing  solutions.
The Company also  competes to a lesser  extent in these markets with a number of
other   manufacturers,   some  of  which  have  greater  financial,   marketing,
manufacturing  and other resources than Tekelec.  The Company  believes that the
success of its  TotalView  product  will  depend in part on its ability to offer
competitive  prices and to further develop its workforce  management  scheduling
and other technologies and its international  distribution channels. The Company
believes  that the success of the TotalNet  product will depend to a significant
degree on its  ability  to develop  market  penetration  and to improve  product
functionality through strategic partnering with third parties.

Intellectual Property

     The Company's  success  depends to a significant  degree on its proprietary
technology and other intellectual  property. The Company relies on a combination
of patents, copyrights,  trademarks,  trade secrets,  confidentiality agreements
and contractual  restrictions to establish and protect the Company's proprietary
rights  both in the United  States and  abroad.  The  Company  has been issued a
number  of  patents  and has a number  of  patent  applications  pending.  These
measures,  however,  afford only limited  protection  and may not prevent  third
parties from  misappropriating  the Company's  technology or other  intellectual
property. In addition,  the laws of certain foreign countries do not protect the
Company's  proprietary  rights to the same  extent as do the laws of the  United
States  and thus  make the  possibility  of  misappropriation  of the  Company's
technology and other intellectual  property more likely. If the Company fails to
successfully  enforce  or  defend  its  intellectual  property  rights or if the
Company fails to detect  misappropriation  of the Company's  proprietary rights,
its ability to effectively compete could be seriously impaired.

     The Company's  pending patent and trademark  registration  applications may
not be allowed and the Company's competitors may challenge the validity or scope
of its patent or trademark registration  applications.  In addition, the Company
may face challenges to the validity or


                                       19
<PAGE>

enforceability  of its  proprietary  rights and  litigation  may be necessary to
enforce and protect the Company's rights, to determine the validity and scope of
the Company's  proprietary rights and the rights of others, or to defend against
claims of infringement or invalidity. Any such litigation would be expensive and
time  consuming,  would divert the Company's  management  and key personnel from
business  operations and would likely harm the Company's  business and operating
results.

     The  communications  industry is  characterized by the existence of a large
number  of  patents  and  frequent  litigation  based on  allegations  of patent
infringement.  From time to time,  third parties may assert  patent,  copyright,
trademark  and  other  intellectual  property  rights to  technologies  that are
important to Tekelec. From time to time, the Company receives notices from or is
sued by third  parties  regarding  patent  claims.  Any claims made  against the
Company  regarding  patents  or  other  intellectual  property  rights  could be
expensive  and time  consuming to resolve or defend,  would divert the Company's
management  and key personnel  from its business  operations and may require the
Company to modify or cease marketing its products,  develop new  technologies or
products,  acquire  licenses to  proprietary  rights that are the subject of the
infringement claim or refund to the Company's  customers all or a portion of the
amounts paid for infringing products. If such claims are asserted,  there can be
no assurances that the dispute could be resolved without  litigation or that the
Company would prevail or be able to acquire any necessary licenses on acceptable
terms,  if at all.  In  addition,  the Company  may be  requested  to defend and
indemnify  certain  of its  customers  and  resellers  against  claims  that the
Company's  products infringe the proprietary  rights of others.  The Company may
also be subject to potentially  significant  damages or injunctions  against the
sale of certain products or use of certain technologies. See "Legal Proceedings"
in Part I, Item 3, of its Annual Report on Form 10K.

Employees

     At March 1, 2002, the Company had 1,057 employees, comprising 420 in sales,
marketing and support,  84 in  manufacturing,  412 in research,  development and
engineering and 141 in management,  administration and finance. Virtually all of
the Company's  employees  hold stock options  and/or  participate in the Company
employee stock purchase plan. None of the Company's  employees is represented by
a labor  union,  and the Company has not  experienced  any work  stoppages.  The
Company believes that its relations with its employees is excellent.

Business Risk Factors

     The  statements  that are not  historical  facts  contained  in this Annual
Report on Form 10-K are  forward-looking  statements  within the  meaning of the
Private  Securities  Litigation Reform Act of 1995. These statements reflect the
current  belief,  expectations  or intent of the  Company's  management  and are
subject to and involve certain risks and uncertainties.  Many of these risks and
uncertainties  are outside of the  Company's  control and are  difficult for the
Company to forecast or mitigate. In addition to the risks described elsewhere in
this Annual Report on Form 10-K and in certain of the Company's other Securities
and Exchange Act Commission  filings,  the following  important  factors,  among
others, could cause the Company's actual results to differ materially from those
expressed or implied by the Company in any  forward-looking  statement contained
herein or made elsewhere by or on behalf of the Company.


                                       20
<PAGE>


Because the Company's  quarterly  operating results are difficult to predict and
may fluctuate, the market price for the Company's stock may be volatile.

     The Company's  quarterly operating results are difficult to predict and may
fluctuate  significantly.  The Company has failed to achieve its revenue and net
income  expectations  for certain  prior  periods,  and it is possible  that the
Company will fail to achieve such  expectations  in the future.  Fluctuations in
the Company's  quarterly  operating  results may contribute to the volatility in
its stock price.  A number of factors,  many of which are outside the  Company's
control, can cause these fluctuations, including among others:

     o    overall telecommunications spending;

     o    changes in general consumer  conditions and specific market conditions
          in the telecommunications industry;

     o    the size, timing, terms and conditions of orders and shipments;

     o    the lengthy sales cycle of the Company's  network systems products and
          the reduced visibility into our customers' spending plans;

     o    the progress and timing of the  convergence of voice and data networks
          and other convergence-related risks described below;

     o    the  ability of  carriers  to utilize  excess  capacity  of  signaling
          infrastructure and related products in the network;

     o    the capital  spending  patterns of customers,  including  deferrals or
          cancellations of purchases by customers;

     o    the dependence on wireless  customers for a significant  percentage of
          the Company's revenue streams;

     o    the success or failure of strategic alliances and acquisitions;

     o    unanticipated   delays  or  problems  in  releasing  new  products  or
          services;

     o    the mix of products and services that the Company sells;

     o    the geographic mix of the Company's revenues and the associated impact
          on gross margins;

     o    the   introduction   and  market   acceptance   of  new  products  and
          technologies;

     o    the timing of the  deployment  by the  Company's  intelligent  network
          services and new technologies;

     o    the ability of our  customers  to obtain  financing or to fund capital
          expenditures;


                                       21
<PAGE>

     o    the  timing  and  level  of the  Company's  research  and  development
          expenditures and other expenses; and

     o    the expansion of the Company's marketing and support operations,  both
          domestically and internationally.

     The Company's  product sales in any quarter depend largely on orders booked
and shipped in that  quarter.  A significant  portion of the  Company's  product
shipments  in each  quarter  occurs  at or near  the end of the  quarter.  Since
individual  orders  can  represent  a  meaningful  percentage  of the  Company's
revenues  and net income in any  quarter,  the deferral of or failure to close a
single order in a quarter can result in a revenue and net income  shortfall that
causes the Company to fail to meet securities  analysts'  expectations  for that
period.  The Company bases its current and future expense levels on its internal
operating  plans and sales  forecasts,  and its  operating  costs are to a large
extent fixed. As a result,  the Company may not be able to  sufficiently  reduce
its costs in any quarter to compensate for an unexpected  near-term shortfall in
revenues,  and even a small  shortfall  could  disproportionately  and adversely
affect the Company's operating results for that quarter.

     The factors  described  above are  difficult  to forecast  and could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial  condition.  There  can be no  assurances  that the  Company  will not
experience a shortfall in the future, which would adversely affect the Company's
operating  results.  Accordingly,  the results of any one quarter  should not be
relied upon as an indication of the Company's future performance.

The Company is exposed to general economic and market conditions

     The  Company's  business  is  subject to the  effects  of general  economic
conditions  in the United  States  and  globally,  and,  in  particular,  market
conditions in the telecommunications industry. In recent quarters, the Company's
operating  results  have been  adversely  affected  as a result  of  unfavorable
economic  conditions and reduced capital spending in the United States,  Europe,
Latin America and Asia. In particular,  sales to network  carriers in the United
States have been adversely  affected during 2001. If the economic  conditions in
the United States and globally do not improve, or if there is a worsening in the
global  economic  slowdown,  the Company may  continue  to  experience  material
adverse impacts on its business, operating results and financial condition.

The Company has limited product offerings, and its revenues may suffer if demand
for any of its products declines or fails to develop as it expects.

     The Company  derives a  substantial  portion of its  revenues  from Network
Systems  products.  During each of 1999,  2000 and 2001, the Company's Eagle and
IP7 signaling  products and related services generated over 50% of its revenues,
and the Company  expects that these  products and services and its other network
systems  products  will  continue to account for a  substantial  majority of the
Company's  revenues for the foreseeable  future. As a result,  factors adversely
affecting  the  pricing of or demand for these  products,  such as  competition,
technological  change or a slower than  anticipated  rate of  deployment  of new
technologies,   could  cause  a  decrease   in  the   Company's   revenues   and
profitability.  Therefore,  continued and widespread  market acceptance of these
products is critical to the Company's  future success.  Moreover,  the Company's
future  financial  performance will depend in significant part on the successful
and timely development, introduction and customer acceptance of new and enhanced


                                       22
<PAGE>

versions of the  Company's  Eagle and IP7  products  and other  Network  Systems
products.  There  are  no  assurances  that  the  Company  will  continue  to be
successful in developing and marketing its network systems  products and related
services.

If  wireless  carriers  do not  continue to buy the  Company's  Network  Systems
products and services, the Company's Network Systems business would be harmed.

     The success of the Company's  Network Systems business will depend in large
part on the  continued  growth  of the  wireless  network  operators  and  their
purchases  of the  Company's  products  and  services.  The  Company  derives  a
substantial  portion of its revenues from the sale of Network  Systems  products
and  services to wireless  networks  operators.  In 2001,  sales to the wireless
market accounted for  approximately 50% of the Company's  revenues.  The Company
expects  that its sales of Network  Systems  products  and  services to wireless
companies will continue to account for a substantial percentage of the Company's
revenues for the foreseeable  future.  The continued  growth of the domestic and
international  wireless  markets  is  subject  to a number of risks  that  could
adversely affect the Company's revenues and profitability, including weakness in
the domestic or global economy,  a slowdown in capital  spending by the wireless
network  operators,  adverse  changes  in the debt and  equity  markets  and the
ability of wireless  carriers to obtain financing on favorable terms,  delays or
scaling back of plans for the  deployment by wireless  network  operators of new
wireless broadband technologies, and slowing wireless network subscriber growth.
Consequently, there can be no assurances that the wireless network carriers will
continue to purchase the Company's Network Systems products and services for the
build out or expansion of their networks.

Risks related to the potential convergence of voice and data networks

     Currently,  voice conversations are carried primarily over circuit switched
networks.  Another type of network, packet switched networks,  carries primarily
data.  Circuit and packet  networks use  fundamentally  different  technologies.
Although  the Company  expects a  substantial  portion of any  increases  in its
future sales of network systems products to result from the interconnection,  or
convergence,  of circuit  and packet  networks,  the Company  cannot  accurately
predict when such convergence will occur.  Therefore,  this convergence presents
several significant and related risks to the Company's business.

If the  convergence  of circuit  and packet  networks  does not occur,  or takes
longer than anticipated, sales of the Company's network infrastructure products,
and the Company's profitability, could be adversely affected.

     Any factor  which  might  prevent or slow the  convergence  of circuit  and
packet networks could materially and adversely affect growth  opportunities  for
the Company's business. Such factors include:

     o    the  failure  to solve or  difficulty  in  solving  certain  technical
          obstacles to the  transmission  of voice  conversations  over a packet
          network;

     o    delays in the  formulation of standards for the  transmission of voice
          conversations over a packet network; and

     o    the imposition on packet network  operators of access fees, which they
          currently do not pay.


                                       23
<PAGE>

     It may be difficult or impossible to solve certain  technical  obstacles to
the  transmission  of voice  conversations  over a packet  network with the same
quality and reliability of a circuit network. For example, delays or gaps in the
timing of a message are typically not as critical to data  transmissions as they
are to voice conversations. The nature of packet switching makes it difficult to
prevent such delays or gaps as well as to repair such defects in a way that does
not degrade the quality of a voice conversation.  If this problem is not solved,
the  convergence  of circuit  and packet  networks  may never fully occur or may
occur  at a much  slower  rate  than  the  Company  anticipates.  It may also be
difficult or time-consuming for the industry to agree to standards incorporating
any one solution to such technical issues if such a solution does exist. Without
uniform  standards,  substantial  convergence of circuit and packet networks may
not occur.

     The Company cannot accurately predict when these technical problems will be
solved,  uniform  standards  agreed  upon  or  when  market  acceptance  of such
solutions  will  occur.  However,  convergence  may well take much longer or, as
noted  above,  not  fully  occur at all.  Moreover,  uncertainty  regarding  the
technology  or standards  employed in converged  networks may cause  carriers to
delay their purchasing plans.

     Finally,  the  imposition of access fees on packet  networks might slow the
convergence of circuit and packet networks.  Today,  federal regulation requires
an operator of a long distance circuit network to pay an access fee to the local
phone  company  serving the recipient of a long distance  call.  Packet  network
operators do not currently pay such access fees. In the future,  access fees may
be imposed on carriers  using packet  networks to transmit  voice  calls.  These
access fees might also be imposed on the  termination of "pure" data messages by
operators of packet  networks.  The imposition of these access fees would reduce
the  economic   advantages  of  using  packet   networks  for  voice  and  other
transmissions, which may slow the convergence of circuit and packet networks.

Customers  may  prefer  fully  integrated  switching  solutions  offered  by the
Company's competitors.

     The Company's product strategy is to develop and provide only certain parts
of a  network  switch  which  would  be used in  converged  circuit  and  packet
networks.  This means that the  Company's  new IP7 Secure  Gateway and VXi Media
Gateway  Controller  will  need  to be  deployed  with  the  products  of  other
manufacturers  in  order to  constitute  a  complete  switching  solution  for a
converged network. Some of the Company's  competitors,  including Lucent, Nortel
and Sonus Networks, manufacture fully integrated switches for converged networks
that  would  not  require  any of the  Company's  products.  Some  or all of the
Company's  customers or potential  customers may prefer to purchase such a fully
integrated  switching  product rather than purchasing the Company's  convergence
switching  products.  They may  prefer a fully  integrated  switch,  even if the
Company's  convergence switching products are offered with the switch components
made by others.  Customers may choose this option  because they believe that the
fully integrated products are superior. If a significant number of the Company's
potential  customers  prefer a fully  integrated  solution  made entirely by one
manufacturer,  the  Company's  strategy  could fail  because its products do not
achieve broad market acceptance for converged  networks,  and its business could
suffer.


                                       24
<PAGE>

The Company's dependence on strategic  relationships with manufacturers of other
products makes it potentially vulnerable to the actions and performance of other
manufacturers.

     Because the Company's IP7 Secure  Gateway and VXi Media Gateway  Controller
will need to be bundled  with the  products of other  manufacturers  in order to
constitute a switch in converged circuit and packet networks, the Company may be
adversely  affected by the actions of the  manufacturers  of the other necessary
switch elements. First, these manufacturers may not choose to make their product
designs compatible with the Company's products.  Second, those manufacturers who
do choose to make their products  compatible with the Company's products may not
develop or deliver their products on a timely basis, or may not develop products
which perform as expected or are priced competitively.  Third,  manufacturers of
these  products may also  subsequently  change the design of their products in a
manner which makes it difficult or  impossible  to make the  Company's  products
compatible.  Fourth,  manufacturers  of these  products  may decide to develop a
fully  integrated  network  switch for converged  networks and may cease selling
non-integrated  switching  products.  Finally,  because the  Company  intends to
market a product which  incorporates  network switching products made by others,
any other  manufacturer  who markets the  Company's  products  together with its
products  may  terminate  or cease  to fully  support  its  efforts  to sell the
Company's  products.  All of these  actions  will be  outside  of the  Company's
control.  Any of  these  actions  could  materially  and  adversely  affect  the
Company's business and profitability.

If the Company's  products do not satisfy  customer  demand for  performance  or
price, the Company's customers could purchase products from its competitors.

     If the Company is not able to compete  successfully against its current and
future  competitors,  its current and potential customers may choose to purchase
similar  products offered by the Company's  competitors,  which would negatively
affect the Company's revenues.  The Company faces formidable  competition from a
number of  companies  offering  a variety  of network  systems,  diagnostics  or
contact center products.  The markets for the Company's  products are subject to
rapid  technological   changes,   evolving  industry  standards  and  regulatory
developments.   The  Company's  competitors  include  many  large  domestic  and
international  companies  as well  as  many  smaller  established  and  emerging
technology companies. The Company competes principally on the basis of:

     o    product performance and functionality;

     o    product quality and reliability;

     o    customer service and support; and

     o    price.

     Many of the Company's  competitors  have  substantially  greater  financial
resources,   product   development,    marketing,   distribution   and   support
capabilities, name recognition and other resources than the Company. The Company
anticipates  that  competition  will continue to intensify with the  anticipated
convergence of voice and data  networks.  The Company may not be able to compete
effectively or to maintain or capture meaningful market share, and the Company's
business could be harmed, if the Company's competitors' solutions provide higher
performance, offer additional features and functionality or are more reliable or
less expensive


                                       25
<PAGE>

than the Company's  products.  Increased  competition could force the Company to
lower its prices or take other  actions to  differentiate  its  products,  which
could adversely affect its operating results.

The Company  depends on a limited  number of  customers,  and the loss of any of
these customers could adversely affect the Company's operating results.

     Historically, a limited number of customers has accounted for a significant
percentage of the Company's  revenues in each fiscal  quarter.  Less than 10% of
the  Company's  customers  accounted  for  approximately  70% of  the  Company's
revenues in each of 2000 and 2001.  The Company  anticipates  that its operating
results in any given period will continue to depend to a significant extent upon
revenues from a small number of customers.  In addition, the Company anticipates
that the mix of customers in each fiscal  period will continue to vary. In order
to  increase  its  revenues,   the  Company  will  need  to  attract  additional
significant  customers  on an ongoing  basis.  Its failure to sell a  sufficient
number of products or to obtain a  sufficient  number of  significant  customers
during a particular period could adversely affect its operating results.

If the Company fails to develop or introduce  new products in a timely  fashion,
its business will suffer.

     If the Company fails to develop or introduce on a timely basis new products
or product enhancements or features that achieve market acceptance, its business
will  suffer.  The markets for the  Company's  network  systems and  diagnostics
products are characterized by rapidly changing technology,  frequent new product
introductions,  short product life cycles and enhancements and evolving industry
standards.  The Company's  success will depend to a significant  extent upon its
ability to accurately anticipate the evolution of new products, technologies and
market trends and to enhance its existing  products.  It will also depend on the
Company's  ability to timely develop and introduce  innovative new products that
gain market acceptance. Finally, sales of both the Company's network systems and
its  diagnostics  products  depend  in part on the  continuing  development  and
deployment  of  emerging  standards  and our ability to offer new  products  and
services that comply with these  standards.  There can be no assurances that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or enhancing  its existing  products on a timely or  cost-effective
basis. Moreover, the Company may encounter technical problems in connection with
its product  development  that could result in the delayed  introduction  of new
products  or  product  enhancements.   In  addition,  products  or  technologies
developed  by  others  may  render  the  Company's  products  noncompetitive  or
obsolete.

Litigation  related to product  liability  claims could be  expensive  and could
negatively affect the Company's profitability.

     Products as complex as the  Company's  may contain  undetected  errors when
first  introduced  or as new versions are  released.  Such errors,  particularly
those  that  result  in  a  failure  of  the  Company's  switching  products  or
telecommunications  networks,  could harm the Company's customer  relationships,
business and reputation.  While the Company's  products have earned a reputation
for reliability and  performance,  there can be no assurances that the Company's
products will not have errors in the future.  A product  liability claim brought
against the Company could result in costly,  protracted,  highly  disruptive and
time consuming litigation, which would harm the Company's business. In addition,
the  Company  may be  subject to claims  arising  from its  failure to  properly
service or maintain its products or to adequately remedy


                                       26
<PAGE>

defects in its  products  once such defects have been  detected.  The  Company's
agreements with its customers typically contain provisions designed to limit its
exposure to potential product liability claims. However, it is possible that the
limitation of liability provisions contained in the Company's agreements may not
be  effective  under  the laws of some  jurisdictions,  particularly  since  the
Company has  significant  international  sales.  Although the Company  maintains
product  liability  insurance,  it may not be  sufficient to cover all claims to
which the Company may be subject.  The successful  assertion against the Company
of one or a series of large uninsured claims would harm the Company's  business.
Although  the Company has not  experienced  any  significant  product  liability
claims to date,  the Company's  sale and support of products may entail the risk
of these types of claims, and subject the Company to such claims in the future.

     In  August  2000,  Alcatel  USA,  Inc.  and  Alcatel  USA  Sourcing,   L.P.
(collectively,  "Alcatel")  filed a  complaint  against  Tekelec  alleging  that
Tekelec  manufactures  and sells  products  that  infringe two patents  owned by
Alcatel USA  Sourcing,  L.P.  The patents at issue relate to a system and method
for  application  location  register  routing in a  telecommunications  network.
Although the Company  believes  that it has defenses to Alcatel's  claims on the
ground of invalidity,  noninfringement and inequitable conduct by Alcatel, there
can be no assurance  that the Company  will be  successful  in this action.  See
"Legal Proceedings", Item 3.

If customers do not continue to purchase test systems, the Company's diagnostics
business would be harmed.

     The future  success of the  Company's  diagnostics  business will depend on
continued growth in the market for telecommunications  test systems and services
and the continued commercial acceptance of the Company's diagnostics products as
solutions to address the testing  requirements of  telecommunications  equipment
manufacturers,  to a lesser  extent,  and network  operators.  While most of the
Company's  existing and potential  customers  have the technical  capability and
financial  resources to produce their own test systems and perform test services
internally,  many have  chosen to purchase a  substantial  portion of their test
equipment  needs.  There can be no assurances that the Company's  customers will
continue to purchase their test systems from third parties or that potential new
customers  will  purchase test  equipment.  Even if they do, they may choose the
diagnostics products and services offered by the Company's competitors.

     Certain  of  the  Company's   customers  in  the  diagnostics  market  also
manufacture  network  systems  products  that  compete or may  compete  with the
Company's current or future network systems products.  Increasing competition in
the network  systems market may cause these  customers to reduce their purchases
of the Company's diagnostics products.

The  Company  is  dependent  on  relationships   with  strategic   partners  and
distributors and other resellers.

     The Company believes that its ability to compete successfully against other
network  systems  product  manufacturers  depends  in part on  distribution  and
marketing relationships with leading communications  equipment suppliers. If the
Company  cannot  successfully  enter these types of  relationships  on favorable
terms to the Company or maintain these relationships, the Company's business may
suffer.

     In addition,  the Company expects to increasingly rely on the deployment of
its products with those of other  manufacturers,  systems  integrators and other
resellers, both domestically and


                                       27
<PAGE>

internationally.  To the extent the Company's products are so incorporated,  the
Company  depends  on the  timely  and  successful  development  of  those  other
products.  Although the Company  currently has a network of distributors for its
diagnostics  products and uses  distributors  only to a limited extent or not at
all with  respect  to its other  product  lines,  the  Company  may  expand  its
distribution  activities with respect to its other products,  including  network
infrastructure products.

The Company's compliance with  telecommunications  regulations and standards may
be difficult and costly,  and if the Company fails to comply,  its product sales
would decrease.

     In order  to  maintain  market  acceptance,  the  Company's  products  must
continue to meet a  significant  number of  regulations  and  standards.  In the
United  States,  the  Company's  products  must comply with various  regulations
defined by the Federal Communications  Commission and Underwriters  Laboratories
as well as standards established by Telcordia (formerly Bell  Telecommunications
Research).  Internationally,  the Company's  products must comply with standards
established by  telecommunications  authorities in various  countries as well as
with  recommendations  of the International  Telecommunications  Union. As these
standards evolve, the Company will be required to modify its products or develop
and support new versions of its products.  The failure of the Company's products
to comply,  or delays in  compliance,  with the various  existing  and  evolving
industry  standards could delay  introduction of its products,  which could harm
the Company's business.

     In order to penetrate the Company's  target  markets,  it is important that
the Company  ensures the  interoperability  of its products with the operations,
administration,  maintenance  and  provisioning  systems  used by the  Company's
customers. To ensure this interoperability, the Company periodically submits its
products  to  technical  audits.  The  Company's  failure or delay in  obtaining
favorable  technical  audit results could  adversely  affect its ability to sell
products to some segments of the communications market.

     Government  regulatory  policies  are  likely to  continue  to have a major
impact on the pricing of existing as well as new public  network  services  and,
therefore,   are   expected  to  affect   demand  for  such   services  and  the
communications  products,  including the Company's  products,  that support such
services.  Tariff  rates,  whether  determined  autonomously  by  carriers or in
response to regulatory  directives,  may affect cost  effectiveness of deploying
public network  services.  Tariff policies are under  continuous  review and are
subject to change.  User  uncertainty  regarding future policies may also affect
demand  for  communications  products,  including  the  Company's  products.  In
addition,  the  convergence  of circuit and packet  networks could be subject to
governmental  regulation.  Regulatory  initiatives in this area could  adversely
affect the Company's business.

The Company has significant  international sales, and international markets have
inherent risks.

     International  sales are subject to inherent  risks,  including  unexpected
changes in regulatory  requirements  and tariffs,  difficulties  in staffing and
managing foreign  operations and  distributors,  longer payment cycles,  greater
difficulty  in  accounts  receivable  collection  and  potentially  adverse  tax
consequences.  Doing  business  overseas  is  generally  more  costly than doing
business in the United States.  The Company sells its products worldwide through
its direct  sales  forces,  distributors  and other  resellers  and wholly owned
subsidiaries in Japan and the United Kingdom.  International sales accounted for
23% in 1999, 29% in 2000 and 27% in 2001.


                                       28
<PAGE>

The Company's  sales through its Japanese  subsidiary,  and to a limited extent,
other sales, are denominated in local currencies while other international sales
are U.S.  dollar-denominated.  The Company expects that international sales will
continue to account for a significant portion of its revenues in future periods.

     Exchange  rate   fluctuations   on  foreign   currency   transactions   and
translations   arising  from   international   operations   may   contribute  to
fluctuations in the Company's  business and operating  results.  Fluctuations in
exchange rates could also affect demand for the Company's products.  If, for any
reason,  exchange or price controls or other  restrictions in foreign  countries
are imposed,  the  Company's  business and operating  results  could suffer.  In
addition,  any inability to obtain local regulatory approvals in foreign markets
on a timely basis could harm the Company's business.

     In  particular,  if the  Company  is not  able  to  manage  its  continuing
expansion into Europe and planned  expansion  into Latin America,  the Company's
business may suffer.  In addition,  the Company is relatively  unknown in Europe
and  Latin   America,   and  the  Company  may  have   difficulty   establishing
relationships  or building name  recognition,  which could adversely  affect its
performance in these markets.  Moreover,  European  telecommunications  networks
generally  have a different  structure,  and the  Company's  products may not be
completely compatible with this different structure.  As a result, the Company's
products may not be competitive with those of its competitors in Europe.

     Access  to  foreign  markets  is  often  difficult  due to the  established
relationships between a government-owned or controlled  communications operating
company and its traditional  indigenous  suppliers of communications  equipment.
These  foreign  communications  networks  are in many  cases  owned or  strictly
regulated by  government.  There can be no  assurances  that the Company will be
able to  successfully  penetrate these markets,  particularly  for its switching
products.

The Company's loss of services of key personnel or failure to attract and retain
additional key personnel could adversely affect the Company's business.

     The Company  depends to a significant  extent upon the continuing  services
and  contributions  of its  senior  management  team and  other  key  personnel,
particularly  Michael L. Margolis,  its Chief  Executive  Officer and President;
Fred Lax, its Chief Operating Officer and Executive Vice President, Lori Craven,
its Vice President and General Manager, Network Systems Division; Lee Smith, its
Vice President and General Manager,  Network  Diagnostics  Division;  and Debbie
May, its Vice  President  and General  Manager,  Contact  Center  Division.  The
Company does not have long-term employment agreements or other arrangements with
its  employees  which would  prevent them from leaving  Tekelec.  The  Company's
future  success  also  depends  upon its  ongoing  ability to attract and retain
highly skilled personnel. The Company's business could suffer if it were to lose
any key personnel and not be able to find  appropriate  replacements in a timely
manner or if it were  unable to attract  and retain  additional  highly  skilled
personnel.

There  can  be  no  assurances  that  the  Company's  measures  to  protect  its
proprietary technology and other intellectual property rights are adequate.

     The Company's  success  depends to a significant  degree on its proprietary
technology and other  intellectual  property.  Although the Company  regards its
technology as proprietary, it has


                                       29
<PAGE>

sought only limited  patent  protection.  The Company relies on a combination of
patents, copyrights,  trademarks, trade secrets,  confidentiality agreements and
contractual  restrictions to establish and protect its proprietary rights. These
measures,  however,  afford only limited  protection  and may not prevent  third
parties from  misappropriating  the Company's  technology or other  intellectual
property. In addition,  the laws of certain foreign countries do not protect the
Company's  proprietary  rights to the same  extent as do the laws of the  United
States,  which makes  misappropriation  of the  Company's  technology  and other
intellectual property more likely. It is possible that others will independently
develop  similar  products  or design  around the  Company's  patents  and other
proprietary  rights. If the Company fails to successfully  enforce or defend its
intellectual  property rights or if it fails to detect  misappropriation  of its
proprietary  rights,  the  Company's  ability to  effectively  compete  could be
seriously impaired.

     The Company's  pending patent and trademark  registration  applications may
not be allowed,  and the  Company's  competitors  may  challenge the validity or
scope  of the  Company's  patent  or  trademark  registration  applications.  In
addition,  the Company  from time to time faces  challenges  to the  validity or
enforceability  of its  proprietary  rights and  litigation  may be necessary to
enforce and  protect its rights,  to  determine  the  validity  and scope of its
proprietary  rights  and the rights of others,  or to defend  against  claims of
infringement  or  invalidity.  Any such  litigation  would be expensive and time
consuming, would divert the Company's management and key personnel from business
operations and would likely harm its business and operating results.

If third  parties  claim  that the  Company  is  infringing  their  intellectual
property,  the Company may be prevented from selling certain  products and incur
significant expenses to resolve these claims.

     The Company  receives from time to time claims of  infringement  from third
parties or otherwise  becomes  aware of relevant  patents or other  intellectual
property rights of third parties that may lead to disputes and  litigation.  Any
claims made against the Company regarding patents or other intellectual property
rights could be expensive and time consuming to resolve or defend and could have
a material  adverse  effect on the  Company's  business.  In addition,  any such
claims would divert the Company's management and key personnel from its business
operations  and may  require  the  Company  to  modify  or cease  marketing  its
products,  develop new technologies or products, acquire licenses to proprietary
rights that are the subject of the infringement claim or refund to its customers
all or a portion  of the  amounts  they paid for  infringing  products.  If such
claims are asserted,  there can be no assurances  that the Company would prevail
or be able to acquire any necessary  licenses on acceptable terms, if at all. In
addition,  the Company may be requested to defend and  indemnify  certain of its
customers  and  resellers   against  claims  that  its  products   infringe  the
proprietary  rights of others.  The Company  may also be subject to  potentially
significant  damages or injunctions  against the sale of certain products or use
of certain  technologies.  There can be no assurances  whether litigation can be
avoided or  successfully  concluded.  Although  the  Company  believes  that its
intellectual  property  rights are  sufficient  to allow it to sell its existing
products without violating the valid proprietary rights of others,  there can be
no assurances that the Company's technologies or products do not infringe on the
proprietary  rights of third  parties  or that such  parties  will not  initiate
infringement actions against the Company.

If the Company is unable to procure some of its subsystems  and components  from
other manufacturers, the Company may not be able to obtain substitute subsystems
or components on terms that are as favorable.


                                       30
<PAGE>

     Certain of the Company's products contain subsystems or components acquired
from other OEMs.  These OEM  products  are often  available  only from a limited
number of  manufacturers.  In the event that an OEM product becomes  unavailable
from a current OEM vendor, second sourcing would be required.  This sourcing may
not be  available  on  reasonable  terms,  if at all,  and could delay  customer
deliveries, which could adversely affect the Company's business.

The Company is exposed to the credit risk of some of its customers and to credit
exposures in weakened markets.

     Due to the current  slowdown in the economy,  the credit risks  relating to
Tekelec's  customers have increased.  Although the Company has programs in place
to monitor and mitigate the associated risk, there can be no assurance that such
programs will be effective in reducing the Company's  credit risks.  The Company
also continues to monitor credit exposure from weakened financial  conditions in
certain geographic regions,  and the impact that such conditions may have on the
worldwide economy.  The Company has experienced losses due to customers' failing
to meet their  obligations.  Although  these  losses have not been  significant,
future  losses,  if  incurred,  could  harm the  Company's  business  and have a
material adverse effect on its operating results and financial condition.

Substantial future sales of the Company's Common Stock or sales by its directors
and officers in the public market may depress the Company's stock price.

     Sales of a substantial  number of shares of the  Company's  Common Stock in
the future could cause the Company's  stock price to fall.  All of the Company's
directors  and  executive  officers  own or have  options to  acquire  shares of
Tekelec  Common  Stock  and  sales  by  these  individuals  could  be  perceived
negatively  by investors and could cause the market price of the Common Stock to
drop.

The  Company's  shareholder  rights plan may make it more  difficult for a third
party to acquire us, despite the possible benefits to our shareholders.

     The  Company's  shareholder  rights  plan may have the effect of  delaying,
deferring  or  preventing  a change in control of the Company  despite  possible
benefits to its  shareholders,  may discourage bids at a premium over the market
price of Tekelec Common Stock and may harm the market price of the Common Stock.

Tekelec's stock price may be volatile.

     The market price for Tekelec Common Stock has experienced  price volatility
and may  continue to be  volatile  and  subject to  fluctuations  in response to
factors  including  those set forth in this Annual Report.  The stock markets in
general,  and The Nasdaq  Stock  Market and  technology  and  telecommunications
companies in particular,  have experienced extreme price and volume fluctuations
that have often been  unrelated  or  disproportionate  to  companies'  operating
performances.  These  broad  market  and  industry  factors,  as well as general
economic and political  conditions,  may materially  adversely impact the market
price of Tekelec Common Stock in the future,  regardless of the Company's actual
operating performance.


                                       31
<PAGE>


Item 2. PROPERTIES

     The Company's executive offices and principal manufacturing  operations are
located in  Calabasas,  California in  facilities  consisting  of  approximately
77,000 square feet.  The Company  leases the facility  under a lease expiring in
November 2004, subject to a five-year renewal option.

     The Company also occupies a 155,000  square-foot  facility in  Morrisville,
North Carolina  under a lease  expiring in November 2009.  This facility is used
primarily for engineering,  product  development,  customer support and regional
sales activities for the Company's network systems  products.  In July 2000, the
Company  agreed  to  lease  an  additional  161,000   square-foot   facility  in
Morrisville,  North Carolina,  to be constructed in three phases.  Phase one was
completed in July 2001, and approximately 57,000 square feet are occupied by the
Company. Construction of the entire facility is scheduled to be completed by May
2003.  This facility is used  primarily for  engineering,  product  development,
customer  support  and  regional  sales  activities  for the  Company's  network
diagnostics products.

     The Company's IEX subsidiary leases a facility  consisting of approximately
95,000  square feet in  Richardson,  Texas  under a lease  expiring in May 2003,
subject to a five-year renewal option. The IEX facility is used for engineering,
product  development,  customer support,  and general  administrative  and sales
activities  for  certain  of the  Company's  network  systems  products  and the
Company's contact center products.

     The Company also has seven regional sales offices occupying an aggregate of
approximately  12,000 square feet under leases expiring between 2002 and 2005 in
Englewood, Colorado; Duluth, Georgia; Lombard, Illinois; Mt. Laurel, New Jersey;
Irving, Texas; Sunset Hills, Virginia; and Amsterdam, the Netherlands.

     The Company's Japanese subsidiary occupies approximately 14,000 square feet
in Tokyo  under  leases  expiring  between  April 2002 and  November  2003.  The
Company's subsidiary in the United Kingdom occupies  approximately 20,000 square
feet in Egham under a lease expiring in March 2016.

     The Company believes that its existing  facilities will be adequate to meet
the Company's  needs at least through 2002, and that the Company will be able to
obtain additional space when, where and as needed on acceptable terms.

Item 3. LEGAL PROCEEDINGS

Alactel USA, Inc. and Alcatel USA Sourcing, L.P. vs. Tekelec

     In  August  2000,  Alcatel  USA,  Inc.  and  Alcatel  USA  Sourcing,   L.P.
(collectively, "Alcatel") filed a complaint against Tekelec in the United States
District  Court  for the  Eastern  District  of  Texas,  Sherman  Division.  The
complaint  alleges  that  Tekelec  makes and sells  products  that  infringe two
patents owned by Alcatel  Sourcing.  The patents at issue relate to a system and
method  for  application  location  register  routing  in  a  telecommunications
network.  Alcatel's allegations relate to three particular software applications
offered by Tekelec as features on its EAGLE STP for  routing  query  messages in
wireless networks.  Alcatel seeks a permanent  injunction  enjoining the Company
from infringing the patents at issue, unspecified general and exemplary damages,
and an award of costs.


                                       32
<PAGE>

     In September  2000,  Tekelec filed an answer and  counterclaim to Alcatel's
complaint   denying   Alcatel's  claims  of  infringement  and  raising  several
affirmative  defenses.  Tekelec has also asserted several  counterclaims against
Alcatel  seeking  declaratory  relief that Tekelec has not infringed the Alcatel
patents and that such patents are invalid and  unenforceable.  Tekelec  believes
that it has strong  defenses to Alcatel's  claims on the grounds of  invalidity,
noninfringement and inequitable conduct by Alcatel,  and is defending the action
vigorously.  The parties are currently completing  pre-trial discovery.  A trial
date has been scheduled for June of 2002.

IEX Corporation vs. Blue Pumpkin Software, Inc.

     In January  2001,  IEX  Corporation,  a wholly owned  subsidiary of Tekelec
("IEX"),  filed suit against Blue Pumpkin  Software,  Inc., in the United States
District  Court for the Eastern  District  of Texas,  Sherman  Division.  In its
complaint,  IEX asserts  that  certain of Blue  Pumpkin's  products and services
infringe United States Patent No.  6,044,355 held by IEX. In the suit, IEX seeks
damages and an injunction prohibiting Blue Pumpkin's further infringement of the
patent. In February 2001, Blue Pumpkin responded to IEX's suit denying that Blue
Pumpkin  infringes  IEX's patent and asserting that such patent is invalid.  IEX
intends to  vigorously  prosecute  this action and to protect  its  intellectual
property.

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,  and Tekelec is  currently  investigating  which  products
and/or processes might be subject to the lawsuit. Several other Arizona lawsuits
involving the same patents 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.  Tekelec  believes  that the same stay may apply to this
lawsuit as well.  Tekelec  currently  believes that the ultimate  outcome of the
lawsuit will not have a material  adverse  effect on its financial  condition or
overall results of operations.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Inapplicable


                                       33
<PAGE>


                                     PART II


Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The  Company's  Common Stock is traded on The Nasdaq Stock Market under the
symbol TKLC.  The  following  table sets forth the range of high and low closing
sales  prices for the Common  Stock for the  periods  indicated.  As of March 1,
2002, there were 242 record shareholders of the Company's Common Stock.

                                                      High            Low
                                                    -------        -------
      2000
         First Quarter...........................   $ 52.19        $ 23.88
         Second Quarter..........................     48.19          27.38
         Third Quarter...........................     48.13          28.88
         Fourth Quarter..........................     39.69          24.06

      2001
         First Quarter...........................   $ 30.50        $ 16.88
         Second Quarter..........................     35.56          16.13
         Third Quarter...........................     26.35          11.79
         Fourth Quarter..........................     21.56          12.06

     The Company has never paid a cash dividend on its Common  Stock.  It is the
present  policy of the  Company to retain  earnings  to  finance  the growth and
development  of its business  and,  therefore,  the Company does not  anticipate
paying cash dividends on its Common Stock in the foreseeable future.

     On November 2, 1999, the Company issued  $135,000,000  principal  amount at
maturity  of its 3.25%  Convertible  Subordinated  Discount  Notes due 2004 (the
"Notes") in a private placement and without  registration in reliance on Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"). The issue
price of the Notes was 85.35% of the principal amount at maturity, and the total
gross proceeds to the Company were  $115,227,900  before discounts and expenses.
The Notes are convertible  into Common Stock of the Registrant at any time on or
after January 31, 2000, unless previously  redeemed or otherwise  repurchased by
the  Registrant.  The  conversion  rate of the Notes is 56.3393 shares of Common
Stock per $1,000 principal amount at maturity,  subject to adjustment in certain
events.  The Company sold the Notes to Deutsche Bank Securities Inc. and Warburg
Dillon  Read LLC as the initial  purchasers,  and the  initial  purchasers  have
advised the Company that they resold the Notes only to "Qualified  Institutional
Buyers" (as defined in Rule 144A under the  Securities  Act) in compliance  with
Rule 144A and, outside of the United States,  to investors that were not "United
States persons" as defined in Rule 902 of Regulation S under the Securities Act.
In February 2000, the Company  registered for resale the Notes and the shares of
Common Stock issuable upon conversion  thereof under the Securities Act of 1933.
The notes are callable after three years from issuance.


                                       34
<PAGE>


Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.

     The  statement of  operations  data  included in the selected  consolidated
financial data set forth below for the years ended  December 31, 2001,  2000 and
1999 and the balance  sheet data set forth  below at December  31, 2001 and 2000
are derived  from,  and are  qualified in their  entirety by  reference  to, the
Company's audited  consolidated  financial statements and notes thereto included
in this Annual Report on Form 10-K.  The statement of operations  data set forth
below for the years ended  December 31, 1998 and 1997 and the balance sheet data
set forth below at December  31,  1999,  1998 and 1997 are derived  from audited
consolidated financial statements of the Company, which are not included herein.

                        Five-Year Selected Financial Data

<TABLE>
<CAPTION>
For the Years Ended December 31,                                        2001          2000         1999         1998         1997
                                                                     ----------    ----------   ----------   ----------   ----------
                                                                                    (thousands, except per share data)
<S>                                                                  <C>           <C>          <C>          <C>          <C>
Statement of Operations Data:
Revenues .........................................................   $  312,451    $  314,334   $  226,068   $  176,669   $  125,140
Income (Loss) before provision
     for income taxes ............................................         (816)       29,622       10,229       55,551       29,741
Net income (loss) ................................................       (6,899)       12,896          444       39,209       28,996
Earnings (Loss) per share:
     Basic .......................................................   $    (0.12)   $     0.22   $     0.01   $     0.73   $     0.58
     Diluted .....................................................        (0.12)         0.20         0.01         0.67         0.51
Weighted average number of shares outstanding:
     Basic .......................................................       59,574        57,823       54,931       53,518       50,408
     Diluted .....................................................       59,574        64,123       58,690       58,708       56,842

Balance Sheet Data (at December 31):
Cash and liquid investments ......................................   $  230,980    $  159,413   $  106,664   $  113,774   $   70,518
Working capital ..................................................      185,168       218,935      127,702      108,762       86,354
Total assets .....................................................      484,404       458,524      394,434      210,210      136,465
Long-term liabilities ............................................      137,929       136,050      137,552        2,252        2,839
Shareholders' equity .............................................      248,822       237,597      176,595      165,777      107,877
</TABLE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS.

     The  following  discussion  should  be read  in  conjunction  with,  and is
qualified in its  entirety by, the  consolidated  financial  statements  and the
notes thereto  included in this Annual Report on Form 10-K.  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.

     The Tekelec logo and Eagle are  registered  trademarks of Tekelec.  Tekelec
IP7 Secure  Gateway,  ASi 4000,  VXi,  MGTS i3000,  TotalView  and  TotalNet are
trademarks of Tekelec.

OVERVIEW

     The  Company's  product  offerings  are  currently  organized  along  three
distinct product lines: network systems, network diagnostics and contact center.

     Network  Systems  Products.  The  Company's  network  systems  product line
consists  principally  of the Eagle 5 SAS and  related  products,  features  and
applications  based on the Eagle platform,  including the IP7 Secure Gateway and
the Company's local number  portability  solution,  the ASi 4000 Service Control
Point, the VXi Media Gateway Controller and other convergence


                                       35
<PAGE>

products.  During 2000,  the Company's  business  segments were  reorganized  to
include the Sentinel network surveillance system in the network systems products
segment.

     Network Diagnostics Products. This product line consists principally of the
MGTS and MGTS i3000 families of diagnostics products.

     Contact Center Products.  The Company's IEX contact center products provide
planning,  management  and call  routing  and control  tools for single  contact
centers and for complex, multiple site contact center environments. This product
line  includes the  TotalView  Workforce  Management  and TotalNet  Call Routing
solutions.  In 2000, the IEX Call Center Division was renamed the Contact Center
Division due to the evolution of that division's  products to support multimedia
contact centers.

Critical Accounting Policies and Estimates

     Management's  discussion and analysis of financial condition and results of
operations  were based upon the  Company's  consolidated  financial  statements,
which have been  prepared in accordance  with  accounting  principles  generally
accepted in the United States.  The  preparation of these  financial  statements
requires  making  estimates  and judgments  that affect the reported  amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, estimates are evaluated, including
those  related  to  revenue   recognition,   allowance  for  doubtful  accounts,
inventories,  investments,  deferred  taxes,  impairment of  long-lived  assets,
product warranty, and contingencies and litigation. These estimates are based on
historical  experience and on various other  assumptions that are believed to be
reasonable  under the  circumstances,  the  results  of which form the basis for
making  judgments about the carrying  values of assets and liabilities  that are
not readily  apparent from other  sources.  Actual results may differ from these
estimates.

     The  Company  applies the  following  critical  accounting  policies in the
preparation of the consolidated financial statements:

     o    Revenue Recognition Policy. Revenues are derived from sales of network
          systems  products,  diagnostics  products and contact center products.
          Revenues are recognized  upon the transfer of title,  generally at the
          time of  shipment to the  customer's  final site and  satisfaction  of
          related Company obligations, if any, provided that persuasive evidence
          of an  arrangement  exists,  the fee is  fixed  and  determinable  and
          collectability is deemed probable. For certain products, the Company's
          sales arrangements  include  acceptance  provisions which are based on
          the  Company's  published  specifications  and  are  accounted  for as
          warranty,  provided that the Company has previously  demonstrated that
          the product meets the specified criteria and has established a history
          with substantially similar transactions. Revenue is deferred for sales
          arrangements  which include  customer-specific  acceptance  provisions
          where the Company is unable to reliably demonstrate that the delivered
          product meets all of the specified criteria until customer  acceptance
          is obtained.  Revenues associated with  multiple-element  arrangements
          are  allocated  to each  element  based on vendor  specific  objective
          evidence  of  fair  value.   Revenues   associated  with  installation
          services,  if provided,  are deferred  based on the fair value of such
          services and are recognized upon completion. Revenue is recognized for
          maintenance  agreements  ratably over the contract  term.  Significant
          management judgments and estimates must be made and used in connection
          with  the  revenue  recognized  in  any  accounting  period.  Material
          differences may result in the amount and timing of our revenue for any
          period if management  made different  judgments or utilized  different
          estimates.


                                       36
<PAGE>

     o    Allowance for Doubtful Accounts. An allowance for doubtful accounts is
          maintained  for estimated  losses  resulting from the inability of our
          customers to make required payments. If the financial condition of our
          customers  were to  deteriorate,  resulting in an  impairment of their
          ability to make payments, additional allowances may be required.

     o    Inventories.  Inventory  levels  are  based on  projections  of future
          demand and market  conditions.  Any  sudden  decline in demand  and/or
          rapid product  improvements  and  technological  changes can result in
          excess and/or obsolete  inventories.  On an ongoing basis  inventories
          are  reviewed  and  written  down  for   estimated   obsolescence   or
          unmarketable  inventories equal to the difference between the costs of
          inventories  and  the  estimated  net  realizable   value  based  upon
          forecasts  for future demand and market  conditions.  If actual market
          conditions are less favorable than our forecasts, additional inventory
          reserves  may be required.  Estimates  could be  influenced  by sudden
          decline in demand due to economic downturn, rapid product improvements
          and technological changes.

     o    Investments.  An  impairment  charge  is  recorded  when an asset  has
          experienced  a decline in value that is other than  temporary.  Future
          adverse  changes in market  conditions  or poor  operating  results of
          underlying  investments  could  result in losses  or an  inability  to
          recover  the  carrying  value  of  the  investments  that  may  not be
          reflected in an investment's  current carrying value, thereby possibly
          requiring an impairment charge in the future.

     o    Deferred  Taxes. A valuation  allowance is recorded to reduce deferred
          tax assets to the amount that is more likely than not to be  realized.
          The Company has evaluated its deferred tax assets and  liabilities and
          has determined that no valuation allowance is necessary.  Should it be
          determined  that the Company  would not be able to realize all or part
          of the net  deferred  tax asset in the future,  an  adjustment  to the
          deferred   tax  asset   would   reduce   income  in  the  period  such
          determination was made.

     o    Impairment   of   Long-Lived   Assets.   The  Company   evaluates  the
          recoverability  of its identifiable  intangible  assets,  goodwill and
          other  long-lived  assets  in  accordance  with  SFAS No.  121,  which
          generally  requires  assessing  these assets for  recoverability  when
          events or circumstances  indicate a potential impairment by estimating
          the undiscounted  cash flows to be generated from the use and ultimate
          disposition of these assets.  Upon  implementation  of SFAS No. 142 on
          January 1, 2002, the fair value method will be used to assess goodwill
          on at least an annual  basis and the  undiscounted  cash flows  method
          will continue to be used for qualifying identifiable intangible assets
          and other long-lived  assets.  As discussed in the "Recent  Accounting
          Pronouncements"  section,  the  Company is  currently  evaluating  the
          provisions   of  SFAS  No.  142  and  its  impact  on  the   Company's
          consolidated financial statements.

     o    Product  Warranty.  Our  warranty  obligation  is  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 the estimated warranty liability would be required.


                                       37
<PAGE>

     o    Commitments  and  Contingencies.  We evaluate  contingent  liabilities
          including threatened or pending litigation in accordance with SFAS No.
          5, "Accounting for Contingencies" and record accruals when the outcome
          of these  matters is deemed  probable and the  liability is reasonably
          estimable.   We  make  these   assessments  based  on  the  facts  and
          circumstances  and in some  instances  based in part on the  advice of
          outside legal counsel.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                             Percentage of Revenues
                                                                        For the Years Ended December 31,
                                                                   ----------------------------------------
                                                                     2001            2000            1999
                                                                   --------        --------        --------
<S>                                                                   <C>             <C>             <C>
Revenues .....................................................        100.0%          100.0%          100.0%
     Cost of goods sold ......................................         33.0            34.4            34.3
     Amortization of purchased technology ....................          3.3             3.2             2.8
                                                                   --------        --------        --------
Gross Profit .................................................         63.7            62.4            62.9
     Research and development ................................         23.0            17.3            18.7
     Selling, general and administrative .....................         33.8            28.3            28.4
     Amortization of goodwill and other intangibles ..........          6.9             7.0             7.0
     Acquired in-process research and development and
        other acquisition-related charges ....................           --              --             3.0
        Restructuring ........................................           --              --             0.8
                                                                   --------        --------        --------
Income from operations .......................................          0.0             9.8             5.0
       Interest and other expense, net .......................         (0.3)           (0.4)           (0.5)
                                                                   --------        --------        --------
Income (Loss) before provision for income taxes ..............         (0.3)            9.4             4.5
Provision for income taxes ...................................          1.9             5.3             4.3
                                                                   --------        --------        --------
       Net income (loss) .....................................         (2.2%)           4.1%            0.2%
                                                                   ========        ========        ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                             Percentage of Revenues
                                                                        For the Years Ended December 31,
                                                                   ----------------------------------------
                                                                     2001            2000            1999
                                                                   --------        --------        --------
<S>                                                                   <C>             <C>             <C>
Network Systems ..............................................           68%             70%             66%
Network Diagnostics ..........................................           20              20              25
Contact Center ...............................................           12              10               9
                                                                   --------        --------        --------
       Total .................................................          100%            100%            100%
                                                                   ========        ========        ========
</TABLE>


                                       38
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             Percentage of Revenues
                                                                        For the Years Ended December 31,
                                                                   ----------------------------------------
                                                                     2001            2000            1999
                                                                   --------        --------        --------
<S>                                                                   <C>             <C>             <C>
North America ................................................           73%             71%             77%
Japan ........................................................            9               8              10
Europe .......................................................            7              11               4
Rest of World ................................................           11              10               9
                                                                   --------        --------        --------
       Total .................................................          100%            100%            100%
                                                                   ========        ========        ========
</TABLE>

2001 Compared with 2000

     Revenues.  The Company's revenues decreased by $1.9 million,  or 1%, during
2001 due  primarily  to lower sales of network  systems  products  and  services
partially offset by higher sales of contact center products.

     Revenues from network systems  products  decreased by $9.2 million,  or 4%,
due primarily to lower sales of the Company's IP7 and Sentinel  products  offset
by higher sales of Eagle STP and local number portability products.

     Revenues from network  diagnostics  products increased by $1.4 million,  or
2%, due  primarily  to higher  sales of  MGTS-related  development  services and
secondarily to higher subcontracting revenues.

     Revenues from contact center  products  increased by $5.9 million,  or 18%,
due primarily to increased  sales of the TotalView  product and  secondarily  to
higher TotalNet sales.

     Revenues in North America  increased by $4.0 million,  or 2%, due primarily
to higher sales of Eagle STP products. Sales in Japan increased $1.4 million, or
5%, as a result of higher sales of MGTS-related  development services and higher
subcontracting revenues.  Revenues in Europe decreased by $11.7 million, or 35%,
due to lower network systems product sales. Rest of world revenues  increased by
$4.4 million, or 14%, due to higher contact center sales.

     The impact of exchange rate fluctuations on currency translations decreased
revenues by $3.5 million, or 1%, and did not have a material effect on net loss.

     The Company  believes that its future  revenue growth depends in large part
upon a number of  factors,  including  the  continued  market  acceptance,  both
domestically and  internationally,  of the Company's products,  particularly the
Eagle  products  and  related  applications  as well as the  Company's  suite of
products for  converged  circuit and packet  networks,  including the IP7 Secure
Gateway and VXi Media Gateway  Controller  network systems products and the MGTS
i3000 diagnostics product.

     Gross Profit.  Gross profit as a percentage of revenues  increased to 63.7%
in 2001 compared with 62.4% in 2000.  The increase in gross margin was primarily
due to  the  Company  recording  a  non-recurring  charge  of  $2.9  million  to
write-down  inventory  related to the IEX network  switch  product line in 2000.
Excluding the  write-down of inventory in 2000,  gross profit as a percentage of
sales was essentially flat at 63.7% in 2001 compared to 63.3% in 2000.


                                       39
<PAGE>

Changes in the following factors, among others, may affect gross profit: product
and distribution channel mix; competition; customer discounts; supply and demand
conditions  in  the  electronic  components  industry;   internal  manufacturing
capabilities  and  efficiencies;  foreign  currency  fluctuations;  and  general
economic conditions.

     Research and  Development.  Research  and  development  expenses  increased
overall by $17.4  million,  or 32%, and increased as a percentage of revenues to
23.0% in 2001 from 17.3% in 2000. The increase was  attributable  principally to
increased  expenses  incurred  in  connection  with  the  hiring  of  additional
personnel  for  product   development  and  enhancements  for  network  systems,
primarily  related  to the  development  of  products  to address  the  Internet
Protocol  ("IP")/Signaling  System #7 ("SS7") and media gateway  controller,  or
"softswitch"  markets,  and Third Generation  wireless ("3G") network diagnostic
products.

     The Company intends to continue to make substantial  investments in product
and technology development and believes that its future success depends in large
part upon its ability to continue to enhance existing products and to develop or
acquire new products that maintain the Company's technological competitiveness.

     Selling,  General and Administrative.  Selling,  general and administrative
expenses  increased by $16.6  million,  or 19%, and increased as a percentage of
revenues to 33.8% in 2001 from 28.3% in 2000. The dollar  increase was primarily
due to  increased  personnel  and  infrastructure-related  expenses  incurred to
support  the  Company's  installed  base and an increase  in the  allowance  for
doubtful  accounts.  Charges to the allowance for doubtful  accounts amounted to
$4.4  million in 2001  compared to $3.0  million in 2000.  Selling,  general and
administrative  expenses also  included a charge of $750,000 in connection  with
the settlement of a legal dispute in 2000.

     Amortization  of Goodwill and Other  Intangibles.  Amortization of goodwill
and  intangible  assets  decreased  by  $256,000,  and  decreased  slightly as a
percentage of revenue at 6.9% in 2001 as compared to 7.0% in 2000.

     Interest and Other Income (Expense), net. Interest expense was $9.0 million
in 2001, compared to $8.7 million in 2000. Interest income increased by $808,000
in 2001, or 10%, due to higher  invested cash balances in 2001 compared to 2000,
partially offset by lower interest rates.

     Income  Taxes.  The  income tax  provision  for 2001 was $6.1  million  and
reflected  the effect of  non-deductible  acquisition-related  costs,  partially
offset by a  benefit  of $4.6  million  from the  utilization  of  deferred  tax
liabilities related to certain of these acquisition-related costs. Excluding the
effect of these  acquisition-related  items, an estimated  effective tax rate of
35% was  applied  and  represented  federal,  state  and  foreign  taxes  on the
Company's income,  reduced primarily by research and development and foreign tax
credits,  compared to an effective tax rate of 35% for 2000. The Company expects
that its effective tax rate, excluding the effect of acquisition-related  items,
will remain relatively consistent with and within the range of the effective tax
rates in prior years.  Changes in the tax rate can be affected by changes in the
mix of  international  sales  and  changes  in the  amount of the  research  and
development credits.


                                       40
<PAGE>


2000 Compared with 1999

     Revenues. The Company's revenues increased by $88.3 million, or 39%, during
2000 due primarily to higher sales of network systems  products and services and
secondarily  to the inclusion of  post-acquisition  sales of IEX contact  center
products for the full year and higher sales of network diagnostics products.

     Revenues from network systems products increased by $70.8 million,  or 48%,
due  primarily  to higher  sales of the  Company's  Eagle  STP and local  number
portability  products,  increased upgrade and extensions sales, and higher sales
of the Company's IP7 products.

     Revenues from network  diagnostics  products increased by $6.2 million,  or
11%, due to higher sales of the Company's MGTS i3000 diagnostic system.

     Revenues from contact center products  increased by $11.2 million,  or 53%,
compared to 1999, which only included sales following the May 1999  acquisition,
and  increased  sales on a full-year  comparison  basis of  TotalView  Workforce
Management products.

     Revenues in North America increased by $50.1 million, or 29%, due primarily
to higher  sales of Eagle STP  products and IP7 Secure  Gateway  product  sales.
Sales in Japan  increased  $3.6 million,  or 16%, as a result of higher sales of
MGTS and third-party data diagnostics products.  Revenues in Europe increased by
$23.8 million,  or 245%, due to higher network  systems  product sales.  Rest of
world revenues  increased by $10.7 million,  or 52%, due to increased  Eagle STP
sales.

     The impact of exchange rate fluctuations on currency translations increased
revenues  by $1.6  million,  or 1%,  and did not have a  material  effect on net
income.

     Gross Profit.  Gross profit as a percentage of revenues  decreased to 62.4%
in 2000 compared with 62.9% in 1999.  The decrease in gross margin was primarily
due to the  increase in  amortization  of  purchased  technology,  primarily  in
connection  with the  acquisition  of IEX, for twelve months in 2000 compared to
eight  months  of such  amortization  in 1999.  Excluding  the  amortization  of
purchased  technology  related  to  the  IEX  acquisition,  gross  profit  as  a
percentage of sales was  essentially  flat at 65.6% in 2000 compared to 65.7% in
1999. In 2000, the Company also recorded a non-recurring  charge of $2.9 million
to write-down inventory related to the IEX network switch product line.

     Research and  Development.  Research  and  development  expenses  increased
overall by $12.2  million,  or 29%, and decreased as a percentage of revenues to
17.3%  in 2000  from  18.7%  in  1999.  The  dollar  increase  was  attributable
principally  to increased  expenses  incurred in  connection  with the hiring of
additional  personnel for product  development and enhancements for both network
systems and network  diagnostics  products,  primarily  related to the Company's
continued  development  of  products  to address  the  IP/SS7 and Media  Gateway
Controller, or "softswitch," markets.


                                       41
<PAGE>

     Selling,  General and Administrative.  Selling,  general and administrative
expenses  increased  by $24.7  million,  or 38%,  and  decreased  slightly  as a
percentage of revenues to 28.3% in 2000 from 28.4% in 1999. The dollar  increase
was primarily due to increased  personnel  and  infrastructure-related  expenses
incurred to support the Company's  installed base and  anticipated  higher sales
levels.  Selling,  general and  administrative  expenses for 2000 include a $2.3
million  charge  to  record  an  allowance  for  doubtful  accounts  related  to
outstanding  receivables  from a customer which filed for bankruptcy  protection
under Chapter 11 in March 2001 and a charge of $750,000 in  connection  with the
settlement of a legal dispute.

     Amortization  of Goodwill and Other  Intangibles.  Amortization of goodwill
and intangible assets increased by $6.1 million, but stayed flat as a percentage
of  revenue  at  7.0% in 2000  and  1999.  The  dollar  increase  was due to the
amortization  of goodwill  and  intangibles,  primarily in  connection  with the
acquisition of IEX, for the full year in 2000 compared to eight months in 1999.

     Interest and Other Income (Expense), net. Interest expense was $8.7 million
in 2000,  compared  to $4.9  million  in 1999.  The $3.8  million  increase  was
primarily  due to a full  year of  interest  expense  in 2000 for the  Company's
convertible notes, compared to approximately eight months of interest expense in
1999 for short-term  notes issued by the Company in May 1999 in connection  with
the  acquisition  of IEX,  and  interest  for the  convertible  notes  issued in
November 1999 to retire the short-term  notes.  Interest  income  increased $3.9
million, or 91%, due to higher invested cash balances in 2000 compared to 1999.

     Income  Taxes.  The income tax  provision  for 2000 was $16.7  million  and
reflected  the effect of  non-deductible  acquisition-related  costs,  partially
offset by a  benefit  of $4.7  million  from the  utilization  of  deferred  tax
liabilities related to certain of these acquisition-related costs. Excluding the
effect of these  acquisition-related  items, an estimated  effective tax rate of
35% was  applied  and  represented  federal,  state  and  foreign  taxes  on the
Company's income,  reduced primarily by research and development and foreign tax
credits, compared to an effective tax rate of 35% for 1999.

Liquidity and Capital Resources

General

     During 2001, cash and cash equivalents  increased by $26.5 million to $92.2
million,   after  $45.1  million  net  purchases  of  short-term  and  long-term
investments,  other than  investments  in  privately-held  companies.  Operating
activities,  net of the effects of exchange rate changes on cash, provided $96.4
million.  Financing activities,  which represented proceeds from the issuance of
Common Stock upon the exercise of options and warrants,  provided $12.8 million,
and investing  activities,  excluding net purchases of short-term  and long-term
investments  other than equity  investments in  privately-held  companies,  used
$37.6  million   primarily  for  capital   expenditures   and   investments   in
privately-held companies.

     During 2001 and 2000, the Company  financed net working capital and capital
expenditure  requirements  principally  from  operations,   available  cash  and
proceeds  from the  issuance  of Common  Stock upon the  exercise of options and
warrants.

     Cash  flow  from  operating  activities  was  comprised  mainly of net loss
adjusted  for  depreciation,  amortization  and tax  benefits  related  to stock
options exercised, a decrease in accounts receivable and an increase in deferred
revenue. Net accounts receivables decreased by


                                       42
<PAGE>

34% during 2001 due primarily to a decrease in revenues in the fourth quarter of
2001 compared to 2000 and strong collections activity.

     Capital  expenditures of $20.5 million during 2001  represented the planned
addition of equipment  principally for research and  development,  manufacturing
operations and a Company wide information system.

     The Company has a $20.0  million line of credit with a U.S.  bank and lines
of  credit   aggregating  $2.3  million  available  to  the  Company's  Japanese
subsidiary from various Japan-based banks.

     The  Company's   $20.0  million  credit  facility  is   collateralized   by
substantially all of the Company's assets,  bears interest at or, in some cases,
below the  lender's  prime rate (4.75% at  December  31,  2001),  and expires on
October 31, 2002, if not renewed.  Under the terms of this facility, the Company
is required to maintain certain  financial ratios and meet certain net worth and
indebtedness  covenants.  The Company  believes it is in  compliance  with these
requirements. There have been no borrowings under this credit facility.

     The Company's Japanese subsidiary has collateralized  yen-denominated lines
of  credit  with  Japan-based  banks,  primarily  available  for  use in  Japan,
amounting to the  equivalent of $2.3 million with interest at Japan's prime rate
(1.375% at  December  31,  2001) plus  0.125% per annum,  which  expire  between
February  2002 and August 2002,  if not renewed.  There have been no  borrowings
under these lines of credit.

     In November  1999,  the Company  completed the private  placement of $135.0
million principal amount at maturity of 3.25% convertible  subordinated discount
notes  due in 2004  (the  "Notes"),  issued  at  85.35%  of  their  face  amount
(equivalent to gross proceeds of approximately $115.2 million at issuance before
discounts and expenses). The Notes are callable after three years from issuance.

     In November  1999,  the Company used a portion of the net proceeds from the
Notes to retire all of the $100 million in  short-term  notes issued in May 1999
in connection with the acquisition of IEX Corporation.

     During 2001, a  significant  portion of our cash inflows were  generated by
our operations. Because our operating results may fluctuate significantly,  as a
result of  decrease in customer  demand or  decrease  in the  acceptance  of our
future products,  our ability to generate positive cash flow from operations may
be jeopardized.


                                       43
<PAGE>

Future payments due under debt and lease obligations as of December 31, 2001 (in
thousands):

                                    3.25%
                                 Convertible           Non
                                Subordinated       Cancelable
                                  Notes due         Operating
                                  2004 (1)           Leases             Total
                                 ----------        ----------        ----------
     2002                        $       --        $    6,910        $    6,910
     2003                                --             7,382             7,382
     2004                           135,000             5,760           140,760
     2005                                --             4,678             4,678
     2006                                --             4,758             4,758
     2007 and thereafter                 --            20,655            20,655
                                 ----------        ----------        ----------
                                 $  135,000        $   50,143        $  185,143
                                 ==========        ==========        ==========

     (1)  In 2002, 2003 and 2004 the Company will make interest payments of $4.4
          million, $4.4 million and $3.7 million, respectively.

     The Company  believes that its existing  working  capital,  funds generated
through  operations,  and its current bank lines of credit will be sufficient to
satisfy operating requirements for at least the next twelve months. Nonetheless,
the Company may seek  additional  sources of capital as necessary or appropriate
to fund acquisitions or to otherwise finance the Company's growth or operations;
however, there can be no assurance that such funds, if needed, will be available
on favorable terms, if at all.

Foreign Exchange

     International  operations are subject to certain  opportunities  and risks,
including  currency  fluctuations.  In 2001,  2000, and 1999, the percentages by
which  weighted  average  exchange  rates  for  the  Japanese  yen  strengthened
(weakened) against the U.S. dollar were (11%), (3%) and 15%, respectively.

     The change in cumulative translation  adjustments in 2001 was due primarily
to the weakening of the Japanese yen against the U.S.  dollar when comparing the
exchange  rate at December  31, 2001,  to that of December  31,  2000.  Realized
exchange gains  (losses) are recorded in the period when incurred,  and amounted
to  ($849,000),  ($492,000) and $79,000 in 2001,  2000, and 1999,  respectively.
Exchange  gains  and  losses  include  foreign  currency  transactions  and  the
settlement of intercompany balances.

Financial Risk

     The Company's  international  sales are  predominantly  denominated in U.S.
dollars,  and therefore  exposure to foreign currency  exchange  fluctuations on
international  sales is  limited.  In certain  instances  where the  Company has
entered into contracts which are denominated in foreign currencies,  the Company
has  obtained  foreign  currency  forward  and  option  contracts,   principally
denominated in Euros or British  pounds,  to offset the impact of currency rates
on  accounts  receivable.  The  Company  had  no  forward  or  option  contracts
outstanding  as of December  31, 2001.  The  notional  amount of the forward and
option  contracts  outstanding  was $10.0 million at December 31, 2000. The fair
value of the forward contracts and options and


                                       44
<PAGE>

premiums paid for the options were not material. The Company does not enter into
derivative  instrument  transactions  for trading or speculative  purposes.  The
Company  does not hedge  foreign  currencies  in a manner  that  would  entirely
eliminate the effects of the changes in foreign  currency rates on the Company's
consolidated  net income.  The Company does not typically  hedge its exposure to
the Japanese Yen,  which is the functional  currency for the Company's  Japanese
subsidiary.

     Fixed income  securities  are subject to interest rate risk. The fair value
of the Company's  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  the  Company's  investment
portfolio.  The portfolio is  diversified  and consists  primarily of investment
grade securities to minimize credit risk.

     There have been no  borrowings  under the  Company's  variable  rate credit
facilities.  All of the Company's  outstanding  long-term debt is fixed rate and
not subject to interest rate fluctuation.

     With  respect to trade  receivables,  the Company  sells  network  systems,
communications diagnostic systems and contact center systems worldwide primarily
to telephone operating companies,  equipment manufacturers and corporations that
use its systems to design,  install,  maintain,  test and operate communications
equipment  and  networks.  Credit is  extended  based on an  evaluation  of each
customer's  financial  condition,  and  generally  collateral  is not  required.
Generally,  payment  terms  stipulate  payment  within 90 days of  shipment  and
currently,  the Company does not engage in leasing or other  customer  financing
arrangements.  Many of the Company's international sales are secured with import
insurance or letters of credit to mitigate credit risk. Although the Company has
processes  in place  to  monitor  and  mitigate  credit  risk,  there  can be no
assurance  that such  programs  will be  effective  in  eliminating  such  risk.
Historically,  credit  losses have been  within  management's  expectations  and
relatively insignificant. The Company's exposure to credit risk has increased as
a result of weakened financial conditions in certain market segments such as the
Competitive  Local Exchange  Carrier  segment.  Credit losses for such customers
have been provided for in the financial statements.  Future losses, if incurred,
could harm the  Company's  business  and have a material  adverse  effect on the
Company's financial position, results of operations or cash flows.

Recent Accounting Pronouncements

     In June 1998, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standard  ("SFAS") No. 133  "Accounting  for
Derivative  Instruments  and Hedging  Activities."  The  statement  requires the
recognition  of all  derivatives  as either assets or liabilities on the balance
sheet and the measurement of those instruments at fair value. The accounting for
changes in the fair value of a  derivative  depends  on the  planned  use of the
derivative and the resulting  designation.  The Company implemented SFAS No. 133
in the first  quarter  of 2001 and the  adoption  of SFAS No. 133 did not have a
material impact on the Company's  financial  position,  results of operations or
cash flows.

     In June 2001,  the FASB issued SFAS No. 141,  "Business  Combinations"  and
SFAS No. 142,  "Goodwill and Other Intangible  Assets." SFAS No. 141 establishes
new  standards  for   accounting   and  reporting   requirements   for  business
combinations  initiated  after  June  30,  2001  and  prohibits  the  use of the
pooling-of-interests method for combinations initiated after June 30, 2001. SFAS
No. 142 changes the  accounting for goodwill from an  amortization  method to an


                                       45
<PAGE>

impairment-only  approach.  Upon  adoption  of SFAS No.  142 on January 1, 2002,
goodwill  will be tested at the reporting  unit annually and whenever  events or
circumstances occur indicating that goodwill might be impaired.  Amortization of
goodwill, including goodwill recorded in past business combinations, will cease.
Amortization of goodwill in 2001 was $19.1 million and the  unamortized  balance
of goodwill was $44.7 million as of December 31, 2001.  The Company is currently
evaluating  the  provisions  of SFAS No. 142 and their  potential  impact on the
Company's consolidated financial statements.

     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived   Assets,"  which  addresses  financial
accounting  and  reporting  for the  impairment  of  long-lived  assets  and for
long-lived  assets to be disposed of. This  Statement  supersedes  SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This  Statement  also  supersedes  the accounting and reporting
provisions  of APB  Opinion  No. 30,  "Reporting  the  Results of  Operations  -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently  Occurring Events and  Transactions," for segments of a
business to be disposed of. This Statement also amends ARB No. 51, "Consolidated
Financial  Statements,"  to  eliminate  the  exception  to  consolidation  for a
temporarily  controlled  subsidiary.  The  adoption  date for  SFAS No.  144 was
effective  January 1, 2002 and its impact will be evaluated in conjunction  with
SFAS No. 142 as discussed above.


                                       46
<PAGE>

"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 Annual Report on Form 10-K are forward-looking statements
within the meaning of the Private Securities  Litigation Reform Act of 1995 that
reflect the current belief,  expectations or intent of the Company's management.
These  statements  are subject to and involve  certain  risks and  uncertainties
including,  but not limited to, timing of  significant  orders and shipments and
the  resulting  fluctuation  of the  Company's  operating  results;  changes  in
customer product mix;  customer  acceptance of the Company's  products;  capital
spending patterns of customers;  the Company's limited product offerings;  risks
relating to the convergence of voice and data networks; competition and pricing;
the Company's relatively limited number of customers;  new product introductions
by the Company or its competitors; product liability risks; the continued growth
in third party purchases of diagnostics systems;  uncertainties  relating to the
Company's international  operations;  intellectual property protection;  carrier
deployment of new technologies and intelligent  network services;  the level and
timing of research and development  expenditures;  regulatory  changes;  general
economic  conditions;  and other risks  described in this Annual  Report on Form
10-K and in certain of the Company's  other  Securities and Exchange  Commission
filings.  Many of these risks and  uncertainties  are  outside of the  Company's
control  and are  difficult  for the Company to  forecast  or  mitigate.  Actual
results  may  differ   materially  from  those  expressed  or  implied  in  such
forward-looking  statements.  The  Company is not  responsible  for  updating or
revising these forward-looking  statements.  Undue emphasis should not be placed
on any  forward-looking  statements  contained herein or made elsewhere by or on
behalf of the Company. See also "Business - Business Risk Factors."


                                       47
<PAGE>

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Company's  international  sales are  predominantly  denominated in U.S.
dollars,  and therefore  exposure to foreign currency  exchange  fluctuations on
international  sales is  limited.  In certain  instances  where the  Company has
entered into contracts which are denominated in foreign currencies,  the Company
has  obtained  foreign  currency  forward  and  option  contracts,   principally
denominated in Euros or British  pounds,  to offset the impact of currency rates
on  accounts  receivable.  The  Company  had  no  forward  or  option  contracts
outstanding  as of December  31, 2001.  The  notional  amount of the forward and
option  contracts  outstanding  was $10.0 million at December 31, 2000. The fair
value of the forward  contracts  and options and  premiums  paid for the options
were not  material.  The  Company  does not  enter  into  derivative  instrument
transactions  for trading or  speculative  purposes.  The Company does not hedge
foreign  currencies in a manner that would entirely eliminate the effects of the
changes in foreign currency rates on the Company's  consolidated net income. The
Company does not typically  hedge its exposure to the Japanese Yen, which is the
functional currency for the Company's Japanese subsidiary.

     Fixed income  securities  are subject to interest rate risk. The fair value
of the Company's  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  the  Company's  investment
portfolio.  The portfolio is  diversified  and consists  primarily of investment
grade securities to minimize credit risk.

     There have been no  borrowings  under the  Company's  variable  rate credit
facilities.  All of the Company's  outstanding  long-term debt is fixed rate and
not subject to interest rate fluctuation.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     See  the  consolidated   financial   statements  of  the  Company  and  its
subsidiaries  included  herein and listed in Item 14(a) of this Annual Report on
Form 10-K.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE.

     None.

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The  information  required by this Item is incorporated by reference to the
sections of the Company's  definitive  Proxy Statement for the Annual Meeting of
Shareholders  to be held on May 10,  2002,  entitled  "Election  of  Directors,"
"Executive   Officers"  and  "Section  16(a)  Beneficial   Ownership   Reporting
Compliance" to be filed with the Commission.


                                       48
<PAGE>


Item 11. EXECUTIVE COMPENSATION.

     The  information  required by this Item is incorporated by reference to the
sections of the Company's  definitive  Proxy Statement for the Annual Meeting of
Shareholders  to be held on May 10,  2002,  entitled  "Election  of  Directors -
Compensation  of Directors,"  "Executive  Compensation  and Other  Information,"
"Board  of   Directors   and   Compensation   Committee   Reports  on  Executive
Compensation" and "Performance Graph," to be filed with the Commission.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The  information  required by this Item is incorporated by reference to the
section of the Company's  definitive  Proxy  Statement for the Annual Meeting of
Shareholders  to be held on May 10, 2002,  entitled  "Common Stock  Ownership of
Principal Shareholders and Management," to be filed with the Commission.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  information  required by this Item is incorporated by reference to the
section of the Company's  definitive  Proxy  Statement for the Annual Meeting of
Shareholders to be held on May 10, 2002,  entitled  "Certain  Relationships  and
Related Transactions," to be filed with the Commission.


                                       49
<PAGE>

                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  The following documents are filed as part of this Report:

                                                                           Page
     1.   Consolidated Financial Statements                                ----

        o Report of Independent Accountants                                F-1

        o Consolidated Statements of Operations for each of the
          three years in the period ended December 31, 2001                F-2

        o Consolidated Balance Sheets as of December 31, 2001 and
          2000                                                             F-3

        o Consolidated Statements of Cash Flow for each of the
          three years in the period ended December 31, 2001                F-4

        o Consolidated Statements of Shareholders' Equity for each
          of the three years in the period ended December 31, 2001         F-6

        o Consolidated Statements of Comprehensive Income for each
          of the three years in the period ended December 31, 2001         F-7

        o Notes to Consolidated Financial Statements                       F-8

     2.   Consolidated Financial Statement Schedule

        o Report of Independent Accountants on Financial Statement
          Schedule                                                         S-1

        o Schedule II Valuation and Qualifying Accounts and
          Reserves for each of the three year in the period ended
          December 31, 2001                                                S-2

Schedules  which are not listed  above have been  omitted  because  they are not
applicable  or the  information  required to be set forth therein is included in
the consolidated financial statements or notes thereto.

     3.   List of Exhibits

     Exhibit
     Number    Exhibit
     ------    -------

     3.1       Amended and Restated Articles of Incorporation(1)

     3.2       Bylaws, as amended(2)

     4.1       Rights Agreement dated as of August 25, 1997 between the
               Registrant and U.S. Stock Transfer Corporation as Rights Agent(3)


                                       50
<PAGE>

     4.2       Indenture dated as of November 2, 1999 between the Registrant and
               Bankers Trust Company as Trustee, including form of the
               Registrant's 3.25% Convertible Subordinated Discount Notes due
               2004(4)

     4.3       Registration Rights Agreement dated as of November 2, 1999 among
               the Registrant, Deutsche Bank Securities Inc. and Warburg Dillon
               Read LLC(4)

     10.1      Amended and Restated 1984 Stock Option Plan, including forms of
               stock option agreements(5) (6)

     10.2      Amended and Restated Non-Employee Director Equity Incentive Plan,
               including form of nonstatutory stock option agreement(5), as
               amended February 21, 1996(6) (7)

     10.3      1994 Stock Option Plan, including forms of stock option
               agreements(8), as amended February 4, 1995(9), March 3, 1995(9),
               January 27, 1996(7), February 26, 1997(10), March 19, 1997(10),
               March 20, 1998(11), March 19, 1999(12), March 23, 2000 (13) and
               May 18, 2001 (6) (14)

     10.4      Form of Indemnification Agreement between the Registrant and all
               directors of the Registrant(6) (15)

     10.5      Lease Agreement dated as of February 8, 1988 between the
               Registrant and State Street Bank and Trust Company of California,
               N.A., not individually, but solely as an Ancillary Trustee for
               State Street Bank and Trust Company, a Massachusetts banking
               corporation, not individually, but solely as Trustee for the AT&T
               Master Pension Trust, covering the Company's principal facilities
               in Calabasas, California(16)

     10.6      Officer Severance Plan, including form of Employment Separation
               Agreement(17), as amended March 8, 1999( 18 ) and February 4,
               2000(6) (19)

     10.7      Employee Stock Purchase Plan, including form of subscription
               agreement (7), as amended May 18, 2001 (6) (14)

     10.8      Warrants to purchase shares of the Registrant's Common Stock and
               Schedule of Warrantholders(6) (20)

     10.9      Stock Award Agreement dated February 17, 1998 between the
               Registrant and Michael Margolis(6) (21)

     10.10     Lease Agreement dated as of November 6, 1998 between the
               Registrant and Weeks Realty, L.P., covering certain of the
               Registrant's facilities in Morrisville, North Carolina(18) as
               amended by First Amendment thereto dated May 27, 1999, Second
               Amendment thereto dated October 1, 1999, Third Amendment thereto
               dated November 30, 1999, and Fourth Amendment thereto dated July
               19, 2000 (22)


                                       51
<PAGE>

     10.11     Loan Agreement and Promissory Note dated October 31, 2001 between
               the Registrant and Union Bank of California

     10.12     Lease Agreement as of July 19, 2000 between the Registrant and
               Duke Construction Limited Partnership covering certain of the
               Company's facilities in Morrisville, North Carolina (22)

     10.13     Nonstatutory Stock Option Agreement dated February 1, 2001
               between the Registrant and Frederick M. Lax (6) (23)

     10.14     Stock Award Agreement dated February 1, 2001 between the
               Registrant and Frederick M. Lax (6) (23)

     10.15     Employment Offer Letter dated November 15, 2001 between the
               Registrant and Lori A. Craven

     10.16     Employment Offer Letter dated November 15, 2001 between the
               Registrant and Daniel B. Walters

     21.1      Subsidiaries of the Registrant

     23.1      Consent of PricewaterhouseCoopers LLP

---------------------
(1)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended June 30, 1998.

(2)  Incorporated by reference to the Registrant's Annual Report on Form 10-K
     (File No. 0-15135) for the year ended December 31, 1996.

(3)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended September 30, 1997.

(4)  Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended September 30, 1999.

(5)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (Registration No. 33-48079) filed with the Commission on May 22,
     1992.

(6)  Constitutes a management contract or compensatory plan or arrangement
     required to be filed as an exhibit to this Annual Report on Form 10-K.

(7)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (Registration No. 333-05933) filed with the Commission on June 13,
     1996.

(8)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (Registration No. 33-82124) filed with the Commission on July 28,
     1994.


                                       52
<PAGE>

(9)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (Registration No. 33-60611) filed with the Commission on June 27,
     1995.

(10) Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (Registration No. 333-28887) filed with the Commission on June 10,
     1997.

(11) Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (Registration No. 333-71261) filed with the Commission on January
     27, 1999.

(12) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended June 30, 1999.

(13) Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (Registration Statement No. 333-39588) filed with the Commission
     on June 19, 2000.

(14) Incorporate by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended June 30, 2001.

(15) Incorporated by reference to the Registrant's Annual Report on Form 10-K
     (File No. 0-15135) for the year ended December 31, 1987.

(16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended June 30, 1988.

(17) Incorporated by reference to the Registrant's Annual Report on Form 10-K
     (File No. 0-15135) for the year ended December 31, 1993.

(18) Incorporated by reference to the Registrant's Annual Report on Form 10-K
     (File No. 0-15135) for the year ended December 31, 1998.

(19) Incorporated by reference to the Registrant's Annual Report on Form 10-K
     (File No. 0-15135) for the year ended December 31, 1999.

(20) Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (Registration No. 333-37843) filed with the Commission on October
     14, 1997.

(21) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended March 31, 1998.

(22) Incorporated by reference to the Registrant's Annual Report on Form 10-K
     (File No. 0-15135) for the year ended December 31, 2000.

(23) Incorporated by reference to the Registrant's Quarterly Report on 10-Q
     (File No. 0-15135) for the quarter ended March 31, 2001.


                                       53
<PAGE>

(b)  Reports on Form 8-K

     No  reports  on Form 8-K were filed by the  Registrant  during the  quarter
     ended December 31, 2001.

(c)  Exhibits

     See the list of Exhibits  under Item 14(a) 3 of this Annual  Report on Form
     10-K.

(d)  Financial Statement Schedules

     See the Schedule under Item 14(a) 2 of this Annual Report on Form 10-K.



                                       54
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                    TEKELEC


                                    By: /s/ Michael L. Margolis
                                        --------------------------------------
                                            Michael L. Margolis, President and
                                            Chief Executive Officer
Dated: March 28, 2002

     Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following  persons on behalf of the  Registrant  and in
the capacities and on the dates indicated.

    Signature                           Title                           Date
    ---------                           -----                           ----

/s/ Jean-Claude Asscher         Chairman of the Board             March 28, 2002
-------------------------
    Jean-Claude Asscher


/s/ Michael L. Margolis         President, Chief Executive        March 28, 2002
-------------------------       Officer and Director
    Michael L. Margolis


/s/ Robert V. Adams             Director                          March 28, 2002
-------------------------
    Robert V. Adams


/s/ Daniel L. Brenner           Director                          March 28, 2002
-------------------------
    Daniel L. Brenner


/s/ Howard Oringer              Director                          March 28, 2002
-------------------------
    Howard Oringer


/s/ Jon F. Rager                Director                          March 28, 2002
-------------------------
    Jon F. Rager


/s/ Paul J. Pucino              Vice President and Chief          March 28, 2002
-------------------------       Financial Officer
    Paul J. Pucino              (Principal Financial and
                                Chief Accounting Officer)


                                       55
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC

     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related consolidated statements of operations, cash flows, shareholders' equity,
and comprehensive  income (loss) present fairly, in all material  respects,  the
financial  position of Tekelec and its subsidiaries  (the "Company") at December
31, 2001 and 2000, and the results of their  operations and their cash flows for
each of the three years in the period ended  December 31,  2001,  in  conformity
with accounting  principles  generally accepted in the United States of America.
These financial  statements are the responsibility of the Company's  management;
our responsibility is to express an opinion on these financial  statements based
on our audits.  We conducted our audits of these  statements in accordance  with
auditing  standards  generally  accepted in the United  States of America  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP
Los Angeles, California
January 29, 2002


                                      F-1
<PAGE>

                                     Tekelec
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                        For the Years Ended December 31,
                                                                  --------------------------------------------
                                                                     2001             2000             1999
                                                                  --------------------------------------------
<S>                                                               <C>              <C>              <C>
Revenues ....................................................     $  312,451       $  314,334       $  226,068
Cost of Sales:
     Cost of goods sold .....................................        103,043          108,001           77,389
     Amortization of purchased technology ...................         10,324           10,135            6,397
                                                                  ----------       ----------       ----------
         Total cost of sales ................................        113,367          118,136           83,786
                                                                  ----------       ----------       ----------
         Gross profit .......................................        199,084          196,198          142,282
                                                                  ----------       ----------       ----------
Operating expenses:
     Research and development ...............................         71,851           54,466           42,289
     Selling, general and administrative ....................        105,620           89,043           64,294
     Amortization of goodwill and other intangibles .........         21,664           21,920           15,863
     Acquired in-process research and development and
          other acquisition-related charges .................             --               --            6,830
     Restructuring ..........................................             --               --            1,800
                                                                  ----------       ----------       ----------
        Total operating expenses ............................        199,135          165,429          131,076
                                                                  ----------       ----------       ----------
Income  (Loss) from operations ..............................            (51)          30,769           11,206
Interest and other income (expense):
     Interest income ........................................          8,893            8,085            4,230
     Interest expense .......................................         (8,955)          (8,739)          (4,914)
     Other, net .............................................           (703)            (493)            (293)
                                                                  ----------       ----------       ----------
        Total other income (expense) ........................           (765)          (1,147)            (977)
                                                                  ----------       ----------       ----------
Income (Loss) before provision for income taxes .............           (816)          29,622           10,229
     Provision for income taxes .............................          6,083           16,726            9,785
                                                                  ----------       ----------       ----------
        Net income (loss) ...................................     $   (6,899)      $   12,896       $      444
                                                                  ==========       ==========       ==========

Earnings (Loss) per share:
     Basic ..................................................     $    (0.12)      $     0.22       $     0.01
     Diluted ................................................          (0.12)            0.20             0.01
Weighted average number of shares outstanding:
     Basic ..................................................         59,574           57,823           54,931
     Diluted ................................................         59,574           64,123           58,690
</TABLE>

See notes to consolidated financial statements


                                      F-2
<PAGE>

                                     Tekelec
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                   --------------------------
                                                                                       2001            2000
                                                                                   --------------------------
                                                                                           (thousands)
<S>                                                                                <C>             <C>
                               Assets
Current assets:
     Cash and cash equivalents ...............................................     $   92,172      $   65,690
     Short-term investments, at fair value ...................................         68,608          81,723
     Accounts and notes receivable, less allowances
       2001 - $5,349; 2000 - $4,287 ..........................................         68,467         104,506
     Inventories .............................................................         21,317          25,868
     Deferred income taxes, net ..............................................         15,840          14,429
     Prepaid expenses and other current assets ...............................         16,417          11,596
                                                                                   ----------      ----------
       Total current assets ..................................................        282,821         303,812

Long-term investments, at fair value .........................................         70,200          12,000
Property and equipment, net ..................................................         34,759          31,700
Investments in privately-held companies ......................................         16,500              --
Deferred income taxes ........................................................          4,350           2,964
Other assets .................................................................          3,482           3,825
Intangible assets ............................................................         72,292         104,223
                                                                                   ----------      ----------
       Total assets ..........................................................     $  484,404      $  458,524
                                                                                   ==========      ==========

                      Liabilities and Shareholders' Equity
Current liabilities:
     Trade accounts payable ..................................................     $   16,903      $   16,750
     Accrued expenses ........................................................         22,583          22,784
     Accrued payroll and related expenses ....................................          9,986          12,063
     Current portion of deferred revenues ....................................         46,587          31,832
     Income taxes payable ....................................................          1,594           1,448
                                                                                   ----------      ----------
       Total current liabilities .............................................         97,653          84,877

Long-term convertible debt ...................................................        122,992         119,269
Deferred income taxes ........................................................          9,983          14,558
Long-term portion of deferred revenues .......................................          4,954           2,223
                                                                                   ----------      ----------
       Total liabilities .....................................................        235,582         220,927
                                                                                   ----------      ----------
Commitments and contingencies (Note M)

Shareholders' equity:
     Common stock, without par value, 200,000,000 shares authorized;
       issued and outstanding 2001-60,107,087; 2000-58,896,708 ...............        171,846         151,830
     Retained earnings .......................................................         78,525          85,424
     Accumulated other comprehensive income (loss) ...........................         (1,549)            343
                                                                                   ----------      ----------
       Total shareholders' equity ............................................        248,822         237,597
                                                                                   ----------      ----------
       Total liabilities and shareholders' equity ............................     $  484,404      $  458,524
                                                                                   ==========      ==========
</TABLE>

See notes to consolidated financial statements


                                      F-3
<PAGE>

                                     Tekelec
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                    For the Years Ended December 31,
                                                                               ------------------------------------------
                                                                                  2001            2000            1999
                                                                               ------------------------------------------
                                                                                               (thousands)
<S>                                                                            <C>             <C>             <C>
Cash flows from operating activities:
     Net income (loss) ....................................................    $   (6,899)     $   12,896      $      444
     Adjustments to reconcile net income to net cash
       provided by operating activities:
     Allowance for doubtful accounts ......................................         4,412           2,968             265
     Inventory provision ..................................................         3,448           4,393             760
     Depreciation .........................................................        17,315          11,846           8,519
     Amortization .........................................................        31,989          32,056          22,128
     Amortization of deferred financing costs .............................           819             812             132
     Write-offs of acquired in-process research and
       development ........................................................            --              --           6,000
     Non-cash portion of restructuring charge .............................            --              --             800
     Convertible debt accretion ...........................................         3,723           3,483             558
     Deferred income taxes ................................................        (7,478)        (11,008)         (4,742)
     Stock-based compensation .............................................           310             121             121
     Tax benefits related to stock options exercised ......................         6,943          22,457           2,009
     Changes in assets and liabilities: (excluding the effect
        of acquisition)
       Accounts and notes receivable ......................................        30,537         (22,860)        (18,722)
       Inventories ........................................................           596          (6,260)         (6,084)
       Income taxes receivable ............................................            --              --           3,478
       Prepaid expenses and other current assets ..........................        (4,844)         (6,472)         (1,182)
       Trade accounts payable .............................................           803           1,195           3,383
       Accrued expenses ...................................................           (16)          3,749           5,798
       Accrued payroll and related expenses ...............................        (2,010)          3,187          (4,442)
       Deferred revenues ..................................................        17,486          (3,812)         11,328
       Income taxes payable ...............................................           229             879             149
                                                                               ----------      ----------      ----------
         Total adjustments ................................................       104,262          36,734          30,256
                                                                               ----------      ----------      ----------
         Net cash provided by operating activities ........................        97,363          49,630          30,700
                                                                               ----------      ----------      ----------
Cash flows from investing activities:
     Purchase of available-for-sale securities ............................      (257,472)       (115,964)        (52,737)
     Proceeds from maturity of available-for-sale
       securities .........................................................       212,387          82,234          81,842
     Purchase of investments in privately-held companies ..................       (16,500)             --              --
     Payments in connection with acquisition, net of cash
       acquired ...........................................................            --              --         (49,087)
     Purchase of property and equipment ...................................       (20,473)        (21,990)        (13,948)
     Purchase of technology ...............................................           (59)           (573)         (1,561)
     Increase in other assets .............................................          (530)           (399)         (3,615)
                                                                               ----------      ----------      ----------
         Net cash used in investing activities ............................       (82,647)        (56,692)        (39,106)
                                                                               ----------      ----------      ----------
Cash flows from financing activities:
     Repayments of short-term notes .......................................            --              --        (100,000)
     Net proceeds from issuance of convertible debt .......................            --              --         115,228
     Proceeds from issuance of common stock ...............................        12,763          27,867           6,452
                                                                               ----------      ----------      ----------
         Net cash provided by financing activities ........................        12,763          27,867          21,680
                                                                               ----------      ----------      ----------
Effect of exchange rate changes on cash ...................................          (997)         (1,786)          1,465
                                                                               ----------      ----------      ----------
         Net increase in cash and cash
           equivalents ....................................................        26,482          19,019          14,739
                                                                               ----------      ----------      ----------
Cash and cash equivalents at beginning of the year ........................        65,690          46,671          31,932
                                                                               ----------      ----------      ----------
Cash and cash equivalents at end of the year ..............................    $   92,172      $   65,690      $   46,671
                                                                               ==========      ==========      ==========
</TABLE>

See notes to consolidated financial statements

                                      F-4
<PAGE>

                                     Tekelec
                Consolidated Statements of Cash Flows (Continued)

<TABLE>
<CAPTION>
                                                                         For the Years Ended December 31,
                                                                  ----------------------------------------------
                                                                    2001               2000               1999
                                                                  ----------------------------------------------
                                                                                    (thousands)
<S>                                                               <C>                <C>                <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
       Interest ............................................      $  4,398           $  4,420           $  3,471
       Income taxes ........................................         6,210              7,140              8,248

Supplemental disclosure of non-cash flow activity:
Notes payable issued in connection with acquisition ........            --                 --            100,000
Assets and liabilities recognized in connection with
acquisition:
       Accounts receivable .................................            --                 --              9,957
       Other current assets ................................            --                 --             13,261
       Investments .........................................            --                 --              7,255
       Property and equipment ..............................            --                 --              3,490
       Other assets ........................................            --                 --                169
       Intangibles .........................................            --                 --             61,000
       Goodwill ............................................            --                 --             95,274
       Accounts payable ....................................            --                 --              1,515
       Other current liabilities ...........................            --                 --             22,929
       Deferred income tax liability .......................            --                 --             22,875
</TABLE>

See notes to consolidated financial statements


                                      F-5
<PAGE>


                                     Tekelec
                 Consolidated Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                                                               Common Stock                           Accumulated
                                                          -----------------------                     Other            Total
                                                          Number                         Retained     Comprehensive    Shareholders'
                                                          of Shares       Amount         Earnings     Income (Loss)    Equity
------------------------------------------------------------------------------------------------------------------------------------

                                                                                       (thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>             <C>              <C>              <C>
Balance, December 31, 1998                                 54,329       $  92,803       $  72,084        $     890        $ 165,777
     Exercise of stock options
       and warrants and issuance
       of shares under employee
       stock purchase plan                                  1,384           6,452              --               --            6,452
       Issuance of restricted stock,
           net of unearned compensation                        --             121              --               --              121
     Stock option tax benefits                                 --           2,009              --               --            2,009
     Translation adjustment                                    --              --              --            1,792            1,792
     Net income                                                --              --             444               --              444
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1999                                 55,713       $ 101,385       $  72,528        $   2,682        $ 176,595
     Exercise of stock options
       and warrants and issuance
       of shares under employee
       stock purchase plan                                  3,184          27,867              --               --           27,867
     Compensation related to vesting
         of restricted stock                                   --             121              --               --              121
     Stock option tax benefits                                 --          22,457              --               --           22,457
     Translation adjustment                                    --              --              --           (2,339)          (2,339)
     Net income                                                --              --          12,896               --           12,896
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2000                                 58,897       $ 151,830       $  85,424        $     343        $ 237,597

     Exercise of stock options
       and warrants and issuance
       of shares under employee
       stock purchase plan                                  1,180          12,763              --               --           12,763
     Compensation related to vesting
       of restricted stock                                     30             310              --               --              310
     Stock option tax benefits                                 --           6,943              --               --            6,943
     Translation adjustment                                    --              --              --           (1,892)          (1,892)
     Net loss                                                  --              --          (6,899)              --           (6,899)
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2001                                 60,107       $ 171,846       $  78,525        $  (1,549)       $ 248,822
====================================================================================================================================
</TABLE>

See notes to consolidated financial statements


                                      F-6
<PAGE>


                                     Tekelec
             Consolidated Statements of Comprehensive Income (Loss)

<TABLE>
<CAPTION>
                                                                For the Years Ended December 31,
                                                            --------------------------------------
                                                              2001           2000           1999
                                                            --------------------------------------
                                                                         (thousands)
<S>                                                         <C>            <C>            <C>
Net income (loss) ....................................      $ (6,899)      $ 12,896       $    444

Other comprehensive income (loss):
     Foreign currency translation adjustments ........        (1,892)        (2,339)         1,792
                                                            --------       --------       --------
Comprehensive income (loss) ..........................      $ (8,791)      $ 10,557       $  2,236
                                                            ========       ========       ========
</TABLE>

See notes to consolidated financial statements


                                      F-7
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

     The Company designs,  manufactures and markets network systems products and
diagnostics  systems for  telecommunications  networks.  The Company's customers
include  telecommunications  carriers,  network service  providers and equipment
manufacturers.  The  Company  also  develops  and sells  management  software to
operators of contact centers.

Principles of Consolidation and Presentation

     The consolidated  financial  statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated.  Certain  items shown in the  December  31, 2000 and 1999  financial
statements   have  been   reclassified   to  conform  with  the  current  period
presentation.

Estimates

     The  preparation  of  financial  statements  requires  management  to  make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities and disclosure of contingent  assets and liabilities at the dates of
the financial statements and revenues and expenses during the reporting periods.
Actual results could differ from those estimates.

Cash and Cash Equivalents

     The Company considers all highly liquid debt instruments  purchased with an
original maturity of three months or less to be cash equivalents.

Investments

     The Company's  marketable  securities are classified as  available-for-sale
securities and are accounted for at their fair value,  and unrealized  gains and
losses on these securities are reported as a separate component of shareholders'
equity.  At  December  31,  2001 and  2000,  net  unrealized  gains or losses on
available-for-sale   securities  were  not  significant.  The  Company  utilizes
specific  identification  in computing  realized gains and losses on the sale of
investments. Realized gains and losses are reported in other income and expense,
and were not significant for 2001, 2000 and 1999.

     The Company also invests in equity instruments of privately-held  companies
for business  and  strategic  purposes.  These  investments  are  classified  as
long-term assets and are accounted for under the cost method as the Company does
not have the ability to exercise  significant  influence  over  operations.  The
Company  monitors its  investments  for  impairment  and records  reductions  in
carrying values when necessary.

Inventories

     Inventories  are  stated  at the lower of cost  (first  in,  first  out) or
market.


                                      F-8
<PAGE>

Property and Equipment

     Property and equipment are stated at cost,  less  accumulated  depreciation
and   amortization.   Depreciation  and  amortization  are  provided  using  the
straight-line method. The estimated useful lives are:

Manufacturing and development equipment     3-5 years
Furniture and office equipment              5 years
Demonstration equipment                     3 years
Leasehold improvements                      The shorter of useful life or lease
                                            term

Software Developed for Internal Use

     The Company capitalizes costs of software,  consulting  services,  hardware
and payroll-related costs incurred to purchase or develop internal-use software.
The Company  expenses  costs incurred  during  preliminary  project  assessment,
research and development, re-engineering, training and application maintenance.

Software Development Costs

     The Company provides for  capitalization  of certain  software  development
costs once  technological  feasibility is established.  The costs so capitalized
are  amortized  on  a  straight-line  basis  over  the  estimated  product  life
(generally  eighteen months to three years),  or on the ratio of current revenue
to total  projected  product  revenues,  whichever  is  greater.  To  date,  the
establishment of technological feasibility of the Company's products and general
release  have  substantially  coincided.  As  a  result,  the  Company  has  not
capitalized any internal software development costs as costs qualifying for such
capitalization have not been significant.

Intangible Assets

     Intangible  assets  consist of  goodwill,  purchased  technology  and other
intangible  assets,  all of which are generally  amortized over periods  ranging
from three to five years. Intangible assets are stated at cost, less accumulated
amortization.

Long-Term Assets

     The  Company  identifies  and  records  impairment  on  long-lived  assets,
including  goodwill that is not identified with an impaired  asset,  when events
and  circumstances  indicate  that such  assets have been  impaired.  Events and
circumstances  that may indicate that an asset is impaired include:  significant
decreases in the fair market value of an asset, a change in the extent or manner
in which an asset is used,  shifts  in  technology,  loss of key  management  or
personnel, changes in the operating model or strategy and competitive forces.

     If events and  circumstances  indicate that that the carrying  amount of an
asset may not be  recoverable  and the expected  undiscounted  future cash flows
attributable  to the asset is less than the  carrying  amount of the  asset,  an
impairment loss equal to the excess of the asset's  carrying value over its fair
value is  recorded.  Fair  value is  determined  based on the  present  value of
estimated expected future cash flows using a discount rate commensurate with the
risks  involved,  quoted  market  prices or appraised  values,  depending on the
nature of the assets. To date, no such impairment has been recorded.

Product Warranty Costs

     The Company  generally  warrants its products  against defects in materials
and  workmanship  for one year  after sale and  provides  for  estimated  future
warranty costs at the time


                                      F-9
<PAGE>

revenue is recognized.  At December 31, 2001 and 2000,  accrued product warranty
costs amounted to $5.5 million and $3.4 million,  respectively, and are included
in accrued expenses.

Revenue Recognition

     Revenues from sales of network systems  products,  diagnostic  products and
contact center products are recognized upon the transfer of title,  generally at
the time of shipment to the customer's  final site and  satisfaction  of related
Company obligations, if any, provided that persuasive evidence of an arrangement
exists, the fee is fixed and determinable and collectability is deemed probable.
For certain  products,  the  Company's  sales  arrangements  include  acceptance
provisions  which are based on the Company's  published  specifications  and are
accounted for as warranty, provided that the Company has previously demonstrated
that the product meets the specified criteria and has established a history with
substantially similar  transactions.  Revenue is deferred for sales arrangements
which  include  customer-specific  acceptance  provisions  where the  Company is
unable to  reliably  demonstrate  that the  delivered  product  meets all of the
specified criteria until customer  acceptance is obtained.  Revenues  associated
with multiple-element arrangements are allocated to each element based on vendor
specific objective evidence of fair value. Revenues associated with installation
services, if provided, are deferred based on the fair value of such services and
are recognized  upon  completion.  Installation  services are accounted for as a
separate  element based on the  customer's  obligation to pay the contract price
upon  shipment of the related  equipment and the fact that such services are not
essential to the  functionality  of the related  equipment,  are available  from
other vendors and can be purchased  unaccompanied  by other  elements.  Extended
warranty  service  revenues are  recognized  ratably  over the warranty  period.
Engineering  service  revenues are recognized on delivery or as the services are
performed.    Development   contract   revenues   are   recognized   using   the
percentage-of-completion  method based on the costs  incurred  relative to total
estimated  costs.  Provisions  for  anticipated  losses,  if any, on development
contracts are recognized in income currently.

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting   Bulletin  ("SAB")  No.  101,  "Revenue   Recognition  in  Financial
Statements." SAB No. 101 provides guidance for revenue recognition under certain
circumstances.  The  Company's  existing  revenue  recognition  policies  are in
accordance with Statement of Position (SOP) 97-2, "Software Revenue Recognition"
and the adoption of SAB No. 101 in 2000 did not have a significant impact on the
Company's financial position, results of operations or cash flows.

Income Taxes

     Income tax expense is the tax payable for the period and the change  during
the period in non-capital-related deferred tax assets and liabilities.  Deferred
income  taxes are  determined  based on the  difference  between  the  financial
reporting and tax bases of assets and liabilities  using enacted rates in effect
during the year in which the  differences  are  expected to  reverse.  Valuation
allowances are  established  when necessary to reduce deferred tax assets to the
amount expected to be realized.

Advertising

     Advertising  costs are expensed as incurred  and amounted to $1.1  million,
$1.6 million and $1.4 million for 2001, 2000 and 1999, respectively.

Stock-Based Compensation

     The Company accounts for stock-based employee compensation  arrangements in
accordance  with the provisions of Accounting  Principles  Board Opinion ("APB")
No. 25,  "Accounting  for Stock  Issued to  Employees,"  and  complies  with the
disclosure provisions of


                                      F-10
<PAGE>

Statement of Financial  Accounting  Standard  ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation." Under APB No. 25, compensation expense is recognized
over the vesting  period based on the  difference,  if any, on the date of grant
between the fair value of the Company's stock and the exercise price on the date
of grant.  The Company  accounts for stock issued to non-employees in accordance
with the  provisions  of SFAS No. 123 and  Emerging  Issues Task Force  ("EITF")
96-18,  "Accounting  for  Equity  Instruments  That Are  Issued  to  Other  Than
Employees for Acquiring,  or in Conjunction  with Selling,  Goods and Services."
See Note Q.

Foreign Currency

     Translation of foreign currencies is accounted for using the local currency
as the functional currency of the Company's foreign subsidiaries. All assets and
liabilities  are  translated  at exchange  rates in effect on the balance  sheet
dates while  revenues and expenses are translated at average rates in effect for
the period.  The resulting gains and losses are included in a separate component
of   shareholders'   equity.   Realized  gains  (losses)  on  foreign   currency
transactions  are  reflected in net income  (loss) and  amounted to  ($849,000),
($492,000), and $79,000 for 2001, 2000 and 1999, respectively.

Earnings Per Share

     Earnings per share are computed using the weighted average number of shares
outstanding and dilutive  Common Stock  equivalents  (options and warrants),  in
accordance with SFAS No. 128, "Earnings per Share."

Comprehensive Income

     Comprehensive  income  generally  represents  all changes in  shareholders'
equity  during  the  period  except  those  resulting  from  investments  by, or
distributions to, shareholders.

Segment Information

     The  Company  uses the  "management  approach"  in  determining  reportable
business segments.  The management approach designates the internal organization
that is  used  by  management  for  making  operating  decisions  and  assessing
performance as the source of the Company's reportable segments.

Recent Accounting Pronouncements

     In June 1998, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standard  ("SFAS") No. 133  "Accounting  for
Derivative  Instruments  and Hedging  Activities."  The  statement  requires the
recognition  of all  derivatives  as either assets or liabilities on the balance
sheet and the measurement of those instruments at fair value. The accounting for
changes in the fair value of a  derivative  depends  on the  planned  use of the
derivative and the resulting  designation.  The Company implemented SFAS No. 133
in the first  quarter  of 2001 and the  adoption  of SFAS No. 133 did not have a
material impact on the Company's  financial  position,  results of operations or
cash flows.

     In June 2001,  the FASB issued SFAS No. 141,  "Business  Combinations"  and
SFAS No. 142,  "Goodwill and Other Intangible  Assets." SFAS No. 141 establishes
new  standards  for   accounting   and  reporting   requirements   for  business
combinations  initiated  after  June  30,  2001  and  prohibits  the  use of the
pooling-of-interests method for combinations initiated after June 30, 2001. SFAS
No. 142 changes the  accounting for goodwill from an  amortization  method to an
impairment-only  approach.  Upon  adoption  of SFAS No.  142 on January 1, 2002,
goodwill  will be tested at the reporting  unit annually and whenever  events or
circumstances occur indicating


                                      F-11
<PAGE>

that goodwill might be impaired.  Amortization of goodwill,  including  goodwill
recorded in past business combinations,  will cease. Amortization of goodwill in
2001 was $19.1 million and the unamortized balance of goodwill was $44.7 million
as of December 31, 2001.  The Company is currently  evaluating the provisions of
SFAS No. 142 and their potential impact on the Company's  consolidated financial
statements.

     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived   Assets,"  which  addresses  financial
accounting  and  reporting  for the  impairment  of  long-lived  assets  and for
long-lived  assets to be disposed of. This  Statement  supersedes  SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This  Statement  also  supersedes  the accounting and reporting
provisions  of APB  Opinion  No. 30,  "Reporting  the  Results of  Operations  -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently  Occurring Events and  Transactions," for segments of a
business to be disposed of. This Statement also amends ARB No. 51, "Consolidated
Financial  Statements,"  to  eliminate  the  exception  to  consolidation  for a
temporarily  controlled  subsidiary.  The  adoption  date for  SFAS No.  144 was
effective  January 1, 2002 and its impact will be evaluated in conjunction  with
SFAS No. 142 as discussed above.

NOTE B - ACQUISITION OF IEX CORPORATION

     On May 7, 1999, the Company  acquired all of the  outstanding  stock of IEX
Corporation ("IEX") for $163 million, consisting of $63 million in cash and $100
million in  short-term  notes that were  refinanced  with  convertible  notes in
November  1999 (See Note L).  IEX  develops,  markets  and sells  solutions  for
intelligent networks, contact centers and other telecommunications markets.

     The  transaction  has been  accounted  for  under  the  purchase  method of
accounting,  and resulted in net goodwill and other intangibles of approximately
$133.4 million,  with an average  amortization  period of five years.  The total
purchase price,  including  acquisition  expenses of $2.0 million, was allocated
among the assets acquired and liabilities  assumed based on their estimated fair
values as follows:

                                                                   (thousands)
     In-process research and development .......................   $   6,000
     Developed and existing technology .........................      48,000
     Other intangibles .........................................      13,000
     Goodwill ..................................................      95,274
     Tangible assets acquired ..................................      50,045
     Deferred income tax liabilities associated with
       certain intangible assets ...............................     (22,875)
     Liabilities assumed .......................................     (24,444)
                                                                   ---------
                                                                   $ 165,000
                                                                   =========

     Based on a third party appraisal,  management  determined that $6.0 million
of the purchase price represented  acquired  in-process research and development
that had not yet reached technological feasibility and had no alternative future
use. This amount was recorded as a  non-recurring  expense in the second quarter
of 1999.  Amortization  expense of  purchased  technology  and other  intangible
assets  resulting  from the  acquisition  amounted  to $26.7  million  and $26.8
million,  net of amortization  of associated  deferred income tax liabilities of
$4.6 million and $4.7 million, for 2001 and 2000, respectively.


                                      F-12
<PAGE>

NOTE C -- FAIR VALUE OF INVESTMENTS

     The Company had short-term  investments in corporate debt  securities  with
original  maturities  of less than 90 days whose  carrying  amounts  approximate
their  fair  values  because  of  their  short   maturities.   These  short-term
investments  are  included  in cash  and cash  equivalents,  are  classified  as
held-to-maturity  securities and amounted to $53.4 million at December 31, 2000.
The Company did not have any of these types of securities at December 31, 2001.

     The  Company  also  had   investments   classified  as   available-for-sale
securities  included in short-term  and long-term  investments,  categorized  as
follows:

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                   ----------------------
                                                                                     2001          2000
                                                                                   ----------------------
                                                                                         (thousands)
<S>                                                                                <C>           <C>
Type of Security:
Corporate debt securities with maturities of less than one year .................  $ 68,608      $ 59,723
U.S. government securities with maturities of less than one year ................        --        22,000
                                                                                   --------      --------
Total short-term investments ....................................................    68,608        81,723
U.S. government securities with maturities of between one and three years .......    70,200        12,000
                                                                                   --------      --------
                                                                                   $138,808      $ 93,723
                                                                                   ========      ========
</TABLE>

NOTE D -- BUSINESS AND CREDIT RISK

     Financial   instruments,   which   potentially   subject   the  Company  to
concentration of credit risk, consist principally of cash, investments and trade
receivables.  The Company invests its excess cash in  interest-bearing  deposits
with major banks, United States government securities,  high-quality  commercial
paper and money market  funds.  At times the  Company's  cash balances may be in
excess of the FDIC insurance limits.

     With  respect to trade  receivables,  the Company  sells  network  systems,
communications diagnostic systems and contact center systems worldwide primarily
to telephone operating companies,  equipment manufacturers and corporations that
use its systems to design,  install,  maintain,  test and operate communications
equipment  and  networks.  Credit is  extended  based on an  evaluation  of each
customer's  financial  condition,  and  generally  collateral  is not  required.
Generally,  payment  terms  stipulate  payment  within 90 days of  shipment  and
currently,  the Company does not engage in leasing or other  customer  financing
arrangements.  Many of the Company's international sales are secured with import
insurance or letters of credit to mitigate credit risk. Although the Company has
processes  in place  to  monitor  and  mitigate  credit  risk,  there  can be no
assurance  that such  programs  will be  effective  in  eliminating  such  risk.
Historically,  credit  losses have been  within  management's  expectations  and
relatively insignificant. The Company's exposure to credit risk has increased as
a result of weakened financial conditions in certain market segments such as the
Competitive  Local Exchange  Carrier  segment.  Credit losses for such customers
have been provided for in the financial statements.  Future losses, if incurred,
could harm the  Company's  business  and have a material  adverse  effect on the
Company's financial position, results of operations or cash flows.

     The Company's  international  sales are  predominantly  denominated in U.S.
dollars,  and therefore  exposure to foreign currency  exchange  fluctuations on
international  sales is  limited.  In certain  instances  where the  Company has
entered into contracts which are denominated in foreign currencies,  the Company
has  obtained  foreign  currency  forward  and  option  contracts,   principally
denominated in Euros or British  pounds,  to offset the impact of currency rates
on  accounts  receivable.  The  Company  had  no  forward  or  option  contracts
outstanding as of


                                      F-13
<PAGE>

December  31,  2001.  The  notional  amount of the forward and option  contracts
outstanding  was $10.0  million  at  December  31,  2000.  The fair value of the
forward  contracts  and  options  and  premiums  paid for the  options  were not
material. The Company does not enter into derivative instrument transactions for
trading or speculative  purposes.  The Company does not hedge foreign currencies
in a manner that would entirely  eliminate the effects of the changes in foreign
currency rates on the Company's  consolidated  net income.  The Company does not
typically  hedge its  exposure  to the  Japanese  Yen,  which is the  functional
currency for the Company's Japanese subsidiary.

     Fixed income  securities  are subject to interest rate risk. The fair value
of the Company's  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  the  Company's  investment
portfolio.  The portfolio is  diversified  and consists  primarily of investment
grade securities to minimize credit risk.

     There have been no  borrowings  under the  Company's  variable  rate credit
facilities.  All of the Company's  outstanding  long-term debt is fixed rate and
not subject to interest rate fluctuation.

NOTE E -- RELATED PARTY TRANSACTIONS

     As of December  31,  2001,  the  Company's  principal  shareholder  and the
Company's  Chairman  (the  "Chairman")  of the Board of Directors and his family
owned an aggregate of approximately 24% of the Company's outstanding stock.

     The  following  is a summary of  transactions  and  balances  with  foreign
affiliates  controlled by the Chairman.  In April 2000, these foreign affiliates
were sold to an unrelated  company.  Sales transacted  subsequent to the sale of
the former  affiliates  and amounts due are no longer  considered  related party
transactions:

                                                 2001         2000         1999
                                                ------       ------       ------
                                                           (thousands)
Product sales ...........................       $   --       $  918       $3,319
Director's fees and expenses ............           51           55           66
Due from affiliates .....................           --           --        1,847

The amounts due from affiliates were non-interest bearing.

     The Company's Japanese subsidiary purchases,  for resale,  products under a
distribution  arrangement  from  an  affiliate  controlled  by a  director.  The
following is a summary of transactions  and balances with an affiliated  company
controlled by a director:

                                                 2001         2000         1999
                                                ------       ------       ------
                                                           (thousands)
Purchases from related party ............       $2,165       $1,581       $  443
Due to related party ....................          168           11           19


                                      F-14
<PAGE>


NOTE F - RESTRUCTURING

     During the first quarter of 1999,  the Company  announced its plan to scale
down its Data Network  Diagnostics  Division and integrate the division into its
Intelligent Network Diagnostics Division. In connection with this restructuring,
the Company recorded a restructuring  charge of $1.8 million  consisting of cash
severance  costs  for  27  terminated  employees  in  management,  research  and
development,   support  and  administrative   functions,  and  non-cash  charges
consisting of the write-down of certain  assets to their net  realizable  value.
The costs consisted of the following:

                 (thousands)
     Severance pay ...........................   $  700
     Other accrued expenses ..................      300
     Inventory ...............................      350
     Fixed assets ............................      200
     Other assets ............................      250
                                                 ------
                                                 $1,800
                                                 ======

     At  December  31,  1999,  all 27  employees  had been  terminated,  and all
severance costs and other accrued expenses had been paid.

NOTE G -- INCOME TAXES

     The provision for income taxes consists of the following:

                                              For the Years Ended December 31,
                                           ------------------------------------
                                             2001          2000          1999
                                           ------------------------------------
                                                       (thousands)
Current:
     Federal .........................     $ 10,219      $ 22,057      $  9,991
     State ...........................        1,882         5,175         2,683
     Foreign .........................        1,353           460           454

Deferred:
     Federal .........................       (6,732)      (11,152)       (2,981)
     State ...........................         (623)          124          (414)
     Foreign .........................          (16)           62            52
                                           --------      --------      --------
                                           $  6,083      $ 16,726      $  9,785
                                           ========      ========      ========


                                      F-15
<PAGE>

     The components of temporary differences that gave rise to deferred taxes at
December 31, 2001 and 2000 are as follows:

                                                                December 31,
                                                           --------------------
                                                              2001        2000
                                                           --------------------
                                                                (thousands)
Deferred tax assets:
     Allowance for doubtful accounts ..................    $  2,069    $  1,646
     Inventory adjustments ............................       1,315       3,181
     Depreciation and amortization ....................         503         (74)
     Research and development credit carryforward .....       4,428       3,738
     Net operating loss carryforward ..................          --          70
     Accrued liabilities ..............................       8,856       6,981
     Warranty accrual .................................       2,317       1,466
     Other ............................................         702         385
                                                           --------    --------
     Total deferred tax asset .........................      20,190      17,393
Current portion .......................................      15,840      14,429
                                                           --------    --------
Long-term portion .....................................    $  4,350    $  2,964
                                                           ========    ========

Deferred tax liability:
     Acquisition-related intangible assets ............    $  9,983    $ 14,558
Current portion .......................................          --          --
                                                           --------    --------
Long term portion .....................................    $  9,983    $ 14,558
                                                           ========    ========

     The Company has not  provided a valuation  allowance  for its  deferred tax
assets, based on management's assessment of the Company's ability to utilize its
deferred tax assets.  Realization of the deferred tax assets of $20.2 million is
dependent on the extent of the  Company's  income in carryback  years and on the
Company generating sufficient taxable income in the future. Although realization
is not  assured,  the  Company  believes  it is more  likely  than  not that the
deferred  tax assets will be  realized.  The amount of the  deferred  tax assets
considered  realizable,  however, could be reduced in the future if estimates of
future taxable income are reduced.  In connection with the acquisition of IEX in
1999,  the Company  recorded  deferred  income tax  liabilities of $22.9 million
associated with certain intangible assets. These deferred income tax liabilities
are amortized on a straight-line basis and amounted to $10.0 million at December
31, 2001.

     The provision for income taxes differs from the amount obtained by applying
the federal  statutory  income tax rate to income  before  provision  for income
taxes as follows:

<TABLE>
<CAPTION>
                                                                     For the Years Ended December 31,
                                                                ----------------------------------------
                                                                  2001            2000            1999
                                                                ----------------------------------------
                                                                               (thousands)
<S>                                                             <C>             <C>             <C>
Federal statutory provision ................................    $   (285)       $ 10,368        $  3,580
State taxes, net of federal benefit ........................       1,122           2,922           1,474
Research and development credits ...........................      (1,844)         (1,647)         (1,531)
Nontaxable foreign source income ...........................        (322)         (1,281)           (507)
Acquisition-related intangible assets, net of related
   deferred income tax liability ...........................       6,367           6,360           6,204
Foreign taxes and other ....................................       1,045               4             565
                                                                --------        --------        --------
Actual income tax provision ................................    $  6,083        $ 16,726        $  9,785
                                                                ========        ========        ========
Effective tax rate .........................................      (748.2%)          56.5%           95.7%
</TABLE>

     At December  31,  2001,  the Company had  available  federal  research  and
development credit carryforwards of $3.2 million, which will begin to expire, if
unused, in the year 2019 and


                                      F-16
<PAGE>

$1.2 million of state research and development credit  carryforwards  which will
begin to expire, if unused, in the year 2003.

     The Company has not provided for federal  income taxes on $12.3  million of
undistributed  earnings of its foreign subsidiaries that have been reinvested in
their operations.

NOTE H -- INVENTORIES

     The components of inventories are:

                                                               December 31,
                                                         ----------------------
                                                            2001         2000
                                                         ----------------------
                                                               (thousands)
Raw materials ........................................   $   8,490    $  10,701
Work in process ......................................       2,530        2,497
Finished goods .......................................      10,297       12,670
                                                         ---------    ---------
                                                         $  21,317    $  25,868
                                                         =========    =========

     In 2000,  the  Company  wrote-down  $2.9  million of  potentially  obsolete
inventory related to its IEX network switch product line.

NOTE I -- PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

                                                               December 31,
                                                         ----------------------
                                                            2001         2000
                                                         ----------------------
                                                               (thousands)
Manufacturing and development equipment ..............   $  52,674    $  43,507
Furniture and office equipment .......................      27,990       21,084
Demonstration equipment ..............................       5,053        3,213
Leasehold improvements ...............................       8,525        7,026
                                                         ---------    ---------
                                                            94,242       74,830
     Less, accumulated depreciation and amortization .     (59,483)     (43,130)
                                                         ---------    ---------
                                                         $  34,759    $  31,700
                                                         =========    =========

NOTE J - INTANGIBLE ASSETS

     Intangible assets consist of the following:

                                                               December 31,
                                                         ----------------------
                                                            2001         2000
                                                         ----------------------
                                                               (thousands)
Goodwill .............................................   $  95,274    $  95,274
Purchased technology .................................      50,193       50,285
Other ................................................      13,000       13,000
                                                         ---------    ---------
                                                           158,467      158,559
     Less, accumulated amortization ..................     (86,175)     (54,336)
                                                         ---------    ---------
              Intangible assets, net .................   $  72,292    $ 104,223
                                                         =========    =========


                                      F-17
<PAGE>


NOTE K -- LINES OF CREDIT AND BORROWINGS

     The Company has a $20.0  million line of credit with a U.S.  bank and lines
of  credit   aggregating  $2.3  million  available  to  the  Company's  Japanese
subsidiary from various Japan-based banks.

     The  Company's   $20.0  million  credit  facility  is   collateralized   by
substantially all of the Company's assets,  bears interest at or, in some cases,
below the  lender's  prime rate (4.75% at  December  31,  2001),  and expires on
October 31, 2002, if not renewed.  Under the terms of this facility, the Company
is required to maintain certain  financial ratios and meet certain net worth and
indebtedness  covenants.  The Company  believes it is in  compliance  with these
requirements. There have been no borrowings under this credit facility.

     The Company's Japanese subsidiary has collateralized  yen-denominated lines
of  credit  with  Japan-based  banks,  primarily  available  for  use in  Japan,
amounting to the  equivalent of $2.3 million with interest at Japan's prime rate
(1.375% at  December  31,  2001) plus  0.125% per annum,  which  expire  between
February  2002 and August 2002,  if not renewed.  There have been no  borrowings
under these lines of credit.

NOTE L - CONVERTIBLE DEBT

     On  November 2, 1999 the Company  completed a private  placement  of $135.0
million aggregate principal amount at maturity of 3.25% convertible subordinated
discount  notes due 2004.  The notes were  issued at 85.35% of their face amount
(equivalent to gross proceeds at issuance of approximately $115.2 million before
discounts and  expenses).  The gross proceeds at issuance  before  discounts and
expenses included approximately $15.2 million from the sale of notes issued upon
the initial purchasers' exercise in full of their over-allotment option.

     The notes are  convertible  at any time after January 31, 2000 into Tekelec
Common  Stock,  unless  the notes have been  previously  redeemed  or  otherwise
purchased, at a conversion rate of 56.3393 shares per $1,000 principal amount at
maturity  (approximately  7.6  million  shares  in  total)  which  represents  a
redemption  price of $15.15 per share of Common Stock. The notes can be redeemed
by the  Company  at any time  after  November  2, 2002 at the  redemption  price
together with accrued but unpaid interest.

     The notes were  issued  with a 14.65%  discount  and carry a cash  interest
(coupon) rate of 3.25%, payable on May 2 and November 2 of each year, commencing
on May 2, 2000.  The  payment of the  principal  amount of the notes at maturity
together with cash  interest paid over the term of the notes  represents a yield
to maturity of 6.75% per year,  computed on a semi-annual bond equivalent basis.
Interest expense is computed based on the accretion of the discount, the accrual
of the cash interest  payment and the  amortization  of expenses  related to the
offering of these notes on a straight-line  basis, and amounted to $8.9 and $8.7
million for 2001 and 2000, respectively,  and approximately $1.4 million for the
period of November 2, 1999 through December 31, 1999.


                                      F-18
<PAGE>


NOTE M -- COMMITMENTS AND CONTINGENCIES

     The Company leases its office and  manufacturing  facilities  together with
certain office equipment under operating lease agreements. Lease terms generally
range from one to ten years; certain building leases contain options for renewal
for additional periods and are subject to increases up to 10% every 24 months.

     Total rent  expense was $6.4  million,  $5.7  million and $4.0  million for
2001, 2000 and 1999, respectively.

     Minimum annual noncancelable lease commitments at December 31, 2001 are:

For the Years Ending December 31,
                                                     (thousands)
2002..............................................   $   6,910
2003..............................................       7,382
2004..............................................       5,760
2005..............................................       4,678
2006..............................................       4,758
Thereafter........................................      20,655
                                                     ---------
                                                     $  50,143
                                                     =========

NOTE N -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

     The Company has various  stock option plans with maximum terms of ten years
under  which  40.5  million  shares  of the  Company's  Common  Stock  have been
authorized and reserved for issuance.  The terms of options  granted under these
option plans are determined at the time of grant,  generally vest ratably over a
one- to five-year period,  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.

     The Company also has an Employee Stock Purchase Plan (ESPP), with a maximum
term of ten years, the latest of which expires in the year 2006, and under which
one  million  shares of the  Company's  Common  Stock have been  authorized  and
reserved for issuance. Eligible employees may authorize payroll deductions of up
to 10% of their  compensation  to purchase  shares of Common Stock at 85% of the
lower of the market price per share at the  beginning  or end of each  six-month
offering period.

     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based  Compensation" (SFAS 123), encourages but does not require companies
to record compensation cost for stock-based employee  compensation plans at fair
value for awards granted subsequent to December 31, 1995. The Company has chosen
to continue to account for  stock-based  compensation  using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock  Issued  to  Employees,"  and  related  interpretations.  Accordingly,  no
compensation  expense has been  recognized  for the  Company's  stock option and
purchase plans. Had  compensation  costs under these plans been determined based
upon the methodology  prescribed under SFAS 123, the Company's net income (loss)
and diluted earnings (loss) per share would  approximate the following  proforma
amounts (in thousands, except per-share data):


                                      F-19
<PAGE>

                                                      As Reported     Proforma
                                                      -----------    ----------
Year Ended December 31, 2001:
     Net loss ......................................   $   (6,899)   $  (41,484)
     Loss per share ................................        (0.12)        (0.70)

Year Ended December 31, 2000:
     Net income (loss) .............................   $   12,896    $   (7,737)
     Earnings (Loss) per share (diluted) ...........         0.20         (0.13)

Year Ended December 31, 1999:
     Net income ....................................   $      444    $  (11,864)
     Earnings (Loss) per share (diluted) ...........         0.01         (0.22)

     The  effects  of  applying  SFAS 123 in this  proforma  disclosure  are not
indicative  of  future  amounts,  and  additional  awards  in  future  years are
anticipated.

     A summary of the status of the Company's stock options,  as of December 31,
2001,  2000 and 1999,  and the changes  during the year ended on those dates are
presented below (shares in thousands):

<TABLE>
<CAPTION>
                                                                   2001                    2000                   1999
                                                          ---------------------------------------------------------------------
                                                                      Wgtd. Avg.              Wgtd. Avg.              Wgtd. Avg.
                                                           Shares    Exer. Price   Shares    Exer. Price    Shares   Exer. Price
                                                          ---------   ---------   ---------   ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>         <C>         <C>         <C>
Outstanding at beginning of year ........................    11,600   $   18.88      10,949   $   10.79       8,438   $    8.90
Granted - price equals fair value .......................     4,546       24.86       4,769       30.70       4,932       12.07
Granted - price greater than fair value .................        --                      --                     123       16.44
Exercised ...............................................     1,013        9.33       2,950        8.00       1,187        3.72
Cancelled ...............................................       778       24.21       1,168       18.81       1,357       10.39
                                                          ---------               ---------               ---------
Outstanding at year-end .................................    14,355       21.17      11,600       18.88      10,949       10.79
                                                          =========               =========               =========

Options exercisable at year-end .........................     6,169                   3,813                   4,063
Options available for future grant ......................     3,869                   4,022                   4,823
Weighted average fair value of options granted
     during the year:
     Exercise price equals fair value at grant date ..... $   17.42               $   21.42               $    8.40
     Exercise price greater than fair value at
     grant date .........................................        --                      --                   10.88
</TABLE>

     The following table summarizes  information about stock options outstanding
at December 31, 2001 (shares in thousands):

<TABLE>
<CAPTION>
                                         Options Outstanding                       Options Exercisable
                                --------------------------------------         ---------------------------
                                              Wgtd. Avg.
                                   Number     Remaining      Wgtd.Avg.            Number        Wgtd. Avg.
                                Outstanding  Contractual     Exercise          Outstanding       Exercise
Range of Exercise Price         at 12/31/01      Life         Price            at 12/31/01        Price
----------------------------------------------------------------------------------------------------------
<S>                                <C>           <C>         <C>                  <C>            <C>
 $ 0.75   to   $ 3.13                 431        3.96        $ 2.52                 431          $ 2.52
   3.19   to     7.09               1,298        4.85          4.88               1,222            4.85
   8.19   to    14.94               2,714        6.93         12.31               1,332           12.43
  15.00   to    25.88               7,394        8.22         23.11               2,464           22.62
  27.56   to    39.50               2,059        8.73         33.82                 537           35.18
  45.75   to    52.19                 459        8.34         48.51                 183           48.59
                                   ------                                        ------
   0.75   to    52.19              14,355        7.61         21.17               6,169           17.28
                                   ======                                        ======
</TABLE>

     The fair value of options  granted during 2001,  2000 and 1999 is estimated
as $52.0 million, $66.8 million and $24.7 million, respectively, on the dates of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
assumptions:  (i) dividend yield of 0%, (ii) expected volatility of 92%, 89% and
79%, respectively, for 2001, 2000 and 1999, (iii) weighted

                                      F-20
<PAGE>

average risk-free interest rates of 4.8%, 6.5% and 5.3% for 2001, 2000 and 1999,
respectively,  (iv) weighted  average  expected option lives of 4.5, 4.4 and 5.1
years for 2001, 2000 and 1999, respectively,  and (v) assumed forfeiture rate of
34%, 35% and 42% for 2001, 2000 and 1999, respectively.

     During  2001,  2000 and 1999,  approximately  165,000,  110,000 and 198,000
shares,  respectively,  were  purchased  under the  Company's  ESPP at  weighted
average exercise prices of $18.95, $23.30 and $10.27, respectively.  At December
31, 2001, 2000 and 1999, there were approximately  154,000,  119,000 and 229,000
shares,  respectively,  available for future grants.  The weighted  average fair
values of ESPP  shares  granted in 2001,  2000 and 1999 were  $9.23,  $14.27 and
$5.15 per share, respectively.

     The Company has a 401(k)  tax-deferred  savings  plan under which  eligible
employees may authorize from 2% to 12% of their  compensation  to be invested in
employee-elected  investment  funds managed by an independent  trustee and under
which the Company may  contribute  matching funds of up to 50% of the employees'
payroll  deductions.  During 2001,  2000 and 1999,  the Company's  contributions
amounted to $2.7 million, $2.4 million and $1.8 million respectively.

NOTE O -- EARNINGS PER SHARE

     The  following  table  provides  a  reconciliation  of the  numerators  and
denominators of the basic and diluted per-share computations for the years ended
December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                        Net Income        Shares         Per-Share
                                                       (Numerator)     (Denominator)      Amount
                                                       --------------------------------------------
For the Year Ended December 31, 2001:                      (thousands except per-share amounts)
<S>                                                     <C>                <C>           <C>
Basic loss per share ...............................    $ (6,899)          59,574        $  (0.12)
Effect of Dilutive Securities - Stock
     Options and Warrants ..........................          --               --
                                                        --------         --------
Diluted loss per share .............................    $ (6,899)          59,574        $  (0.12)
                                                        ========         ========        ========

For the Year Ended December 31, 2000:

Basic earnings per share ...........................    $ 12,896           57,823        $   0.22
Effect of Dilutive Securities - Stock
     Options and Warrants ..........................          --            6,300
                                                        --------         --------
Diluted earnings per share .........................    $ 12,896           64,123        $   0.20
                                                        ========         ========        ========

For the Year Ended December 31, 1999:

Basic earnings per share ...........................    $    444           54,931        $   0.01
Effect of Dilutive Securities - Stock
     Options and Warrants ..........................          --            3,759
                                                        --------         --------
Diluted earnings per share .........................    $    444           58,690        $   0.01
                                                        ========         ========        ========
</TABLE>

     The  computation of diluted  number of shares  excludes  unexercised  stock
options and  warrants and  potential  shares  issuable  upon  conversion  of the
Company's convertible  subordinated  discount notes that are anti-dilutive.  The
numbers of such shares excluded were 14.6 million,  8.2 million and 11.5 million
for the years ended December 31, 2001, 2000 and 1999, respectively.


                                      F-21
<PAGE>

     There were no transactions subsequent to December 31, 2001, which, had they
occurred prior to January 1, 2002,  would have changed  materially the number of
shares in the basic or diluted earnings per share computations.

NOTE P -- OPERATING SEGMENT INFORMATION

     The  Network  Systems  operating  segment  develops,  markets and sells the
Company's  Eagle  STP  products  based on the  Company's  high  capacity  packet
switching  platform;  the IP7 Secure Gateway, an SS7/IP gateway for signaling in
converged  networks,  and other IP7  convergence  products;  and network systems
products  resulting from the Company's  acquisition  of IEX,  including ASi 4000
Service Control Point, an advanced  database server used for the provisioning of
telephony  applications,  and VXi Media  Gateway  Controller,  a controller  for
converged   networks.   During  2000,  the  Company's   business  segments  were
reorganized to include the Sentinel network  surveillance  system in the Network
Systems  product  segment.  Prior  periods  have been  restated to reflect  this
reorganization.

     The  Network  Diagnostics  operating  segment  develops,  markets and sells
diagnostic  products,  including  MGTS,  a  diagnostic  tool used  primarily  by
equipment  suppliers for research and development,  and i3000, a diagnostic tool
for converged and third  generation  wireless  networks.  The Japan  Diagnostics
operating segment sells the Company's and third parties'  diagnostic products to
customers in Japan.

     At the end of 2000, the IEX Call Center business was renamed Contact Center
in order to  reflect  the  products'  evolution  to support  multimedia  contact
centers.  The  Contact  Center  operating  segment  develops,  markets and sells
software-based  solutions  for  call  centers,   including  TotalView  Workforce
Management and TotalNet Call Routing.

     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.


                                      F-22
<PAGE>

The Company's operating segments and geographical information are as follows (in
thousands):

Operating Segments

<TABLE>
<CAPTION>
                                                                               Net Sales
                                                         -----------------------------------------------------
                                                             2001                 2000                  1999
                                                         -----------------------------------------------------
<S>                                                      <C>                   <C>                   <C>
Network Systems ..................................       $ 210,467             $ 219,892             $ 148,814
Network Diagnostics ..............................          40,163                44,847                36,177
Contact Center ...................................          38,231                32,344                21,128
Japan Diagnostics ................................          27,309                26,513                21,890
Intercompany Eliminations ........................          (3,719)               (9,262)               (1,941)
     Total net sales .............................       $ 312,451             $ 314,334             $ 226,068
</TABLE>

<TABLE>
<CAPTION>
                                                                           Operating Income
                                                         -----------------------------------------------------
                                                             2001                 2000                  1999
                                                         -----------------------------------------------------
<S>                                                      <C>                   <C>                   <C>
Network Systems(1) ...............................       $  46,206             $  64,364             $  38,552
Network Diagnostics(2) ...........................            (353)                9,112                 4,921
Contact Center ...................................          16,986                12,088                 9,068
Japan Diagnostics ................................             788                 2,515                 2,352
Intercompany Eliminations ........................             677                (2,424)                  114
General Corporate(3) .............................         (64,355)              (54,886)              (43,801)
                                                         ---------             ---------             ---------
     Total operating income (loss) ...............       $     (51)            $  30,769             $  11,206
                                                         =========             =========             =========
</TABLE>

----------
     (1) Network Systems  operating segment includes charges recorded in 2000 of
$2,880 for the write-down of inventory related to the IEX network switch product
line (See Note H),  and  $2,332 to record an  allowance  for  doubtful  accounts
related to a bankruptcy filing by a certain customer.

     (2) Network Diagnostics operating segment reflects the $1,800 restructuring
charge recorded in 1999 (See Note F).

     (3) General Corporate includes a non-recurring charge of $750 in connection
with the settlement of a legal dispute in 2000 and  acquisition-related  charges
and  amortization  of  $31,264,  $31,520  and  $28,970  for 2001,  2000 and 1999
respectively.

Enterprise Wide Disclosures

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

<TABLE>
<CAPTION>
                                                             2001                 2000                  1999
                                                         -----------------------------------------------------
<S>                                                      <C>                   <C>                   <C>
Network Systems ..................................       $ 210,390             $ 219,554             $ 148,745
Network Diagnostics ..............................          63,830                62,436                56,195
Contact Center ...................................          38,231                32,344                21,128
                                                         ---------             ---------             ---------
     Total revenues from external customers ......       $ 312,451             $ 314,334             $ 226,068
                                                         =========             =========             =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                             2001                 2000                  1999
                                                         -----------------------------------------------------
<S>                                                      <C>                   <C>                   <C>
North America ....................................       $ 227,743             $ 223,694             $ 173,590
Japan ............................................          27,030                25,663                22,034
Europe ...........................................          21,796                33,509                 9,717
Rest of World ....................................          35,882                31,468                20,727
                                                         ---------             ---------             ---------
     Total revenues from external customers ......       $ 312,451             $ 314,334             $ 226,068
                                                         =========             =========             =========
</TABLE>


                                      F-23
<PAGE>

     The  following  table sets  forth,  for the periods  indicated,  long-lived
assets by geographic area in which the Company holds assets (in thousands):

<TABLE>
<CAPTION>
                                                             2001                 2000                  1999
                                                         -----------------------------------------------------
<S>                                                      <C>                   <C>                   <C>
United States ....................................       $ 112,478             $ 138,393             $ 160,109
Japan ............................................           1,454                 1,024                 1,175
Other ............................................             951                   331                   385
                                                         ---------             ---------             ---------
     Total long-lived assets .....................       $ 114,883             $ 139,748             $ 161,669
                                                         =========             =========             =========
</TABLE>

     Sales to one customer  accounted for 14% of the revenues for the year ended
December 31, 2001 and included sales from all three  operating  segments.  There
were no customers accounting for 10% or more of revenues in 2000 and 1999.

NOTE Q -- COMMON STOCK

     Warrants:  At  December  31,  2001  and  2000,  the  Company  had  warrants
outstanding to purchase an aggregate of 195,000  shares of its Common Stock,  as
more fully discussed below.

     In July 1997,  the Company  issued  warrants to purchase a total of 360,000
shares of its Common Stock to five directors and one corporate officer at $14.08
per share.  These  warrants vest and become  exercisable  in 12 equal  quarterly
installments  beginning  on  September  30,  1997.  During  2001,  none of these
warrants were  exercised and warrants to purchase  195,000 were  outstanding  at
December  31,  2001.  During  2000,  warrants  to purchase  124,000  shares were
exercised,  and warrants to purchase 195,000 shares were outstanding at December
31, 2000.

     Restricted  Stock: In February 1998, the Company granted a restricted stock
award of 30,000 shares of its Common Stock to a director and  corporate  officer
in connection with the  commencement of his  employment.  The restricted  shares
vest in five equal annual  installments  beginning in February 1999.  This award
was valued at $607,000,  which is being  recognized as stock-based  compensation
expense over the term of the award.

     In February  2001, the Company  granted a restricted  stock award of 30,000
shares  of its  Common  Stock to a  corporate  officer  in  connection  with the
commencement of his employment.  The restricted shares vest in four equal annual
installments  beginning  in February  2001.  This award was valued at  $827,000,
which is being recognized as stock-based  compensation  expense over the term of
the award.


                                      F-24
<PAGE>

NOTE R -- QUARTERLY FINANCIAL SUMMARY (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                Quarters

For the Years Ended December 31,                                       First            Second             Third             Fourth
                                                                     --------------------------------------------------------------
                                                                                   (thousands, except per-share data)
<S>                                                                  <C>               <C>               <C>               <C>
2001

Revenues ...................................................         $ 84,315          $ 70,882          $ 77,475          $ 79,779
Gross profit ...............................................           55,042            47,089            47,216            49,737
Income (Loss) before provision for income
taxes ......................................................            4,555            (4,552)           (1,442)              623
Net income (loss) ..........................................            1,369            (4,551)           (2,530)           (1,187)
Earnings (Loss) per share:
     Basic .................................................         $   0.02          $  (0.08)         $  (0.04)         $  (0.02)
     Diluted ...............................................             0.02             (0.08)            (0.04)            (0.02)

2000

Revenues ...................................................         $ 60,062          $ 74,148          $ 83,755          $ 96,369
Gross profit ...............................................           37,769            46,594            53,912            57,923
Income (Loss) before provision for income
taxes ......................................................             (213)            5,790            12,230            11,815
Net income (loss) ..........................................           (1,802)            2,036             6,158             6,504
Earnings (Loss) per share:
     Basic .................................................         $  (0.03)         $   0.04          $   0.11          $   0.11
     Diluted ...............................................            (0.03)             0.03              0.10              0.10
</TABLE>

     Typically a substantial  portion of the Company's  revenues in each quarter
result  from  orders  received  in  that  quarter.  Further,  Tekelec  typically
generates a  significant  portion of its  revenues  for each quarter in the last
month of the quarter.  Tekelec  establishes its expenditure  levels based on its
expectations  as to future  revenues,  and if revenue  levels were to fall below
expectations this would cause expenses to be disproportionately high. Therefore,
a drop in  near-term  demand  would  significantly  affect  revenues,  causing a
disproportionate  reduction  in profits or even  losses in a quarter.  Tekelec's
quarterly  operating  results may  fluctuate as a result of a number of factors,
including  general economic and political  conditions (such as recessions in the
U.S.,  Japan and Europe),  capital  spending  patterns of  Tekelec's  customers,
increased competition, variations in the mix of sales, fluctuation in proportion
of  foreign  sales,  and  announcements  of  new  products  by  Tekelec  or  its
competitors.


                                      F-25
<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC

     Our audits of the  consolidated  financial  statements  referred  to in our
report dated January 29, 2002 appearing in the Annual Report to  Shareholders of
Tekelec (which report and consolidated financial statements are included in this
Annual Report on Form 10-K) also  included an audit of the  financial  statement
schedule appearing on page S-2 of this Form 10-K. In our opinion, this financial
statement  schedule presents fairly, in all material  respects,  the information
set  forth  therein  when  read in  conjunction  with the  related  consolidated
financial statements.


/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 28, 2002


                                      S-1
<PAGE>


                                     TEKELEC
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
   Column A                               Column B                      Column C                     Column D             Column E
-----------------------------------------------------------------------------------------------------------------------------------

                                                                       Additions
                                         Balance at          Charged to          Charged to         Deductions           Balance at
                                         Beginning           Costs and             Other             and other             End of
   Description                           of Period            Expenses            Accounts          Adjustments            Period
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                (thousands)
<S>                                        <C>                 <C>                 <C>                 <C>                 <C>
Year ended December 31, 1999:
-----------------------------

Allowance for doubtful accounts            $  763              $  265              $  495              $   45              $1,478
Product warranty                            2,343               1,395                  --                 985               2,753
Inventory provision                         1,740                 760                  --                 328               2,172

Year ended December 31, 2000:
-----------------------------

Allowance for doubtful accounts            $1,478              $2,968              $   --              $  159              $4,287
Product warranty                            2,753               1,986                  --               1,305               3,434
Inventory provision                         2,172               4,393                  --               3,590               2,975

Year ended December 31, 2001:
-----------------------------

Allowance for doubtful accounts            $4,287              $4,412              $   --              $3,350              $5,349
Product warranty                            3,434               3,965                  --               1,937               5,462
Inventory provision                         2,975               3,448                  --               2,096               4,327
</TABLE>


                                      S-2
<PAGE>


                                  EXHIBIT INDEX


                                                                    Sequentially
Exhibit                                                             Numbered
Number    Description                                               Page
------    -----------                                               ----

10.11     Loan Agreement and Promissory Note dated October 31,
          2001 between the Registrant and Union Bank of
          California.............................................

10.15     Employment Offer Letter dated November 13, 2001 between
          the Registrant and Lori A. Craven......................

10.16     Employment Offer Letter dated November 13, 2001 between
          the Registrant and Daniel B. Walters...................

21.1      Subsidiaries of the Registrant.........................

23.1      Consent of PricewaterhouseCoopers LLP..................