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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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, 1996

                         COMMISSION FILE NUMBER 0-15135

                                     TEKELEC
             (Exact name of registrant as specified in its charter)

                                   CALIFORNIA
         (State or other jurisdiction of incorporation or organization)

                                   95-2746131
                     (I.R.S.Employer Identification 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
                                (Title of class)

     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. [X]

     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 3, 1997 as reported on the Nasdaq National Market, was approximately
$161,000,000.

     The number of shares outstanding of the registrant's Common Stock on
March 3, 1997, was 12,325,793.

                       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 21, 1997 are incorporated by reference into Part III of this Annual
Report.
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                                     TEKELEC

                     INDEX TO ANNUAL REPORT ON FORM 10-K

                  For the fiscal year ended December 31, 1996
                                                                            Page
                                                                            ----
                                     PART I

Item 1.       Business....................................................     3
Item 2.       Properties..................................................    23
Item 3.       Legal Proceedings...........................................    23
Item 4.       Submission of Matters to a Vote of Security Holders.........    23

                                     PART II

Item 5.       Market for Registrant's Common Equity and Related
              Stockholder Matters.........................................    24
Item 6.       Selected Consolidated Financial Data........................    25
Item 7.       Management's Discussion and Analysis of Financial Condition
              and Results of Operations...................................    26
Item 8.       Financial Statements and Supplementary Data.................    33
Item 9.       Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure....................................    33

                                    PART III

Item 10.      Directors and Executive Officers of the Registrant..........    34
Item 11.      Executive Compensation......................................    34
Item 12.      Security Ownership of Certain Beneficial Owners and
              Management..................................................    34
Item 13.      Certain Relationships and Related Transactions..............    34

                                     PART IV

Item 14.      Exhibits, Financial Statement Schedules, and Reports
              on Form 8-K.................................................    35

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                                     PART I

ITEM 1. BUSINESS.

         Tekelec (the "Company") designs, manufactures and markets innovative
diagnostic systems and network switching solutions for the global communications
marketplace. Tekelec's products enable communications infrastructure suppliers
and network providers to rapidly deliver advanced communications products and
services. The Company's diagnostic systems are used in the design, installation
and maintenance of a broad range of communications equipment and networks.
Tekelec's EAGLE(R) STP switching platform enables operators of wireline and
wireless networks to deliver Advanced Intelligent Network (AIN) services such as
Caller ID, voice messaging, personal number calling, Service Provider Local
Number Portability (SP-LNP) and customized routing and billing as well as
digital wireless services such as Personal Communications Systems (PCS) and
Global Systems for Mobile (GSM). The Company sells its diagnostic systems
worldwide to long distance carriers, telephone operating companies,
communications equipment manufacturers, wireless and cellular network operators
and government agencies. The Company's switching products have been sold
primarily to U.S. independent telephone companies (ITCs), PCS and cellular
operators, interexchange carriers (IXCs), competitive access providers (CAPs)
and local exchange carriers through the Company's direct sales force and
distribution and marketing relationships with Lucent Technologies, Inc. and
Stratus Computer, Inc. (Stratus).

INDUSTRY BACKGROUND

         Deregulation and privatization worldwide have intensified competition
among existing operators of public communications networks and encouraged the
entrance of new service providers. At the same time, the convergence of
telephony and computing is resulting in end users demanding new and enhanced
high quality communications services at lower cost. As a result, network
operators are increasingly pressured to reduce the time and expense required to
introduce such services. Together, these forces are creating the need for new
equipment and infrastructure for both wireline and wireless networks.

  PUBLIC NETWORKS:  INCREASED COMPETITION AND COMPLEXITY

         In the U.S., long distance carriers, Regional Bell Operating Companies
(RBOCs) and new competitive service providers that have entered the local and
long distance markets are competing with one another to offer enhanced products
and services to their customers. The passage of the Telecommunications Act of
1996 in early 1996 has increased competition among telephone operating
companies, cable companies and long distance carriers. The rapid growth of
cellular and wireless networks has also further increased the number of
communications alternatives offered to end users. In response to this
environment, operators of public networks are seeking to lower their costs and
differentiate themselves by rapidly introducing new services.

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These include high-speed data services such as Asynchronous Transfer Mode (ATM)
and Frame Relay, AIN services such as Caller ID, voice messaging, Service
Provider Local Number Portability and customized routing and billing as well as
digital wireless services such as PCS and GSM.

         While communications markets are becoming increasingly competitive, a
proliferation of standards and protocols is making the design and operation of
communications networks more complex. Demand for high speed communications
integrating voice, data and video is growing rapidly. Services based on emerging
technologies, such as ATM, Frame Relay, xDSL, digital video and Fast Ethernet
are being deployed while Integrated Services Digital Network (ISDN) is
increasingly available to provide end-user access to combined voice and data
services, particularly for Internet services. With the explosive growth of the
Internet comes the need for high-capacity, high-speed, flexible data products
and services. In addition, network operators must also support these standards
and protocols in an increasing number of Local Area Networks (LANs),
Metropolitan Area Networks (MANs), Wide Area Networks (WANs) and Global Area
Networks (GANs).

         As a result, network operators have become more demanding of
communications equipment suppliers to provide cost effective solutions that
enable them to increase the overall capabilities of their networks while
maintaining the highest network integrity.

  DIAGNOSTIC TOOLS

         The proliferation of standards and protocols, growth of the Internet
and Intranet and the increasing complexity of communications equipment and
networks are creating a need for new, more sophisticated diagnostic systems
capable of simultaneously testing multiple existing and emerging technologies.
Network operators use diagnostic tools to efficiently monitor network
performance, simulate network services and test interoperability of equipment.
In an increasingly competitive environment, network operators need diagnostic
systems that can reduce time to market by shortening the testing cycles
necessary to model and implement new services. In addition, network operators
require advanced diagnostic solutions that verify reliability of network
elements, offer flexibility to support new standards and protocols as they
emerge and enable them to centralize the testing expertise within their
organizations.

         Equipment manufacturers use diagnostic tools to design and test their
products, such as switches, hubs and routers, for conformance to new and
existing standards and to simulate network operating conditions. Manufacturers
seek diagnostic tools that enable them to shorten their product development
cycles and reduce their testing costs as these elements are principal
contributors to product development time and expense. Furthermore, diagnostic
tools with a flexible architecture are necessary to accommodate the rapid
changes in technology.

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  INTELLIGENT NETWORK AND ADVANCED INTELLIGENT NETWORK (AIN) SWITCHING

         The Intelligent Network (IN) utilizes a highly complex protocol called
Common Channel Signalling System No. 7 (SS7) to provide the basis for virtually
all new telecommunications services. The IN architecture uses two separate but
parallel paths; one to handle the voice or data traffic and a second to carry
the signalling information for call set up and routing. Network operators
utilize the IN architecture to increase the efficiency of their network by
offloading signalling traffic onto the SS7 network, thus freeing up trunk line
capacity needed for revenue generating traffic.

         A second generation Intelligent Network called the Advanced Intelligent
Network (AIN) is used by carriers and service providers seeking to differentiate
themselves by offering advanced voice and data communications services. The AIN
is a network architecture and a set of standards designed to allow network
operators to create, deploy and modify these services quickly and economically.
AIN services represent the merging of telephony with database information
through SS7 signalling. Such services include Caller ID, voice messaging,
personal number calling, Service Provider Local Number Portability and
customized routing and billing as well as digital wireless services such as PCS
and GSM.

         Network operators are increasingly using SS7 networks as a source of
competitive advantage to introduce new services through software changes in IN
network elements rather than in central office switches. The key network
elements in the IN and AIN architecture are as follows:

                  Signal Transfer Point (STP) - An STP is a switch that handles
the signalling messages used to set up telephone calls, queries external
databases for routing and processing information and dispatches call handling
instructions.

                  Service Switching Point (SSP) - An SSP is a component of the
central office switch that sets up trunk connections. When an SSP identifies an
AIN call, it routes a signalling message to the STP and awaits further
instructions for call processing.

                  Service Control Point (SCP) - An SCP is a computer database
that is accessed by STPs for customer call routing and other special information
required for AIN services.

         Additional components of the AIN architecture include Service Creation
Environments (SCE) used to create new software-based services and Service
Management Systems (SMS) used for billing and administration.

         While SS7 has been available since the 1980s, to date it has been used
principally to support intelligent services such as call set-up, 800 number
calling and calling card verification. AIN standards and services have only
recently emerged and the number and complexity of these

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services continue to grow. Services such as Caller ID, voice messaging, personal
number calling, Service Provider Local Number Portability and customized routing
and billing as well as digital wireless services such as PCS and GSM all require
SS7 networking technology. ISDN, driven by the growth of the Internet and
telecommuting, is also increasing the need for SS7 to provide the signalling
connectivity for ISDN applications.

         The accelerating rate of introduction of these new enhanced services
enabled by SS7 has placed increasing demand for functionality and capacity on
the installed base of older generation STPs. These devices are, in most cases,
modified central office digital switches that fundamentally were not optimized
for AIN purposes. In addition, the telecommunications industry is evolving
towards an architecture of more intelligent distributed switching in which
software will allow for third party developers to be involved in creating
applications.

         The Federal Communications Commission's June 1996 order requiring that
Incumbent Local Exchange Carriers (ILECs) provide competitors with the ability
to transition customers to their networks without changing the customer's
existing telephone number (i.e., Service Provider Local Number Portability) will
have a dramatic impact upon the SS7 network and all ILECs.

         With competition among network operators accelerating the deployment of
AIN services, the strategic and economic value of sophisticated switching
equipment optimized for SS7 applications is rapidly increasing. In addition, the
importance of SS7 network-to-network operators mandates extremely high
reliability and fault tolerance from the equipment as well as higher throughput
and scalability to support the rapid and unpredictable growth in enhanced AIN
services. Companies that offer SS7-based products that are built on scalable,
open distributed architectures and enable AIN applications can benefit from this
industry shift.

PRODUCTS

  NETWORK DIAGNOSTICS PRODUCTS

         Equipment manufacturers and network operators use the Company's
diagnostic products to perform a wide variety of simulation and analysis to
detect, diagnose and isolate communications problems. The Company's proprietary
simulation language enables the controlled imitation of communications devices,
traffic loads and networks. Its analysis software helps monitor, selectively
capture and interpret digitized pulses transmitted through a network.
Uses of the Company's products include the following:

         o Designing Communications Equipment. By simulating existing and
emerging communications devices (e.g., digital switches, STPs, SCPs, routers and
hubs) and protocols (e.g., ATM, Frame Relay, SS7, ISDN, FDDI, Ethernet and Fast
Ethernet), the Company's products enable engineers to more rapidly design
communications devices that will be

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compatible with, and minimize potential breakdowns of, the networks in which the
devices will be deployed.

         o Ensuring Product Reliability. By simulating a wide range of operating
situations, 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, thereby accelerating time to market and
potentially reducing costly failures after installation.

         o Verifying Certification. By executing certain standard tests, network
operators and manufacturers use the Company's products to rapidly verify that
communications devices meet specified standards (e.g., X.25, ISDN and SS7).

         o Monitoring Networks. By collecting and analyzing traffic, the
Company's products can monitor networks on a continuous basis and provide
advance notice of potential system failures, allowing faster service restoration
or even service failure prevention.

         o Troubleshooting. By identifying the specific location and type of
communication error, the Company's products can isolate which network device has
failed (e.g., channel bank or PBX). The Company's products help technicians and
engineers repair devices and networks promptly and minimize expensive downtime
associated with service failure.

         The Company's principal data network diagnostics products are:

         Chameleon(R) Open. The Chameleon Open is a multiprotocol analyzer that
features a flexible open architecture for a family of applications that provide
simultaneous full bandwidth testing of broadband, LAN, GAN, MAN and WAN
equipment and networks. It can perform tests at speeds up to 155 Mbps and
currently supports a number of protocols and interfaces including ATM, SMDS,
FDDI, Frame Relay, ISDN, TCP/IP, X.25, T1, E1, Fast Ethernet, Ethernet and Token
Ring. The Chameleon Open is based on an Intel x86-based pentium hardware
platform and a UNIX operating system incorporating an X-Windows, Motif graphical
user interface. Tekelec's proprietary programming tool, Protocol Adaptable State
Machine (PASM), was added to the Chameleon Open platform in 1995 to enable ATM
signalling and Frame Relay simulation. Each Chameleon Open supports, depending
on its configuration, up to 12 network interfaces simultaneously and can be
configured as either a portable or rack mount system. Multiple systems can be
networked in a LAN or WAN configuration.

         Chameleon 32 Plus. The Chameleon 32 Plus is a sophisticated diagnostic
system that simulates and analyzes multiple types of communications devices and
networks. Research and development users utilize the Chameleon 32 to
comprehensively test ISDN primary and basic rate interfaces, SS7 and data
protocols such as Frame Relay and X.25.

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         The Company's principal intelligent network diagnostics product is:

         MGTS/GSMT. The MGTS/GSMT system is used primarily for SS7-based device
simulation, load generation and network monitoring. In its fully configured
form, the system includes Tekelec's proprietary programming tool, PASM, that can
be used to design customized testing scenarios. The MGTS/GSMT software runs on
Sun Microsystems and Hewlett-Packard UNIX operating systems with an X-Windows,
Motif graphical user interface. The MGTS/GSMT system supports a number of
protocols, including SS7, AIN, GSM, IS.41 and personal digital communications
(PDC) networks. Each system can simulate up to 32 SS7 links or 16 network nodes
simultaneously, and a number of MGTS/GSMT systems may be networked together.

         List prices for the Company's principal diagnostic products range from
approximately $35,000 to $150,000 depending on configuration.

  NETWORK SWITCHING PRODUCTS

         EAGLE STP. The Company introduced the EAGLE STP in early 1992. The
EAGLE STP is designed to meet the demands of SS7 switching and features a fully
distributed, standards-based open architecture. Its distributed open
architecture, high capacity and throughput are tailored to the SS7 switching
needs of common carriers, local exchange carriers and PCS and cellular
operators. The EAGLE STP is economically scaleable in configurations from 2 to
500 links. On-going software releases provide continual product improvement to
meet the evolving needs of end users. As is required in SS7 networks, the EAGLE
is sold and deployed in pairs, for redundancy. The EAGLE has the following
features:

         Designed for SS7 Standards. The EAGLE STP is designed to exceed the
requirements for STPs as defined by Bell Communications Research (Bellcore) and
presently supports both American National Standards Institute (ANSI) and
International Telephone and Telegraph Consultative Commission (CCITT) SS7
standards. Bellcore defines the standards used primarily by the RBOCs for
equipment used in their networks. See "-- Sales, Marketing and Support."

         Powerful, Distributed Architecture. The EAGLE STP features a fully
distributed, open architecture, utilizing Intel x86 microprocessors. The
performance of the product results from its uniquely distributed architecture
and the elimination of central processors. In the EAGLE STP, all SS7 network
intelligence, including SS7 routing information, is distributed among up to 250
signalling interface processors. Each interface is interconnected via a high
speed, redundant bus subsystem. The bus subsystem utilizes two, counter-rotating
125 Mbps busses and features proprietary switching and buffering algorithms,
which minimize collision and guarantee message delivery between all attached
interfaces. All interfaces attached to the bus subsystem are hot-swappable, so
that interface repair or replacement does not affect system operation.

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         Software Architecture. The EAGLE STP's software is fully modular and
written entirely in industry-standard programming languages. All software is
released in complete versions, eliminating the need for interim patching,
minimizing the potential for errors. EAGLE STP software is optimized for the
capacity and redundancy features of the host hardware.

         Open Software Interfaces. Users of the EAGLE STP can rapidly add new
functionality and value-added services to their network, utilizing the EAGLE
STP's open software interfaces. Major new features enabling these open
interfaces include the STP LAN feature, which allows users to attach inexpensive
general purpose computers to the EAGLE for network analysis; the Database
Transport Access feature, which allows users to change the behavior of protocols
in their network without relying on the vendor's development cycles; and the
X.25 to SS7/IS.41 Protocol Conversion feature which allows first-generation
legacy cellular switches to interwork with the more advanced SS7 cellular
network. A significant new capability enabling Service Provider Local Number
Portability on the EAGLE allows carriers to eliminate significant numbers of
dedicated Service Control Point (SCP) general purpose computers.

         Ease of Operation and Maintenance. EAGLE STP installations generally do
not require any enhancements to the central office's power supply, cooling
system or flooring and require less than 36 square feet of space. An EAGLE STP
can usually be installed in less than one week. No scheduled maintenance is
required to support the EAGLE STP, eliminating the requirement for on-site
personnel.

         Prices for a pair of EAGLE STPs typically range from approximately
$250,000 to $5,000,000, depending on configuration and associated software
applications.

  COMPLIANCE WITH INDUSTRY STANDARDS

         The Company's products are designed to meet a significant number of
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, the Company's products must comply with various
regulations defined by the Federal Communications Commission (FCC) and
Underwriters Laboratories as well as standards established by Bellcore and the
ANSI. Internationally, the Company's products must comply with standards
established by telecommunications authorities in various countries as well as
with recommendations of the CCITT and the International Standards Organization
(ISO). The failure of the Company's products to comply, or delays in compliance,
with the various existing and evolving standards could have a material adverse
effect on the Company's business and operating results.

PRODUCT DEVELOPMENT

         The communications market is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
Standards for new services such as ATM, AIN and PCS are still evolving. As these
standards and the demand for services and

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applications evolve, the Company intends to adapt its products or develop and
support new products. The Company solicits product development input through
discussions with users of the Company's products and participation in industry
organizations and international standards committees, such as the ATM Forum and
Telecommunications Industry Association (TIA), and by closely monitoring the
activities of the ITU, ETSI, ISO and Bellcore.

         The Company's diagnostic product development activities are principally
focused on expanding the capabilities of the Chameleon Open and MGTS, including
their interfaces, software modules and protocol capabilities for emerging
technologies such as ATM and AIN, and adapting these products for the emerging
Network Operations market. From time to time the Company engages in development
projects for special applications for customers. The Company is usually free to
use such technology in future products which are not competitive with the
specific application for which the development work was performed.

         The Company's network switching product development group has as its
priority the release of new software versions to incorporate enhancements
desired by customers and compliance with standards to enable EAGLE to address
additional domestic and international markets. In addition, the Company plans
continued improvement of hardware components to improve performance and
capability.

         The Company utilizes a common standards-based open architecture
approach in the design of its products. This approach facilitates and
accelerates the development of new applications and products and permits the
Company to enhance existing products by substituting new hardware or software
modules. This modular approach also helps to extend the life cycles of the
Company's products, ensure compatibility among successive generations of
products and simplify manufacturing.

         The Company's success depends, to a substantial degree, upon its
ability to respond rapidly to changes in technology, industry standards and
customer requirements. This requires the timely selection, development and
marketing of enhancements and new products on a cost-effective basis. The
Company has invested and expects to continue to invest substantial resources in
the development of new products and technology and product enhancements. There
can be no assurance that the Company's product development efforts will result
in commercially successful new or enhanced products or that the Company's
products will not be rendered obsolete or noncompetitive by changing technology
or new competitive products.

         Products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. Such errors have occurred in the past. Although the Company's products
have not experienced any significant errors, such errors, particularly those
that result in a failure of the Company's switching products, could have a
material adverse effect on the Company's customer relationships, business and
operating results. There can be no assurance that, despite thorough testing by
the Company and by customers, errors will not be found in the Company's
products.

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         Product development includes expenditures for research and development,
new product design, enhancement of existing products and selective acquisition
of technology. Research and development expenses amounted to approximately $17.1
million, $15.1 million, and $12.0 million in 1996, 1995 and 1994, respectively.
There were no capitalized software development costs in 1996, 1995 and 1994. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note A to Consolidated Financial Statements.

         The Company's development facilities are located in California, North
Carolina, Japan and India. As of March 1, 1997, the Company had 141 persons
engaged full time in product development. The Company believes that recruiting
and retaining highly skilled engineering personnel is essential to its success.
To the extent that the Company is not successful in attracting and retaining its
technical staff, its business and operating results would be adversely affected.

SALES, MARKETING AND SUPPORT

         The Company's sales and marketing strategy for its diagnostic products
is to initially target customers' research and development departments designing
the next generation of communications equipment and then to target the
manufacturing groups and ultimate users in network operations as equipment is
manufactured, certified and installed. This strategy permits the Company to gain
expertise in testing emerging technologies in the early stages of their life
cycles.

         The Company's sales and marketing strategy for its EAGLE switching
product is to continue to focus on sales to the U.S. ITC and cellular markets
and to pursue new customer relationships including RBOCs and selected
international opportunities. Current and future strategic alliances will
continue to be an integral component of the strategy to reach broader markets
and attain greater market presence. The network switching sales cycle typically
ranges from three to 18 months depending on the complexity of a customer's
planning, bidding and implementation requirements.

         RBOCs and other large service providers require their suppliers to
continuously participate in Bellcore Technical Auditing programs as new hardware
and software features are introduced. Bellcore provides Technical Auditing
Services ("technical audits") to suppliers of network equipment assessing the
supplier's conformance to certain Bellcore standards which have been adopted by
RBOCs and other service providers. Ongoing technical audits of the EAGLE STP are
conducted by Bellcore and the results of these audits are available to the
Company and its customers. Bellcore does not endorse or certify any product or
service or guarantee its performance. Failure or delay in obtaining favorable
technical audit results could have a material adverse effect on the Company's
ability to sell EAGLE STP to this large segment of the communications carrier
market.

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         Domestic Distribution. The Company sells its diagnostic and switching
products in the U.S. principally through separate direct sales forces and, for
the EAGLE STP, also through strategic relationships with Lucent Technologies,
Inc. (formerly AT&T Network Systems) and Stratus. The Company's direct sales
forces operate out of the Company's headquarters in Calabasas, California and
its regional offices located in Colorado, Illinois, Missouri, New Jersey, North
Carolina, Northern California, Texas and Virginia.

         International Distribution. The Company sells its diagnostic products
internationally through a network of 26 distributors and two wholly owned
subsidiaries in Japan and Canada. The Company's Japanese subsidiary, which
presently sells only diagnostic products, generated approximately 22%, 22% and
20% of the Company's revenues for 1996, 1995 and 1994, respectively. In 1997,
the Company intends to transition its sales in Canada to its direct sales force.
The Company currently sells its switching products internationally through its
direct sales force.

         Tekelec-Airtronic, S.A., an affiliate of the Company, and its wholly
owned subsidiaries are the distributors of the Company's diagnostic products in
France, Italy, Germany, the Netherlands, Belgium, Luxembourg, Portugal, Spain
and China. Twenty additional independent companies distribute the Company's
products in other Western European countries, the Far East (other than Japan),
Australia, New Zealand, the Middle East, South America and South Africa.
Distributors typically purchase products directly from the Company pursuant to
agreements that are exclusive for a particular territory and are cancelable by
either party upon 90 days notice. Export sales to international distributors
accounted for approximately 13%, 17% and 14% of revenues in 1996, 1995 and 1994,
respectively.

         The Company typically invoices export sales in U.S. dollars and its
foreign subsidiaries invoice sales in their respective local currency.
International sales are subject to inherent risks, including longer payment
cycles, unexpected changes in regulatory requirements and tariffs, difficulties
in staffing and managing foreign operations and distributors, greater difficulty
in accounts receivable collection and potentially adverse tax consequences.
Additionally, 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. In addition,
due to the technical nature of the Company's products, certain of the Company's
export sales must be licensed by the Office of Export Administration of the U.S.
Department of Commerce. The Company's products are subject, in certain
international jurisdictions, to reduced protection for the Company's copyrights
and trademarks. See Notes A, E and M to Consolidated Financial Statements.

         Strategic Relationships. The Company believes that it can improve
market penetration and acceptance for its EAGLE products through strategic
relationships with leading communications equipment suppliers. These suppliers
have long-standing relationships with

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public carriers and provide a broad range of services to these carriers through
their existing sales and support networks. Tekelec seeks strategic relationships
that (i) enhance the Company's presence in its target markets, (ii) offer
products that complement the EAGLE to provide value-added networking solutions
and (iii) leverage the Company's core technologies enabling the communications
equipment suppliers to develop enhanced products with market differentiation
that can be integrated with the EAGLE platform.

         The Company has a non-exclusive distribution agreement with Lucent
Technologies, Inc. and a marketing agreement with Stratus for the EAGLE STP. The
Company believes that its relationships with Lucent and Stratus demonstrate
recognition of the technical advantages of the EAGLE STP. The Company believes
that these agreements provide the Company with additional opportunities to
penetrate the SS7 network switching marketplace. Through the Company's
relationships with Lucent and Stratus, the Company has enhanced its market
presence and its ability to access leading telephone companies such as the
RBOCs. In general, these agreements can be terminated by either party on limited
notice and do not require minimum purchases. Furthermore, Lucent is not
precluded from selling products that are competitive with the Company's
products. A termination of the Company's relationship with Lucent or the sale of
competing products by Lucent could materially and adversely affect the Company's
business and operating results.

         Advertising and Promotion. The Company uses advertising in trade
journals, exhibitions at trade shows, a presence on the Internet via the World
Wide Web and direct mail to promote awareness of the Company and its products.
The Company has been most successful in generating sales through demonstrations
of its products and, therefore, focuses its advertising and promotional
activities on generating opportunities for demonstrations. The Company also
provides extensive training for, and merchandising aids to, its direct sales
force and distributors. These include sales brochures, demonstration systems and
promotional product literature. In order to support the Company's marketing
efforts, the Company also publishes a newsletter for its customers and
distributors, as well as maintains a presence on the Internet.

         Services, 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 its products. The Company maintains an in-house repair facility and
provides ongoing training and telephone assistance to customers and
international distributors from its headquarters in Calabasas, California,
certain U.S. regional offices and its Japanese subsidiary. The Company's
Technical Assistance Center in Morrisville, North Carolina supports the
Company's switching products on a 24 hour-a-day, seven day-a-week basis. Support
services include 24-hour technical support, remote access diagnostic and
servicing capabilities, extended maintenance and support programs, comprehensive
technical customer training, extensive customer documentation, field
installation and emergency replacement. The Company typically warrants its
products against defects in materials and workmanship for one year after the
sale and thereafter offers extended service

                                       13
<PAGE>

warranties.  To date, warranty expenses have been consistently within
management's expectations.

CUSTOMERS

         During 1996, the Company shipped approximately 600 units of its
diagnostic products to over 250 customers worldwide and 26 pairs of EAGLE STPs
to 21 customers. The Company's customers include end users and marketing
intermediaries. End users for the Company's diagnostic products include long
distance carriers, telephone operating companies, communications equipment
manufacturers, wireless and cellular network operators and government agencies.
End users for the Company's EAGLE STP consist primarily of U.S. ITCs, PCS and
cellular operators, interexchange carriers, competitive access providers and
local exchange carriers.

         The Company's diagnostic business is substantially dependent on repeat
business and, therefore, customer satisfaction and loyalty are crucial to its
long-term success. Many of the Company's largest customers in 1996 were
purchasers of the Company's diagnostic systems in prior years. Sales of
diagnostic products to Nippon Telegraph & Telephone (NTT) accounted for 12% of
the Company's 1996 revenues. No other customer accounted for more than 10% of
the Company's revenues in 1996.

         Federal and state agencies, including the FCC, regulate many of the
Company's domestic customers. The FCC and a majority of the states have enacted
or are considering regulations based upon alternative pricing methods.
Uncertainty regarding future pricing policies and the cost effectiveness of
deploying public network services may affect demand for communications products,
including the Company's products. However, the Company believes that
deregulation of the telecommunications market and new methods of price
regulation as evidenced by the passage of the Telecommunications Act of 1996 in
early 1996 could increase the demand for products such as those offered by the
Company which enhance the efficiency of the network or allow the expedited
introduction of new revenue-producing services.

BACKLOG

         Orders for the Company's diagnostic products are usually placed by
customers on an as-needed basis, and the Company has typically been able to ship
these products in 15 to 30 days after the acceptance of the purchase order.
Backlog for switching products typically consists of contracts or purchase
orders for both product delivery scheduled within the next 12 months and EAGLE
STP extended service warranty to be provided over the next five years. Because
of variations in the magnitude and duration of orders received by the Company,
and customer delivery requirements, which may be subject to cancellation or
rescheduling, the Company's backlog at any particular date may not be a
meaningful indicator of future financial results. At

                                       14
<PAGE>

December 31, 1996, the Company's backlog amounted to approximately $28.0
million, of which $16.6 million related to EAGLE STP service warranty. This
compared to $23.3 million at December 31, 1995, of which $12.3 million related
to EAGLE STP service warranty.

MANUFACTURING

         The Company's manufacturing operations consist of the procurement and
inspection of components, final assembly, burn-in, quality control testing and
packaging. Printed circuit boards, chassis and most of the other major
components used in the Company's products are subassembled to the Company's
specifications by independent contractors with whom the Company generally has
had long-standing working relationships. The assembled components are then
delivered to the Company's production facilities for final assembly, quality
control testing and product configuration, including software installation. The
Company's products incorporate the Company's proprietary software as well as
software licensed from third parties. The Company believes that its use of
independent contractors for subassembly coupled with in-house final assembly
improves production planning, increases efficiency, reduces costs and improves
quality.

         The Company has a computerized manufacturing inventory control system
which integrates and monitors purchasing, inventory control and production. The
Company's quality control process tests for reliability and conformance with
product specifications and utilizes certain automated software test procedures.
The Company received ISO 9002 certification from Bellcore in 1995, ISO 9001
certification from Bellcore for its network switching operation in 1996 and is
currently undergoing the processes for ISO 9001 certification for its remaining
operations and expects to obtain such certification in 1997.

         The Company is in the process of obtaining CE Mark registration for
certain of its diagnostic products to meet EC regulations for shipment of
products into Europe. The Company has already obtained CE Mark registration for
those products with significant demand in Europe in 1996 and currently expects
to be compliant for all remaining products before the end of the second quarter
of 1997. Although delays in the Company's ability to obtain CE Mark registration
for all of its products did not have a material impact on European sales in
1996, further delays or failure to obtain such registration could have a
material impact on future sales in Europe.

         The Company generally uses industry standard components for its
products which are available from multiple sources; however, a few key
components, such as certain microprocessors, video displays and power supplies,
are currently only available from single suppliers. Vendor supply agreements
often include provisions requiring the vendor to maintain a specified level of
key components. The Company believes that inventory levels of key components,
including those maintained by vendors, are adequate. In addition, should any
components become unavailable the Company believes that functionally similar, if
not identical, components could be obtained, and any necessary internal redesign
accomplished, without

                                       15
<PAGE>

materially adversely impacting the Company. To date, the Company has not
experienced any significant delays in obtaining components from its suppliers
and independent contractors. However, the electronics industry is subject to
rapid technological change. Components become obsolete and are discontinued by
manufacturers as new succeeding generations are introduced. An inability to
obtain essential components, if prolonged, could materially adversely affect the
Company's business and operating results and damage customer relationships.

COMPETITION

         Diagnostic Products. The communications diagnostic market is intensely
competitive and subject to rapid technological change and evolving industry
standards. The Company primarily competes in the high performance segment of the
market. Its principal competitor is Hewlett-Packard. The Company also competes
with a number of other manufacturers, some of which have greater financial,
marketing, manufacturing and technological resources than the Company. The
Company believes that its long-term success will depend in part on its ability
to be a leader in offering products that address new emerging industry standards
and to offer a broad line of integrated applications.

         The Company believes that the principal competitive factors in the
communications diagnostic market in which the Company competes are product/price
performance, functionality and reliability, timely introduction of new products,
breadth of integrated product applications, marketing and distribution
capability and customer service and support. The Company believes that it
competes favorably, although there can be no assurance that new or established
competitors will not offer products superior to or lower in price than those of
the Company.

         Network Switching Products. The market for STPs is highly competitive
and has been highly concentrated among a limited number of dominant suppliers.
The Company expects competition to increase in the future from existing and new
competitors. The Company presently competes with DSC and to a lesser extent
with a limited number of other manufacturers, all of which have significantly
greater financial, marketing, manufacturing and other resources and larger
installed customer bases than the Company. The Company believes that its
long-term success will depend on its ability to further penetrate the major
telephone companies, including the RBOCs, offer products with the best
price/performance profile and be responsive to customers' needs for new features
and services.

         The Company believes that the principal competitive factors in the
network switching products market are product price/performance characteristics
and reliability, customer service and support and the supplier's financial
resources, marketing and distribution capability. The Company anticipates that
responsiveness in adding new features will become an increasingly important
competitive factor. While the Company's competitors have greater financial
resources, the Company believes it competes favorably in other respects.
However, there can be no assurance that new entrants or established competitors
with greater financial resources have not

                                       16
<PAGE>

or will not offer products superior in performance, quality, service and support
to, and/or lower in price than, those of the Company.

INTELLECTUAL PROPERTY

         The Company relies on a combination of trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its products. The Company does not hold any patents with respect to
its products. The Company has entered into confidentiality and invention
assignment agreements with its employees, and enters into non-disclosure
agreements with its suppliers, distributors and appropriate customers among
others so as to limit access to and disclosure of its proprietary information.
There can be no assurance that these statutory and contractual arrangements will
prove sufficient to deter misappropriation of the Company's technologies or
independent third-party development of similar technologies. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely. The Company believes that, because of the rapid pace of technological
change in the communications market, legal protections for its products are less
significant factors in the Company's success than the knowledge, ability and
experience of the Company's employees, the frequency and timely introduction of
product enhancements and the quality of support services provided by the
Company.

         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 exclusive patent,
copyright, trademark and other intellectual property rights to technologies that
are important to the Company. There are no currently pending material claims
that the Company's products, trademarks or other proprietary rights infringe the
proprietary rights of third parties. However, there can be no assurance that the
Company will not receive communications from third parties in the future
asserting that the Company's products infringe or may infringe the proprietary
rights of third parties. In its distribution agreements and certain of its major
customer agreements, the Company agrees to indemnify its customers for any
expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. In the event of litigation to
determine the validity of any third-party claims, such litigation, whether or
not determined in favor of the Company, could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel from productive tasks. In the event of an adverse ruling in such
litigation, the Company might be required to discontinue the use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain licenses from third parties. There can be no assurance that
licenses from third parties would be available on reasonable commercial terms,
if at all. In the event of a successful claim against the Company and the
failure of the Company to

                                       17
<PAGE>

develop or license a substitute technology, the Company's business and operating
results would be materially adversely affected.

EMPLOYEES

         At March 1, 1997, the Company had 367 employees, comprising 131 in
sales, marketing and support, 51 in manufacturing, 141 in research, development
and engineering and 44 in management, administration and finance. The Company
believes that its future success will depend in part on its ability to attract,
motivate and retain highly qualified personnel. Many employees hold stock
options and/or participate in an 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 employee relations
are excellent.

                                       18
<PAGE>
                                    GLOSSARY

AIN (Advanced Intelligent Network)......  Bellcore's set of standards for
                                          advanced intelligent services for the
                                          telephone networks of Regional Bell
                                          Operating Companies.

ANSI (American National Standards
   Institute)...........................  The coordinating body for voluntary
                                          standards groups within the United
                                          States. ANSI is a member of the
                                          International Organization for
                                          Standardization (ISO).

ATM (Asynchronous Transfer Mode)........  A broadband, low-delay, packet-based
                                          switching and multiplexing technique.
                                          Usable capacity is segmented into
                                          fixed-size cells, consisting of header
                                          and information fields, allocated to
                                          services on demand.

BRI (Basic Rate Interface)..............  One interface type used to access the
                                          Integrated Services Digital Network.
                                          The BRI allows two simultaneous calls
                                          across a single pair of copper wires.

CCITT (International Telephone and
   Telegraph Consultative Committee)....  A United Nations organization which
                                          establishes international
                                          telecommunications standards.

El .....................................  The European telecommunications
                                          standard defining circuits that
                                          operate at speeds of 2.048 Mbps,
                                          similar to T1 lines in the United
                                          States.

Ethernet................................  A standard set of specifications for a
                                          particular type of LAN that employs
                                          baseband signalling (single signal on
                                          a cable) and has a transmission rate
                                          of 10 Mbps.

Fast Ethernet...........................  100 Mbps' technology for workstation
                                          LANs from the eponymous Fast Ethernet
                                          Alliance, which includes 3Com and
                                          SynOptics. It has been adopted by the
                                          IEEE as the basis for the 100BaseT
                                          Ethernet standard.

FDDI (Fiber Distributed Data
   Interface)...........................  A standard for operating fiber
                                          optic-based LANs at 110 Mbps used for
                                          high speed and backbone applications.

Frame Relay.............................  A variable length packet-based
                                          transmission technology that is used
                                          to transmit data at speeds up to 2
                                          Mbps.

                                       19
<PAGE>

GAN (Global Area Network)...............  A network of computers connected
                                          across countries.

GSM (Global Systems for Mobile).........  The standard for a set of protocols
                                          for digital wireless initially
                                          deployed in Europe.

IN (Intelligent Network)................  An out-of-band, packet switched
                                          overlay network to the in-band Public
                                          Switched Telephone Network (PSTN). The
                                          Intelligent Network minimally consists
                                          of SS7-equipped Central Offices
                                          (Service Switching Points, or SSPs),
                                          packet switches (Signal Transfer
                                          Points, or STPs) and databases
                                          (Service Control Points, or SCPs).

Internet................................  The worldwide system of linked
                                          networks that is capable of exchanging
                                          mail and data through a common
                                          addressing and naming system based on
                                          TCP/IP protocols.

Intranet................................  A private network that uses Internet
                                          software and standards.

ISDN (Integrated Services Digital
   Network).............................  Public digital communications
                                          services supporting a wide range of
                                          data, voice and image services
                                          accessed by standard interfaces
                                          integrated with customer control.

IS.41...................................  One of the Interim Standards for North
                                          American mobile applications for
                                          digital cellular.

LAN (Local Area Network)................  A type of high-speed data
                                          communications arrangement in which
                                          multiple computer and related products
                                          in an office or campus environment are
                                          connected by means of a standard
                                          transmission medium (typically coaxial
                                          cable, twisted-pair wire or optical
                                          fiber).

MAN (Metropolitan Area Network).........  A high-speed network designed to
                                          link together sites in a metropolitan
                                          or campus area. The IEEE has defined
                                          its 802.6 standard for MANs based on
                                          the Distributed Queue Dual Bus
                                          technology.

Mbps (Megabits per second)..............  A measurement unit, equal to 1,048,576
                                          bits per second, used to describe data
                                          transfer rates as a function of time.

MSC (Mobile Switching Center)...........  A switch that coordinates trunk call
                                          set-up to and from users in a digital
                                          cellular network.

                                       20
<PAGE>
Packet Switching........................  A data transmission technique whereby
                                          user information is segmented and
                                          routed in discrete data envelopes
                                          called packets, each with its own
                                          appended control information for
                                          routing, sequencing and error
                                          checking.

PCS (Personal Communications
   Systems).............................  A set of evolving standards and
                                          protocols providing for the concept of
                                          one number per user and associated
                                          advanced intelligent services
                                          regardless of location primarily
                                          involving mobile communications.

PDC (Personal Digital
   Communications)......................  A set of protocol standards for
                                          Japanese digital cellular mobile
                                          network promulgated by NEC.


Primary Rate Interface (PRI)............  A T1 or E1 circuit used to carry 23 or
                                          30 ISDN calls, respectively. In an
                                          ISDN PRI, a single channel is used for
                                          signalling for calls placed on all of
                                          the other channels in the T1 or E1
                                          circuit.

protocol................................  A formal set of standards governing
                                          the establishment of a communications
                                          link and controlling the format and
                                          timing of transmissions between two
                                          devices.

RBOCs (Regional Bell Operating
   Companies)...........................  (1) One of seven telephone companies
                                          created by the AT&T divestiture. (2)
                                          The acronym for the local telephone
                                          companies created in 1984 as part of
                                          the break-up of AT&T.

signalling..............................  The process by which digital
                                          information is exchanged to establish,
                                          control and manage connections in a
                                          network.


SCE (Service Creation Environments).....  An application in the Advanced
                                          Intelligent Network which allows for
                                          the development and customization of
                                          new telephone services, utilizing
                                          Advanced Intelligent Network (AIN)
                                          "building blocks". Using customized
                                          Service Information Blocks (SIBs) and
                                          "triggers", users describe services
                                          such as time-of-day routing. These
                                          descriptions are loaded into Service
                                          Control Points (SCPs) or Service Nodes
                                          (SNs) for execution in the network.

SCP (Service Control Point).............  A computer database that is accessed
                                          by STPs for customer call routing
                                          information and other special
                                          information required for AIN services.

SMDS (Switched Multi-megabit Data
   Service).............................  A communications service providing
                                          high speed, connectionless data
                                          transport.

                                       21
<PAGE>

SMS (Service Management System).........  A proprietary application which
                                          provides the user a maintenance and
                                          administration interface to various IN
                                          and AIN network elements.

SP-LNP (Service Provider Local
   Number Portability)..................  A capability mandated by the Federal
                                          Communications Commission in June,
                                          1996 which allows telephone customers
                                          to change their local service provider
                                          without changing their telephone
                                          number. Adding SP-LNP capabilities to
                                          the Public Switched Telephone Network
                                          requires the introduction of three new
                                          network elements and new software
                                          capabilities in virtually every
                                          existing network element.

SS7 (Common Channel Signalling
   System No. 7)........................  A complex protocol which governs
                                          signalling between certain devices in
                                          a digital telephone network.

SSP (Service Switching Point)...........  An SSP is a component of the central
                                          office switch that sets up trunk
                                          connections. When an SSP identifies an
                                          AIN call, it routes a signalling
                                          message to the STP and awaits further
                                          instructions for call processing.

STP (Signal Transfer Point).............  An STP is a switch that handles the
                                          signalling messages used to set up
                                          telephone calls, queries external
                                          databases for routing and processing
                                          information and dispatches call
                                          handling instructions.

T1 .....................................  The North American telecommunications
                                          standard defining a circuit that
                                          multiplexes and switches 24 channels
                                          and operates at speeds of 1.544 Mbps
                                          (T3 is the equivalent of 27 T1
                                          circuits).

TCP/IP (Transmission Control
   Protocol/Internet Protocol)..........  The common name for the suite of
                                          protocols developed by the U.S.
                                          Department of Defense in the 1970s to
                                          support the construction of world-
                                          wide internetworks. TCP and IP are the
                                          two best- known protocols in the
                                          suite. TCP corresponds to Layer 4 (the
                                          transport layer) of the OSI reference
                                          model. It provides reliable
                                          transmission of data. IP corresponds
                                          to layer 3 (the network layer) of the
                                          OSI reference model and provides
                                          connectionless datagram service.

WAN (Wide Area Network).................  A network that extends beyond the
                                          distance that can be accommodated by
                                          local cabling methods. A WAN typically
                                          utilizes public carrier services to
                                          connect sites, which may span a city,
                                          state, country or the world.

                                       22
<PAGE>

xDSL....................................  Another name for an ISDN BRI channel.
                                          Operated at the Basic Rate Interface
                                          (with two 64 kbps circuit switched
                                          channel), the DSL can carry both voice
                                          and data signal at the same time, in
                                          both directions, as well as the
                                          signaling data used for call
                                          information and customer data.

X.25..................................... A protocol for transfer of information
                                          across packet data networks.  X.25 was
                                          the first packet data technology to be
                                          widely implemented.

ITEM 2. PROPERTIES.

         The Company's executive offices, as well as its principal manufacturing
and data network diagnostics product engineering and marketing operations, are
located in an approximate 58,000 square-foot facility in Calabasas, California
under a lease which expires in November 2004 with an option to extend for an
additional five years.

         The Company also occupies a 68,000 square-foot facility in Morrisville,
North Carolina under a lease expiring in March 2003, primarily for engineering,
product development, customer support and regional sales activities for its
network switching and intelligent network diagnostics products. The Company also
has eight regional sales offices occupying an aggregate of approximately 10,600
square feet under leases expiring between 1997 and 1998 in Milbrae, California;
Boulder, Colorado; Lombard, Illinois; Kansas City, Missouri; Iselin, New Jersey;
Irving, Texas; Arlington, Virginia; and Ottawa, Canada. The Company's Japanese
subsidiary occupies approximately 10,600 square feet in Tokyo under leases
expiring between April 1997 and November 1997, and the Company's India
subsidiary occupies approximately 3,500 square feet under a lease expiring in
December 1999. The Company believes that its existing facilities will be
adequate to meet its needs at least through 1997. The Company believes it will
be able to obtain additional space when and as needed on acceptable terms.

ITEM 3. LEGAL PROCEEDINGS.

         Inapplicable.

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

         Inapplicable.

                                       23
<PAGE>
                                     PART II

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

         The Company's Common Stock is traded over-the-counter on the Nasdaq
National Market under the symbol TKLC. The following table sets forth the high
and low closing sales prices for the Common Stock, as reported on the Nasdaq
National Market. As of March 3, 1997, there were 197 record holders of the
Company's Common Stock based on information provided by the Company's transfer
agent.

                                                        High              Low
                                                     ---------        ----------
         1995
         ----
            First Quarter.........................   $   23.13        $    15.50
            Second Quarter........................       24.50             18.25
            Third Quarter.........................       26.75             21.50
            Fourth Quarter........................       22.50             10.25

         1996
         ----
            First Quarter.........................   $   14.38        $     9.50
            Second Quarter........................       17.50             12.63
            Third Quarter.........................       14.75              9.00
            Fourth Quarter........................       17.25             12.00

         The Company has never paid a cash dividend. 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.

                                       24
<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, 1996, 1995 and
1994 and the balance sheet data set forth below as of December 31, 1996 and 1995
are derived from, and are qualified in their entirety by reference to, the
Company's audited consolidated financial statements and notes thereto. The
statement of operations data set forth below for the years ended December 31,
1993 and 1992 and the balance sheet data set forth below as of December 31,
1994, 1993 and 1992 are derived from audited consolidated financial statements
of the Company which are not included herein.

<TABLE>
                                                  FIVE-YEAR SELECTED FINANCIAL DATA
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,                                           1996       1995       1994       1993        1992
                                                                        ------------------------------------------------------------
                                                                                    (thousands, except per share data)
<S>                                                                     <C>         <C>        <C>        <C>         <C>

STATEMENT OF OPERATIONS DATA:
Revenues ............................................................   $ 72,126    $ 75,276   $ 61,189   $ 46,856    $ 58,090
Income (Loss) before provision
   for income taxes .................................................       (284)      8,450      5,711    (17,101)     (6,693)
Net income (loss) ...................................................     (2,511)      6,311      4,460    (18,543)     (8,296)
Earnings (Loss) per share:(1)
     Primary ........................................................   $  (0.21)   $   0.52   $   0.47   $  (2.23)   $  (1.01)
     Fully diluted ..................................................      (0.21)       0.52       0.43      (2.23)      (1.01)
Weighted average number of
   shares outstanding:(1)
     Primary ........................................................     11,775      12,060      9,550      8,314       8,178
     Fully diluted ..................................................     11,775      12,063     10,360      8,314       8,178

BALANCE SHEET DATA (at December 31):
Cash and investments ................................................   $ 44,244    $ 43,609   $  7,653   $  3,669    $ 10,067
Working capital .....................................................     43,627      56,983     13,466      3,215      15,471
Total assets ........................................................     82,518      80,488     34,409     28,139      38,403
Long-term obligations ...............................................       --           380        654        323         204
Shareholders' equity ................................................     61,751      63,607     18,720     11,693      28,751

---------------
<FN>

(1) Earnings (Loss) per share and weighted average number of shares outstanding have been retroactively adjusted to reflect the
    two-for-one stock split effected March 17, 1995.

</TABLE>
                                       25
<PAGE>

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.

CORPORATE ORGANIZATION

         The Company is organized into three divisions: Data Network
Diagnostics, Intelligent Network Diagnostics and Network Switching.

         The Data Network Diagnostics Division and Intelligent Network
Diagnostics Division develop and supply diagnostic products for the
communications marketplace. These products, primarily the Chameleon family of
products for the Data Network Diagnostics Division and the MGTS products for the
Intelligent Network Diagnostics Division, are the foundation of the Company's
business and the source of the technology and expertise that has facilitated the
Company's entry into other markets.

         The Network Switching Division capitalized on the Company's expertise
in SS7 to develop the EAGLE, a high-capacity packet switching platform.

                                       26
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
                                                                                             PERCENTAGE OF REVENUES
                                                                             ------------------------------------------------------
                                                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                                             ------------------------------------------------------
                                                                                   1996               1995               1994
                                                                             ---------------     ---------------    ---------------
<S>                                                                          <C>                 <C>                <C>

Revenues .................................................................             100.0%              100.0%             100.0%
     Cost of goods sold ..................................................              37.0                33.3               33.3
                                                                             ---------------     ---------------    ---------------
Gross profit .............................................................              63.0                66.7               66.7
     Research and development ............................................              23.7                20.0               19.6
     Selling, general and administrative .................................              41.4                36.7               36.7
     Restructuring .......................................................               0.4              --                 --
                                                                             ---------------     ---------------    ---------------
Income (Loss) from operations ............................................              (2.5)               10.0               10.4
     Interest and other income (expense), net ............................               2.1                 1.2               (1.1)
                                                                             ---------------     ---------------    ---------------
Income (Loss) before provision for income taxes ..........................              (0.4)               11.2                9.3
     Provision for income taxes ..........................................               3.1                 2.8                2.0
                                                                             ---------------     ---------------    ---------------
       Net income (loss) .................................................              (3.5)%               8.4%               7.3%
                                                                             ===============     ===============    ===============
</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,
                                                                             -----------------------------------------------------
                                                                                   1996               1995               1994
                                                                             ---------------    ---------------    ---------------
<S>                                                                          <C>                <C>                <C>

Data network diagnostics ..................................................               29%                41%                50%
Intelligent network diagnostics ...........................................               33                 27                 22
Network switching .........................................................               38                 32                 28
                                                                             ---------------    ---------------    ---------------
       Total ..............................................................              100%               100%               100%
                                                                             ===============    ===============    ===============
</TABLE>

         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,
                                                                             -----------------------------------------------------
                                                                                   1996              1995               1994
                                                                             ---------------    ---------------    ---------------
<S>                                                                          <C>                <C>                <C>

North America .............................................................               59%                59%                59%
Japan .....................................................................               22                 22                 20
Europe ....................................................................                9                  9                  9
Rest of World .............................................................               10                 10                 12
                                                                              ---------------   ---------------    ---------------
       Total ..............................................................              100%               100%               100%
                                                                              ===============   ===============    ===============
</TABLE>
                                       27
<PAGE>

1996 COMPARED WITH 1995

Revenues

         The Company's revenues decreased by $3.2 million, or 4%, during 1996
due to lower sales of data network diagnostics products, partially offset by
higher sales of switching and intelligent network diagnostics products.

         Revenues from data network diagnostics products decreased by 32%, or
$9.8 million, to $21.2 million, primarily due to lower sales in all markets for
both the Chameleon Open and the Company's older Chameleon products.

         Revenues from intelligent network diagnostics products increased by
15%, or $3.1 million, to $23.7 million. This increase was primarily driven by
strong demand for the Company's MGTS products in the domestic and Japanese
markets.

         Revenues from switching products increased by 15%, or $3.5 million, to
$27.2 million due primarily to increased EAGLE STP sales worldwide, particularly
internationally. This increase was lower than anticipated principally due to
delays in Regional Bell Operating Companies' SS7 network replacement and
expansion. In 1996, 26 pairs of EAGLE STPs were sold compared with 28 in 1995.
The increased revenues despite lower unit sales reflect a trend towards larger
average system sizes, combined with increased service revenues as the EAGLE
installed base grows. Revenues in North America decreased by $1.4 million, or
3%, as a result of lower Chameleon product sales, partially offset by higher
MGTS and switching product sales. Revenues in Japan decreased by $938,000, or
6%, due to lower sales of Chameleon products and the impact of exchange rate
fluctuations on currency translations in 1996, partially offset by strong MGTS
product sales. Other international revenues decreased by $862,000, or 6%,
primarily due to lower sales of both diagnostic product lines, partially offset
by higher switching product sales.

         The impact of exchange rate fluctuations on currency translations
decreased revenues by approximately $2.4 million, or 3%, and increased net loss
by $257,000, or 11%.

Gross Profit

         Gross profit as a percentage of revenues decreased from 67% in 1995 to
63% in 1996, due primarily to increased competition in the EAGLE product market
and lower sales of higher margin diagnostic products. 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.

                                       28
<PAGE>

Research And Development

         Research and development expenses increased by $2.0 million, or 13%,
and represented 24% of revenues in 1996, compared to 20% in 1995. The increase
was attributable primarily to the hiring of additional personnel in the Network
Switching Division, expenses incurred in connection with the Bellcore technical
audits of the Company's EAGLE product and higher depreciation expense as a
result of equipment acquisitions for EAGLE research and development.

         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
develop new products that maintain its technological competitiveness.

Selling, General And Administrative

         Selling, general and administrative expenses increased by $2.2 million,
or 8%, and represented 41% of revenues in 1996, compared to 37% in 1995. The
increase was attributable primarily to severance charges, recruiting activity
and relocation expenses incurred in connection with personnel changes.

Restructuring

         During the third quarter of 1996, the Company recorded restructuring
charges amounting to $327,000 which represent severance pay, benefit costs and
other costs related to the consolidation of the Company's Ohio research facility
into the Company's North Carolina facility. See Note F to Consolidated Financial
Statements.

Income Taxes

         Although the Company's pre-tax results showed a loss in 1996, the
Company had a tax provision of $2.2 million, compared to $2.1 million and an
effective tax rate of 25% in 1995. The provisions for both periods were
principally foreign taxes on the income of the Company's Japanese subsidiary.
The 1996 provision was impacted by the Company's inability to currently
recognize a benefit for its U.S. loss and credits carryforwards, which remain
available to reduce future U.S. taxes. In 1995, the Company was able to utilize
a portion of its prior years' U.S. loss carryforwards, and consequently provided
for taxes on its U.S. taxable income at the federal alternative minimum tax rate
and applicable state tax rates.

         The Company anticipates that it has sufficient loss and credits
carryforwards available in 1997 to offset most of its expected U.S. taxes.
However, the Company's overall tax rate is significantly influenced by the level
of income derived from its Japanese subsidiary.

                                       29
<PAGE>

Interest, Net

         Net interest income increased by $554,000 primarily as a result of
higher average investment balances in 1996.

1995 COMPARED WITH 1994

Revenues

         The Company's revenues increased by $14.1 million, or 23%, during 1995
due to higher sales of both switching and intelligent network diagnostics
products.

         Revenues from switching products increased by 41% in 1995 to $23.8
million due to growing market acceptance of the Company's EAGLE STP product,
particularly in the cellular market. In 1995, 28 pairs of EAGLE STPs were sold
compared with 25 in 1994.

         Revenues from intelligent network diagnostics products increased by
53%, or $7.2 million, to $20.6 million due to higher sales in all markets as a
result of increased demand and market acceptance of the Company's MGTS products,
particularly internationally.

         Revenues from data network diagnostics products were flat due to
increased Chameleon Open sales offset by lower sales of the Company's older
Chameleon products.

         Revenues in North America increased by $7.7 million, or 21%, as a
result of higher switching and MGTS product sales, partially offset by lower
Chameleon product sales as a result of slower spending by large equipment
suppliers and major carriers in the third and fourth quarters. Revenues in Japan
increased by $4.4 million, or 36%, due to higher sales of both diagnostic
product lines and the impact of exchange rate fluctuations on currency
translations in 1995. Other international revenues grew $2.0 million, or 16%,
primarily due to higher sales of both diagnostic product lines, partially offset
by lower switching product sales.

         The impact of exchange rate fluctuations on currency translations
increased revenues by approximately $1.5 million, or 2%, and increased net
income by $139,000, or 2%.

Gross Profit

         Gross profit as a percentage of revenues was 67% for both 1995 and
1994. Although margins on EAGLE sales were slightly higher than in 1994, this
increase was offset by the higher proportion of EAGLE sales as a percentage of
total Company sales, as the gross profit percentage on switching products is
generally lower than on diagnostic products.

Research And Development

         Research and development expenses increased by $3.1 million, or 26%, in
1995 and represented 20% of revenues for both 1995 and 1994. The dollar increase
was attributable

                                       30
<PAGE>

primarily to increased headcount, including contractors, and included costs to
accelerate certain development programs and the Bellcore audits of the EAGLE
product.

Selling, General And Administrative

         Selling, general and administrative expenses increased by $5.2 million,
or 23%, in 1995 primarily as a result of increased headcount in customer
service, increased sales commissions due to higher revenues, and higher
tradeshow and travel expenses to support the increased revenues.

Income Taxes

         In 1995, the Company had an effective tax rate of 25% compared to 22%
in 1994. The provisions for both years were principally foreign taxes on the
income of the Company's Japanese subsidiary. In both years, the Company was able
to utilize a portion of its prior years' U.S. loss carryforwards, and
consequently provided for taxes on its U.S. taxable income at the federal
alternative minimum tax rate and applicable state tax rates.

Interest, Net

         Net interest income increased by $1.5 million as a result of interest
earned on short-term cash investments resulting primarily from proceeds of the
Company's public stock offering in 1995.

LIQUIDITY AND CAPITAL RESOURCES

         During 1996, cash and cash equivalents decreased by $26.4 million to
$17.2 million, primarily due to a net transfer of approximately $27.0 million to
short-term and long-term investments. Operating activities, net of the effects
of exchange rate changes on cash, provided $5.5 million, financing activities
provided $1.1 million and $6.0 million was used for capital expenditures.

         Accounts receivable, including amounts due from related parties,
decreased by 13% during 1996. The decrease was due primarily to a reduced level
of receivables with extended terms at December 31, 1996 compared to December 31,
1995 and a lower concentration of sales in the last month of the year in 1996
compared to 1995. Inventories increased by 26% during 1996 primarily to support
increased fourth quarter sales volume.

         Capital expenditures were $6.0 million during 1996 and represented the
planned replacement and addition of equipment principally for research and
development, the Company's new facility in North Carolina and sales
demonstration. There are currently no significant commitments for capital
expenditures; however, the Company expects that its capital expenditures will be
at a similar level in 1997, principally for the acquisition of equipment for
research and development, sales demonstration and manufacturing operations.

                                       31
<PAGE>

         Net cash provided by financing activities in 1996 was $1.1 million,
which represented $2.1 million in proceeds from the issuance of Common Stock
upon the exercise of options and warrants, partially offset by debt and other
obligation repayments amounting to $981,000.

      In September 1996, the Company repaid all of the outstanding borrowings on
its $7.5 million line of credit and terminated the credit facility. In October
1996, the Company agreed to terms for a $10 million line of credit with a U.S.
bank, collateralized by substantially all of the Company's assets and bearing
interest at, or in some cases below, the U.S. prime rate (8.25% at December 31,
1996). There have been no borrowings under this credit facility, which expires
June 30, 1998 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 tests for which the Company is in compliance.

         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 $3.0 million with interest at the Japanese prime
rate (1.625% at December 31, 1996) plus 0.125% per annum which expire between
May 29, 1997, and March 31, 1998, if not renewed. There have been no borrowings
under these lines of credit.

      The Company's weighted average short-term borrowing rates were 11.6% and
11.5% in 1996 and 1995, respectively.

         The Company believes that existing working capital, funds generated
from operations and its current bank lines of credit are sufficient to satisfy
anticipated operating requirements at least through 1997.

Foreign Exchange

         International operations are subject to certain opportunities and
risks, including currency fluctuations. In 1996, 1995 and 1994, the percentages
by which weighted average exchange rates for the currencies indicated below
strengthened (weakened) against the U.S. dollar were as follows:

                                                FOR THE YEARS ENDED DECEMBER 31,
                                                --------------------------------
                                                  1996       1995       1994
                                                ---------  ---------  ---------

Japanese yen................................      (18)%        9%         9 %
Canadian dollar.............................        1 %        0%        (9)%


         The change in cumulative translation adjustment in 1996 was due
primarily to the weakening of the Japanese yen against the U.S. dollar when
comparing the exchange rate at December 31, 1996 to that of December 31, 1995.
Exchange gains (losses) are recorded in the period when incurred, and amounted
to $(180,000), $(210,000) and $(235,000) in 1996, 1995 and 1994, respectively.
Exchange gains and losses include the remeasurement of certain currencies into
functional currencies and the settlement of intercompany balances.

                                       32
<PAGE>

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

         The statements which are not historical facts contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this report on Form 10-K are forward-looking
statements that involve certain risks and uncertainties including, but not
limited to, competition in the data network diagnostics, intelligent network
diagnostics and network switching markets, capital spending patterns of the
Company's customers, foreign currency fluctuations, general economic and
political conditions, announcements of new products by Tekelec or its
competitors, and other risks described in this Annual Report on Form 10-K and in
the Company's other Securities and Exchange Commission filings.

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.

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

         Inapplicable.

                                       33
<PAGE>
                                    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 21, 1997, entitled "Election of Directors" and
"Executive Officers" to be filed with the Commission.


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 21, 1997, 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 21, 1997, 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 21, 1997, entitled "Certain Relationships and
Related Transactions," to be filed with the Commission.

                                       34
<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:

    CONSOLIDATED FINANCIAL STATEMENTS                                       PAGE

    o Report of Independent Accountants                                     F-1

    o Consolidated Statements of Operations for each of the
      three years in the period ended December 31, 1996                     F-2

    o Consolidated Balance Sheets as of December 31, 1996 and 1995          F-3

    o Consolidated Statements of Cash Flow for each of the
      three years in the period ended December 31, 1996                     F-4

    o Consolidated Statements of Shareholders' Equity for each of
      the three years in the period ended December 31, 1996                 F-5

    o Notes to Consolidated Financial Statements                            F-6

---------------
                                                                            PAGE

    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

    o Schedule II  Valuation and Qualifying Accounts and Reserves
                   for each of the three years in the period ended
                   December 31, 1996                                        S-1

         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.

    LIST OF EXHIBITS

    3.1      Amended and Restated Articles of Incorporation(1)

    3.2      Bylaws, as amended

                                       35
<PAGE>

    10.1     Amended and Restated 1984 Stock Option Plan, including forms of
             stock option agreements(2)(3)

    10.2     Amended and Restated Non-Employee Director Equity Incentive Plan,
             including forms of stock award certificate and nonstatutory stock
             option agreements(4), as amended February 21, 1996(3) (5)

    10.3     1994 Stock Option Plan, including forms of stock option
             agreements(4), as amended February 4, 1995(6), March 3, 1995 (6)
             and January 27, 1996(3)(5)

    10.4     Retirement Pension Rules of Tekelec Ltd.(1)(3)

    10.5     Form of Indemnification Agreement between the Registrant and all
             directors of the Registrant(3)(7)

    10.6     Lease 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(8)

    10.7     Form of International Distributor Agreement(9) and Schedule of
             Distributors

    10.8     Officer Severance Plan, including form of Employment Separation
             Agreement(3)(10)

    10.9*    Distributorship Agreement dated September 16, 1994 between the
             Registrant and AT&T Corp.(11)

    10.10*   Compensation agreement dated November 22, 1995 between the
             Registrant and Allan Toomer(3)(12)

    10.11    Agreement dated March 26, 1997 between the Registrant and Allan
             Toomer(3)

    10.12    Employee Stock Purchase Plan, including form of subscription
             agreement(3)(5)

    10.13    Consulting Agreement dated August 1, 1996 between the Registrant
             and Howard Oringer, including forms of Warrant and Confidentiality
             Agreement(13), and Amendment No. 1 thereto dated November 30, 1996

    10.14    Credit Agreement dated October 22, 1996 between the Registrant and
             Imperial Bank, together with Promissory Note of the Registrant
             dated October 22, 1996

                                       36
<PAGE>

    10.15    General Security Agreement dated October 22, 1996 between the
             Registrant and Imperial Bank

    11.1     Statement of Computation of Earnings Per Share

    21.1     Subsidiaries of the Registrant

    23.1     Consent of Coopers & Lybrand L.L.P.

    27.1     Financial Data Schedule

---------------

*    Confidential treatment has been granted with respect to portions of this
     exhibit, and such confidential portions have been deleted and filed with
     the Commission pursuant to Rule 24b-2 promulgated under the Securities
     Exchange Act of 1934.

(1)  Incorporated by reference to the Registrant's Annual Report on Form 10-K
     (File No. 0-15135) for the year ended December 31, 1994.

(2)  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.

(3)  Constitutes a management contract or compensatory plan or arrangement
     required to be filed as an exhibit to this Annual Report.

(4)  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.

(5)  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.

(6)  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.

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

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

(9)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (Registration No. 33-4123) filed with the Commission on March 19,
     1986.

                                       37
<PAGE>

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

(11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended September 30, 1994.

(12) Incorporated by reference to the Registrant's Annual Report on Form 10-K
     (File No. 0-15135) for the year ended December 31, 1995.

(13) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 0-15135) for the quarter ended September 30, 1996.


(b)  REPORTS ON FORM 8-K

     No reports on Form 8-K were filed or required to be filed by the
     Registrant during the quarter ended December 31, 1996.

(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.

                                       38
<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/ Allan J. Toomer
                                            ------------------------------------
                                            Allan J. Toomer, President

Dated: March 31, 1997


    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 31, 1997
---------------------------------
      Jean-Claude Asscher


/s/ Allan J. Toomer                President and Director         March 31, 1997
---------------------------------
        Allan J. Toomer


/s/ Robert V. Adams                Director                       March 31, 1997
---------------------------------
        Robert V. Adams


/s/ Daniel L. Brenner              Director                       March 31, 1997
---------------------------------
       Daniel L. Brenner


/s/ Howard Oringer                 Director                       March 31, 1997
---------------------------------
        Howard Oringer


/s/ Jon F. Rager                   Director                       March 31, 1997
---------------------------------
         Jon F. Rager


/s/ Gilles C. Godin                Vice President, Finance and    March 31, 1997
---------------------------------  Chief Financial Officer
        Gilles C. Godin

<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC

         We have audited the accompanying consolidated balance sheets of Tekelec
and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flow, and the financial
statement schedule for each of the three years in the period ended December 31,
1996. These financial statements and the financial statement schedule 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tekelec and Subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents, in all material respects the information
required to be included therein.

/s/ Coopers & Lybrand L.L.P.
Sherman Oaks, California
February 5, 1997

                                      F-1
<PAGE>
<TABLE>
                                                               TEKELEC
                                                CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
                                                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                                              -----------------------------------------------------
                                                                                    1996               1995              1994
                                                                              ---------------    ---------------    ---------------
                                                                                       (thousands, except per share data)
<S>                                                                           <C>                <C>                <C>

REVENUES (including sales to related parties of
     1996 - $4,130; 1995 - $5,305; 1994 - $3,809) .........................   $        72,126    $        75,276    $        61,189

COSTS AND EXPENSES:
     Cost of goods sold ...................................................            26,682             25,035             20,388
     Research and development .............................................            17,076             15,054             11,962
     Selling, general and administrative ..................................            29,842             27,653             22,466
     Restructuring ........................................................               327               --                 --
                                                                              ---------------    ---------------    ---------------
       Total costs and expenses ...........................................            73,927             67,742             54,816

Income (Loss) from operations .............................................            (1,801)             7,534              6,373
Other income (expense):
     Interest, net ........................................................             1,693              1,139               (327)
     Other, net ...........................................................              (176)              (223)              (335)
                                                                              ---------------    ---------------    ---------------
       Total other income (expense) .......................................             1,517                916               (662)
                                                                              ---------------    ---------------    ---------------
Income (Loss) before provision for income taxes ...........................              (284)             8,450              5,711
     Provision for income taxes ...........................................             2,227              2,139              1,251
                                                                              ---------------    ---------------    ---------------
       NET INCOME (LOSS) ..................................................   $        (2,511)   $         6,311    $         4,460
                                                                              ===============    ===============    ===============

EARNINGS (LOSS) PER SHARE:
       Primary ............................................................   $         (0.21)   $          0.52    $          0.47
       Fully diluted ......................................................             (0.21)              0.52               0.43

WEIGHTED AVERAGE NUMBER OF SHARES:
       Primary ............................................................            11,775             12,060              9,550
       Fully diluted ......................................................            11,775             12,063             10,360

See notes to consolidated financial statements.

</TABLE>
                                                                F-2
<PAGE>
<TABLE>
                                                               TEKELEC
                                                     CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                                                            DECEMBER 31,
                                                                                                   ---------------------------------
                                                                                                         1996             1995
                                                                                                   ---------------   ---------------
                                                                                                     (thousands, except share data)
<S>                                                                                                <C>               <C>
                                            ASSETS

CURRENT ASSETS:
     Cash and cash equivalents .................................................................   $        17,211   $        43,609
     Short-term investments, at fair value .....................................................            17,913              --
     Accounts and notes receivable, less allowances
         1996-- $368; 1995-- $391 ..............................................................            17,026            19,167
     Inventories ...............................................................................             8,116             6,423
     Amounts due from related parties ..........................................................             2,381             3,053
     Prepaid expenses and other current assets .................................................             1,747             1,232
                                                                                                   ---------------   ---------------
       Total current assets ....................................................................            64,394            73,484

Long-term investments, at fair value ...........................................................             9,120              --
Property and equipment, net ....................................................................             8,174             6,107
Other assets ...................................................................................               830               897
                                                                                                   ---------------   ---------------
       Total assets ............................................................................   $        82,518   $        80,488
                                                                                                   ===============   ===============

                           LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Short-term borrowings and current portion of long-term debt ...............................   $          --     $           570
     Trade accounts payable ....................................................................             5,631             3,960
     Accrued expenses ..........................................................................             5,989             4,404
     Accrued payroll and related expenses ......................................................             4,027             3,294
     Deferred revenues .........................................................................             3,778             2,908
     Current portion of other obligations ......................................................              --                  31
     Income taxes payable ......................................................................             1,342             1,334
                                                                                                   ---------------   ---------------
       Total current liabilities ...............................................................            20,767            16,501

Long-term debt .................................................................................              --                 380
                                                                                                   ---------------   ---------------
       Total liabilities .......................................................................            20,767            16,881

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
     Common stock, without par value, 50,000,000 shares authorized;
       issued and outstanding 1996--12,010,099; 1995-- 11,599,073 ..............................            57,049            54,936
     Retained earnings .........................................................................             3,879             6,390
     Cumulative translation adjustments ........................................................               823             2,281
                                                                                                   ---------------   ---------------
       Total shareholders' equity ..............................................................            61,751            63,607
                                                                                                   ---------------   ---------------
       Total liabilities and shareholders' equity ..............................................   $        82,518   $        80,488
                                                                                                   ===============   ===============

See notes to consolidated financial statements.

</TABLE>
                                       F-3
<PAGE>
<TABLE>
                                                               TEKELEC
                                                CONSOLIDATED STATEMENTS OF CASH FLOW
<CAPTION>
                                                                                       FOR THE YEARS ENDED DECEMBER 31,
                                                                              -----------------------------------------------------
                                                                                    1996               1995              1994
                                                                              ---------------    ---------------    ---------------
                                                                                                   (thousands)
<S>                                                                           <C>                <C>                <C>

CASH FLOW FROM OPERATING ACTIVITIES:
     Net income (loss) ....................................................   $        (2,511)   $         6,311    $         4,460
     Adjustments to reconcile net income to net cash
       provided by operating activities:
     Depreciation and amortization ........................................             3,842              3,643              4,406
     Changes in current assets and liabilities:
       Accounts and notes receivable ......................................             1,810             (5,022)            (5,522)
       Inventories ........................................................            (1,840)            (2,079)               400
       Amounts due from related parties ...................................               672             (1,515)              (294)
       Income taxes receivable ............................................              --                 --                  216
       Prepaid expenses and other current assets ..........................              (564)              (567)               427
       Trade accounts payable .............................................             1,776               (188)              (304)
       Accrued expenses ...................................................             1,645              1,346               (703)
       Accrued payroll and related expenses ...............................               755               (865)               559
       Deferred revenues ..................................................               870              1,496                932
       Income taxes payable ...............................................               307                810               (150)
                                                                              ---------------    ---------------    ---------------
         Total adjustments ................................................             9,273             (2,941)               (33)
                                                                              ---------------    ---------------    ---------------
         Net cash provided by
          operating activities ............................................             6,762              3,370              4,427
                                                                              ---------------    ---------------    ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
     (Increase) Decrease in restricted cash ...............................              --                1,000             (1,000)
     Purchase of available-for-sale securities ............................           (45,033)              --                 --
     Proceeds from maturity of available-for-sale
         securities .......................................................            18,000               --                 --
     Purchase of property and equipment ...................................            (6,008)            (4,530)            (1,508)
     (Increase) Decrease in other assets ..................................               (17)              (305)               222
                                                                              ---------------    ---------------    ---------------
         Net cash (used in) investing activities ..........................           (33,058)            (3,835)            (2,286)
                                                                              ---------------    ---------------    ---------------
CASH FLOW FROM FINANCING ACTIVITIES:
     Repayments of short-term
         borrowings .......................................................              (570)              (796)            (1,878)
     Proceeds from long-term debt .........................................              --                 --                1,000
     Repayment of long-term debt ..........................................              (380)              (240)              (140)
     Repayments of other obligations ......................................               (31)              (323)              (235)
     Proceeds from issuance of common stock and stock
       option tax benefits ................................................             2,113             38,996              1,591
                                                                              ---------------    ---------------    ---------------
         Net cash provided by financing activities ........................             1,132             37,637                338
                                                                              ---------------    ---------------    ---------------
Effect of exchange rate changes on cash ...................................            (1,234)              (216)               505
                                                                              ---------------    ---------------    ---------------
         Net increase (decrease) in cash and cash
           equivalents ....................................................           (26,398)            36,956              2,984

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR ........................            43,609              6,653              3,669
                                                                              ---------------    ---------------    ---------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR ..............................   $        17,211    $        43,609    $         6,653
                                                                              ===============    ===============    ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

CASH PAID DURING THE YEAR FOR:
       Interest ...........................................................   $            98    $           231    $           343
       Income taxes .......................................................             1,970              1,543              1,131

See notes to consolidated financial statements.

</TABLE>
                                        F-4
<PAGE>
<TABLE>
                                                               TEKELEC
                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
                                                        COMMON STOCK
                                              ---------------------------------     RETAINED          CUMULATIVE         TOTAL
                                                  NUMBER                            EARNINGS          TRANSLATION     SHAREHOLDERS'
                                                 OF SHARES          AMOUNT          (DEFICIT)         ADJUSTMENTS        EQUITY
                                              ---------------   ---------------   ---------------   ---------------  ---------------
                                                                                     (thousands)
<S>                                           <C>               <C>               <C>               <C>              <C>

BALANCE, DECEMBER 31, 1993 ................             8,530   $        14,349   $        (4,381)  $         1,725  $       11,693
     Exercise of stock options ............               493             1,591              --                --             1,591
     Translation adjustment ...............              --                --                --                 976             976
     Net income ...........................              --                --               4,460              --             4,460
                                              ---------------   ---------------   ---------------   ---------------  ---------------

BALANCE, DECEMBER 31, 1994 ................             9,023            15,940                79             2,701          18,720
     Issuance of common stock .............             2,013            36,520              --                --            36,520
     Exercise of stock options
       and warrants .......................               563             2,374              --                --             2,374
     Stock option tax benefits ............              --                 102              --                --               102
     Translation adjustment ...............              --                --                --                (420)           (420)
     Net income ...........................              --                --               6,311              --             6,311
                                              ---------------   ---------------   ---------------   ---------------  ---------------

BALANCE, DECEMBER 31, 1995 ................            11,599            54,936             6,390             2,281          63,607
     Exercise of stock options
       and warrants .......................               411             2,050              --                --             2,050
     Stock option tax benefits ............              --                  63              --                --                63
     Translation adjustment ...............              --                --                --              (1,458)         (1,458)
     Net loss .............................              --                --              (2,511)             --            (2,511)
                                              ---------------   ---------------   ---------------   ---------------  ---------------

BALANCE, DECEMBER 31, 1996 .................           12,010   $        57,049   $         3,879   $           823   $      61,751
                                              ===============   ===============   ===============   ===============  ===============

See notes to consolidated financial statements.

</TABLE>
                                      F-5
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 1995 and
1994 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.

INVENTORIES

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

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

TECHNOLOGY

         Product development costs, including costs of purchased and licensed
technology incurred to enhance significantly a product that results in the
creation and sales of a new generation of products, are capitalized; costs
incurred in conceptualization and design of new products are expensed as
incurred.

                                      F-6
<PAGE>

         Amortization is based on the greater of related net shipments made
during the period to total anticipated net shipments, or the three-year
straight-line method. There were no capitalized internally developed software
costs in 1996 and 1995.

LONG-TERM ASSETS

         The carrying value of long-term assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying value.

PRODUCT WARRANTY COSTS

         The Company generally warrants its products for one year after sale and
provides for estimated future warranty costs at the time revenue is recognized.
At December 31, 1996 and 1995, accrued product warranty costs amounted to $1.6
million and $879,000, respectively, and are included in accrued expenses.

REVENUE RECOGNITION

         Revenues from sales of diagnostic products are generally recognized
when products are shipped. Revenues from sales of switching products are
recognized upon shipment to the customer's final site and satisfaction of
related significant Company obligations, if any. Revenues associated with
installation are realized upon completion. Extended warranty service revenues
are recognized ratably over the warranty period. Engineering service revenues
are recognized on delivery or as the services are performed.

INCOME TAXES

         Income tax expense is the tax payable for the period and the change
during the period in 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 $620,000,
$625,000 and $305,000 for 1996, 1995 and 1994, respectively.


TRANSLATION OF FOREIGN CURRENCIES

         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 current exchange rates 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. Gains (losses) on foreign currency transactions are reflected in net
income (loss) and amounted to $(180,000), $(210,000) and $(235,000) for 1996,
1995 and 1994, respectively.

                                      F-7
<PAGE>

STOCK-BASED COMPENSATION

         In 1996 the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company adopted this standard by disclosing the pro forma net income and
earnings per share amounts assuming the fair value method was adopted on January
1, 1995. See Note L.

EARNINGS (LOSS) PER SHARE

         Earnings (Loss) per share are computed using the weighted average
number of shares outstanding and dilutive common stock equivalents (options and
warrants).

NOTE B -- RESTRICTED CASH

         At December 31, 1994, the Company's Japanese subsidiary had $1.0
million of restricted cash included in current assets, which represented cash on
deposit at a bank in Japan as collateral for outstanding short-term borrowings
in the U.S. under a $2.0 million line of credit. Upon expiration of this
facility during 1995, the outstanding loan balance of $1.0 million was paid in
full and the line of credit was not renewed.

NOTE C -- FAIR VALUE OF INVESTMENTS

         The Company has 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 $3.0 million and $35.9 million at
December 31, 1996 and December 31, 1995, respectively. At December 31, 1996, the
Company also had investments classified as available-for-sale securities
included in short-term and long-term investments, consisting of $6.0 million of
United States Treasury Notes with maturities of less than one year, $9.1 million
of United States Treasury Notes with maturities of between one and two years,
and $11.9 million of corporate debt securities with maturities of less than one
year. These available-for-sale securities 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, 1996, unrealized gains or
losses on available-for-sale securities were not significant.

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 communications diagnostic and network switching 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

                                      F-8
<PAGE>

is not required. Credit losses, if any, have been provided for in the financial
statements and have been consistently within management's expectations.

NOTE E -- RELATED PARTY TRANSACTIONS

         As of December 31, 1996, the Company's principal shareholder, a
director and his family, and a foreign-affiliated company controlled by the
director owned an aggregate of approximately 33% of the Company's outstanding
stock.

         The following is a summary of transactions and balances with these
affiliates:

                                                         1996     1995     1994
                                                         ----     ----     ----
                                                               (thousands)

Product sales .......................................   $4,130   $5,305   $3,809
Purchases of inventory ..............................      125      321       49
Director's fees and expenses ........................       59       32       15
Due from affiliates .................................    2,381    3,053    1,538
Due to affiliates ...................................      145      254       41

         The amounts due from and to the affiliates are non-interest bearing.

         In August 1996, the Company entered into a consulting agreement with a
director, pursuant to which such director earned $30,000 and received a warrant
to purchase 30,000 shares of the Company's Common Stock. This agreement
terminated December 31, 1996. See Note P.

         In January 1994, the Company entered into a six-month consulting
agreement with a director pursuant to which such director received $52,000 and a
warrant to purchase 20,000 shares of the Company's Common Stock.

NOTE F -- RESTRUCTURING

         During the third quarter of 1996, the Company recorded restructuring
charges amounting to $327,000 which represent severance pay and benefit costs
for eight terminated employees in research and development and support
functions, and other costs related to the consolidation of the Company's Ohio
research facility into the Company's North Carolina facility. The costs
consisted of the following:

                                                                     (thousands)

Severance pay.....................................................    $     250
Other accrued expenses............................................           57
Property and equipment write-down.................................           20
                                                                      ---------
                                                                      $     327
                                                                      =========

         At December 31, 1996, all identified employees had been terminated, and
approximately $200,000 of the severance costs and other accrued expenses had
been paid.

                                      F-9
<PAGE>

NOTE G -- INCOME TAXES

         The provision for income taxes consists of the following:

                                            FOR THE YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                           1996           1995           1994
                                       -----------------------------------------
                                                       (thousands)

CURRENTLY PAYABLE:
     Federal .......................   $      --      $        88    $       133
     State .........................             1            228            202
     Foreign .......................         2,392          2,258            916

DEFERRED:
     Federal .......................          --             --             --
     State .........................          --             --             --
     Foreign .......................          (166)          (435)          --
                                       -----------    -----------    -----------
                                       $     2,227    $     2,139    $     1,251
                                       ===========    ===========    ===========

         The primary components of temporary differences which gave rise to
deferred taxes at December 31, 1996 and 1995 are:

                                                                DECEMBER 31,
                                                           ---------------------
                                                              1996       1995
                                                           ---------------------
                                                                (thousands)

DEFERRED TAX ASSETS:
     Net operating loss carryforward ...................   $  9,174    $  5,191
     Foreign tax credit carryforward ...................        918         918
     Allowance for doubtful accounts ...................        126         141
     Inventory adjustments .............................      1,029         883
     Depreciation and amortization .....................        205         392
     Deferred product development costs ................        100        --
     Research and development
       credit carryforward .............................      2,033       1,901
     Accrued liabilities ...............................      1,059         681
     Warranty accrual ..................................        629         358
     Other .............................................        166         323
                                                           --------    --------
     Total deferred tax asset ..........................     15,439      10,788
     Less, valuation allowance .........................    (14,990)    (10,271)
                                                           --------    --------
     Total net deferred tax asset ......................        449         517
                                                           --------    --------
DEFERRED TAX LIABILITIES:
     Deferred product development costs ................       --            45
     Other .............................................       --           103
                                                           --------    --------
     Total deferred tax liability ......................       --           148
                                                           --------    --------
NET DEFERRED TAX ASSET .................................        449         369
CURRENT PORTION ........................................        242         224
                                                           --------    --------
LONG-TERM PORTION ......................................   $    207    $    145
                                                           ========    ========

                                      F-10
<PAGE>

     The valuation allowance for deferred taxes is based on the Company's
operating history and management's assessment of various uncertainties related
to their future realization. Because realization of deferred tax benefits is
dependent upon generating sufficient U.S. taxable income in future years, the
amount of the valuation allowance for deferred taxes may be reduced in the near
term if sustainable positive U.S. taxable income trends develop.

         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:

                                             FOR THE YEARS ENDED DECEMBER 31,
                                         ---------------------------------------
                                             1996          1995          1994
                                         ---------------------------------------

Federal statutory provision
     (benefit) at 34% ................   $      (97)   $    2,873    $    1,942
State taxes,
     net of federal benefit ..........         --             152           348
Foreign taxes ........................          785           465           394
Utilization of operating
     loss carryforwards ..............         --          (1,437)       (1,571)
Loss for which no tax benefit
     was recorded ....................        1,182          --            --
Temporary differences for which
     no tax benefit was recorded .....          252          --            --
Other ................................          105            86           138
                                         ----------    ----------    ----------
Actual income tax provision ..........   $    2,227    $    2,139    $    1,251
                                         ----------    ----------    ----------
Effective tax rate ...................        784.0%         25.3%         21.9%

         At December 31, 1996, the Company had available federal net operating
loss carryforwards of $24.7 million, of which $4.5 million, if utilized, will
result in a credit to Common Stock, foreign tax credit carryforwards of $918,000
and research and development credit carryforwards of $2.0 million which will
generally expire beginning in the years 2007, 1997 and 2007, respectively.

         The Company has not provided for federal income taxes on $11.6 million
of undistributed earnings of its foreign subsidiaries which have been reinvested
in their operations. If these earnings were distributed, net operating loss
carryforwards and foreign tax credits available under current law would
eliminate the resulting federal income tax liability.

                                      F-11
<PAGE>

NOTE H -- INVENTORIES

         The components of inventories are:

                                                             DECEMBER 31,
                                                      -------------------------
                                                         1996           1995
                                                      -------------------------
                                                             (thousands)

Raw materials......................................   $   2,825       $    3,109
Work in process....................................       1,869            1,653
Finished goods.....................................       3,422            1,661
                                                      ---------       ----------
                                                      $   8,116       $    6,423
                                                      =========       ==========

NOTE I -- PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:

                                                             DECEMBER 31,
                                                      -------------------------
                                                         1996           1995
                                                      -------------------------
                                                              (thousands)

Manufacturing and
     development equipment.........................   $  13,520       $  10,823
Furniture and office equipment.....................       7,300           5,651
Demonstration equipment............................       4,055           3,406
Leasehold improvements.............................       1,118           1,232
                                                      ---------       ----------
                                                         25,993          21,112
Less, accumulated depreciation
     and amortization................... ...........    (17,819)        (15,005)
                                                      ---------       ----------
                                                      $   8,174       $   6,107
                                                      =========       =========

NOTE J -- BORROWINGS

         In September 1996, the Company repaid all of the outstanding borrowings
on its $7.5 million line of credit and terminated the credit facility. In
October 1996, the Company agreed to terms for a $10 million line of credit with
a U.S. bank, collateralized by substantially all of the Company's assets and
bearing interest at, or in some cases below, the U.S. prime rate (8.25% at
December 31, 1996). There have been no borrowings under this credit facility,
which expires June 30, 1998 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 tests for which the Company is in compliance.

         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 $3.0 million with interest at the Japanese prime
rate (1.625% at December 31, 1996) plus 0.125% per annum which expire between
May 31, 1997 and March 31, 1998, if not renewed. There have been no borrowings
under these lines of credit.

      The Company's weighted average short-term borrowing rates were 11.6% and
11.5% in 1996 and 1995, respectively.

                                      F-12
<PAGE>

NOTE K -- 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 $2.4 million, $2.4 million and $2.2 million, for
1996, 1995 and 1994, respectively.

         Minimum annual noncancelable lease commitments at December 31, 1996
are:

         For The Years Ending December 31,
         ---------------------------------
                                                             (thousands)

         1997..............................................     $ 1,989
         1998..............................................       1,635
         1999..............................................       1,613
         2000..............................................       1,552
         2001..............................................       1,020
         Thereafter........................................       3,359
                                                                -------
                                                                $11,168
                                                                =======

NOTE L -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

         The Company has various stock option plans with maximum terms of ten
years under which 5.8 million shares of the Company's Common Stock have been
issued or reserved for issuance. The terms of options granted under these Option
Plans are determined at the time of grant, generally vest ratably over a three-
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 Employee Stock Purchase Plans ("ESPP"), with
maximum terms of ten years, the latest of which expires in the year 2006 and
under which 200,000 shares of the Company's Common Stock have been 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.

                                      F-13
<PAGE>

         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. 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-based compensation plans. Had compensation
costs for the Company's stock option and purchase plans been determined based
upon the methodology prescribed under SFAS 123, the Company's net income (loss)
and earnings (loss) per share would approximate the pro forma amounts below (in
thousands except per share data):

                                                 As Reported           Pro forma
                                                 ------------          ---------
Year Ended December 31, 1996:
     Net loss...............................     $   (2,511)          $  (3,777)
     Loss per share.........................          (0.21)              (0.32)

Year Ended December 31, 1995:
     Net income.............................     $    6,311           $   5,672
     Earnings per share.....................           0.52                0.47

         The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.

         A summary of the status of the Company's stock options, as of December
31, 1996, 1995 and 1994, and the changes during the year ended on those dates is
presented below (shares in thousands):

<TABLE>
<CAPTION>
                                                                  1996                     1995                      1994
                                                        ---------------------------------------------------------------------------
                                                                     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 ....................        2,338   $     8.29        2,248   $     4.32        1,947   $     3.68
Granted - price equals fair value ...................          612        13.43          635        18.47        1,102         5.20
Granted - price greater than fair value .............          685        14.22           12        22.50          191         3.68
Exercised ...........................................          345         3.98          470         3.76          408         3.24
Cancelled ...........................................          872        14.22           87         5.78          584         4.39
                                                        ----------   ----------   ----------   ----------   ----------   ----------
Outstanding at year-end .............................        2,418         9.74        2,338         8.29        2,248         4.32
                                                        ==========   ==========   ==========   ==========   ==========   ==========

Options exercisable at year-end .....................          980                       706                       584
Options available for future grant ..................          498                     1,088                     1,698
Weighted average fair value of options granted
  during the year:
  Exercise price equals fair value at grant date ....   $     9.67                $    13.30
  Exercise price greater than fair value at
    grant date ......................................   $     4.33                $    13.05

</TABLE>
                                      F-14
<PAGE>

         The following table summarizes information about stock options
outstanding at December 31, 1996 (shares in thousands):

<TABLE>
<CAPTION>
                                 Options Outstanding           Options Exercisable
                         ----------------------------------  -----------------------
                                       Wgtd. Avg.   Wgtd.
                            Number     Remaining     Avg.       Number    Wgtd. Avg.
                         Outstanding  Contractual  Exercise  Outstanding   Exercise
Range of Exercise Price  at 12/31/96      Life      Price    at 12/31/96    Price
------------------------------------------------------------------------------------
<C>                      <C>          <C>          <C>       <C>          <C>

$1.88 to $ 4.99              969          5.90    $  3.46        654      $   3.45
 5.00 to   9.99               47          7.06       8.74         18          7.60
10.00 to  14.99              819          8.64      12.60        132         12.65
15.00 to  17.50              583          8.58      16.23        176         16.51
                         -----------                         -----------
1.88 to   17.50            2,418          7.50       9.74        980          7.12
                         ===========                         ===========
</TABLE>

         The fair value of options granted during 1996 and 1995 is estimated as
$3.6 million and $3.3 million, respectively, on the dates of grants using the
Black-Scholes option-pricing model with the following assumptions: (i) dividend
yield of 0%, (ii) expected volatility of 87% and 85%, respectively, for 1996 and
1995, (iii) weighted average risk-free interest rates of 6.2% and 6.9% for 1996
and 1995, respectively, (iv) weighted average expected life of 4.8 years and 5.1
years for 1996 and 1995, respectively, and (v) assumed forfeiture rate of 64%.

         During 1996, 1995 and 1994, approximately 62,000, 34,000 and 85,000
shares, respectively, were purchased under the Company's ESPP at weighted
average exercise prices of $9.59, $10.95 and $3.07, respectively. At December
31, 1996 and 1995, there were approximately 138,000 and 116,000 shares,
respectively, available for future grants, and none available at December 31,
1994. The weighted average fair value of ESPP options granted in 1996 and 1995
were $4.71 and $6.03 per share, respectively.

         In 1996, the Company granted warrants to purchase 30,000 shares of
common stock. The grant date fair value of these warrants was $9.80 per share.
See Note P.

         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. As
determined annually by the Board of Directors, the Company may contribute
matching funds of up to 50% of the employees' payroll deductions. During 1996,
1995 and 1994, the Company's contributions amounted to $187,000, $167,000 and
$122,000, respectively.

                                      F-15
<PAGE>

NOTE M --GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS

         The Company operates in one business segment. Transfers between
geographic areas are made at prices reflecting market conditions. Geographic
segment information including sales and transfers between geographic areas is
presented below:

                                              FOR THE YEARS ENDED DECEMBER 31,
                                              ---------------------------------
                                                 1996       1995        1994
                                              ---------------------------------
                                                        (thousands)

Revenues from unaffiliated customers
     United States ........................   $ 55,040    $ 55,801    $ 47,722
     Japan ................................     15,773      16,684      12,269
     Other ................................      1,313       2,791       1,198
                                              --------    --------    --------
         Total ............................   $ 72,126    $ 75,276    $ 61,189
                                              ========    ========    ========

Transfers between geographic areas
     United States ........................   $  5,197    $  6,060    $  4,993
     Japan ................................       --          --          --
     Other ................................       --          --          --
                                              --------    --------    --------
         Total ............................   $  5,197    $  6,060    $  4,993
                                              ========    ========    ========

Total revenues
     United States ........................   $ 60,237    $ 61,861    $ 52,715
     Japan ................................     15,773      16,684      12,269
     Other ................................      1,313       2,791       1,198
     Intersegment eliminations ............     (5,197)     (6,060)     (4,993)
                                              --------    --------    --------
         Total ............................   $ 72,126    $ 75,276    $ 61,189
                                              ========    ========    ========

Income (Loss) from operations
     United States ........................   $ (6,437)   $  3,441    $  4,561
     Japan ................................      4,340       3,395       1,930
     Other ................................        296         698        (118)
                                              --------    --------    --------
         Total ............................   $ (1,801)   $  7,534    $  6,373
                                              ========    ========    ========

Identifiable assets
     United States ........................   $ 67,275    $ 69,741    $ 24,905
     Japan ................................     14,948      10,019       9,056
     Other ................................        295         728         448
                                              --------    --------    --------
         Total ............................   $ 82,518    $ 80,488    $ 34,409
                                              ========    ========    ========

U.S. export sales to unaffiliated customers
  by destination of sale
     Europe ...............................   $  6,498    $  7,097    $  5,636
     Other ................................      8,029       8,184       7,284
                                              --------    --------    --------
         Total ............................   $ 14,527    $ 15,281    $ 12,920
                                              ========    ========    ========

NOTE N -- MAJOR CUSTOMERS

         Sales to Nippon Telegraph and Telephone amounted to 12%, 14% and 13% of
revenues in 1996, 1995 and 1994, respectively. Sales to AT&T amounted to 12% of
revenues in 1995.

                                      F-16
<PAGE>

NOTE O -- QUARTERLY FINANCIAL SUMMARY (UNAUDITED)

<TABLE>
<CAPTION>
                                                              QUARTERS
                                            -------------------------------------------
                                              First      Second       Third     Fourth
                                            -------------------------------------------
                                                 (thousands, except per share data)
<S>                                         <C>         <C>         <C>        <C>

For the Years Ended December 31,
-----------------------------------------
1996
-----------------------------------------

Revenues ................................   $ 11,860    $ 16,864    $ 19,396   $ 24,006
Gross profit ............................      7,265      10,123      11,986     16,070
Income (Loss) before provision for income
 taxes ..................................     (3,540)     (1,151)        819      3,588
Net income (loss) .......................     (3,968)     (1,412)        275      2,594
Earnings (Loss) per share:
     Primary ............................   $  (0.34)   $  (0.12)   $   0.02   $   0.20
     Fully diluted ......................      (0.34)      (0.12)       0.02       0.20

1995
-----------------------------------------

Revenues ................................   $ 18,630    $ 19,500    $ 19,947   $ 17,199
Gross profit ............................     12,423      12,843      13,796     11,179
Income before provision for income taxes       2,120       2,820       3,252        258
Net income ..............................      1,468       2,050       2,560        233
Earnings per share:
     Primary ............................   $   0.14    $   0.18    $   0.20   $   0.02
     Fully diluted ......................       0.13        0.18        0.20       0.02

</TABLE>

         Tekelec typically operates with a limited backlog, and most of its
revenues in each quarter result from orders received in that quarter. Further,
Tekelec typically generates one-half or more 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 disproportionate reduction in profits or even losses in a quarter.
Tekelec's operating results may fluctuate for this reason or as a result of a
number of other factors, including general economic and political conditions
(such as recessions in the U.S. and Japan), capital spending patterns of
Tekelec's customers,

                                      F-17
<PAGE>

increased competition, variations in the mix of sales, fluctuation in proportion
of foreign sales, and announcements of new products by Tekelec or its
competitors.

NOTE P -- COMMON STOCK

         At December 31, 1996 and 1995, the Company had warrants outstanding to
purchase an aggregate of 40,000 and 20,000 shares of its Common Stock,
respectively, as more fully discussed below.

         In August 1996, pursuant to a consulting agreement between the Company
and a director, the Company issued warrants to purchase 30,000 shares of its
Common Stock at $9.50 per share to such director. These warrants vested during
1996, and were all outstanding at December 31, 1996.

         In April 1994, the Company issued warrants to purchase 10,000 shares of
its Common Stock at $3.375 per share to one director, all of which were
outstanding at December 31, 1995. During 1996, 4,500 of these shares were
exercised and the remaining 5,500 were cancelled.

         In 1992, the Company issued warrants to purchase a total of 20,000
shares of its Common Stock to two directors at $7.5625 per share. These warrants
were re-priced to $3.595 per share in 1993, and were exercisable in full at any
time prior to January 17, 1997. During 1995, 10,000 of these warrants were
exercised, and 10,000 remained outstanding at December 31, 1995 and December 31,
1996.

                                      F-18
<PAGE>
<TABLE>
                                                               TEKELEC
                                           VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<CAPTION>
           Column A                    Column B                   Column C                   Column D        Column E
--------------------------------------------------------------------------------------------------------------------------
                                                                 Additions
                                      Balance at        Charged to        Charged to                         Balance at
                                      Beginning         Costs and           Other                              End of
          Description                 of Period          Expenses          Accounts         Deductions         Period
--------------------------------   ---------------   ---------------   ---------------   ---------------   ---------------
                                                                          (thousands)
<S>                                <C>               <C>               <C>               <C>               <C>

Year ended December 31, 1994:
Allowance for doubtful accounts    $           221   $          --     $           161   $            64   $           318
Product warranty ...............               280               819              --                 272               827
Inventory provision ............             1,089               315              --                 239             1,165
Deferred tax valuation allowance            11,958              --                --               2,462             9,496

Year ended December 31, 1995:

Allowance for doubtful accounts    $           318   $           120   $          --     $            47   $           391
Product warranty ...............               827               581              --                 529               879
Inventory provision ............             1,165               391              --                 241             1,315
Deferred tax valuation allowance             9,496               775              --                --              10,271

Year ended December 31, 1996:

Allowance for doubtful accounts    $           391   $          --     $          --     $            23   $           368
Product warranty ...............               879             1,083              --                 407             1,555
Inventory provision ............             1,315               704              --                 329             1,690
Deferred tax valuation allowance            10,271             4,719              --                --              14,990

</TABLE>
                                                                     SCHEDULE II
                                       S-1
<PAGE>
                                  EXHIBIT INDEX

Exhibit Number                            Description
--------------  ----------------------------------------------------------------

     3.2        Bylaws, as amended

    10.7        Schedule of Distributors

    10.11       Agreement dated March 26, 1997 between the Registrant and
                Allan Toomer

    10.13       Amendment No. 1 dated November 30, 1996 to Consulting
                Agreement between the Registrant and Howard Oringer

    10.14       Credit Agreement dated October 22, 1996 between the Registrant
                and Imperial Bank, together with Promissory Note of the
                Registrant dated October 22, 1996

    10.15       General Security Agreement dated October 22, 1996 between the
                Registrant and Imperial Bank

    11.1        Statement of Computation of Earnings Per Share

    21.1        Subsidiaries of the Registrant

    23.1        Consent of Coopers & Lybrand L.L.P.

    27.1        Financial Data Schedule