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

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FORM 10-K

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x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 0-15135

(Exact name of Registrant as Specified in its Charter)



|California                                                     | 95-2746131                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

5200 Paramount Parkway
Morrisville, North Carolina     27560

(919) 460-5500

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Securities registered pursuant to Section 12(b) of the Act:

|Title of Each Class             | Name of Each Exchange on Which Registered
|------------------------------- | -----------------------------------------
|Common Stock, without par value | The NASDAQ Stock Market LLC              

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES     ̈ NO    x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES     ̈ NO    x

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 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 (§229.405 of this chapter) 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 Form10-K or any amendment to this Form 10-K.
   x

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

Large accelerated filer     x Accelerated filer     ̈ Non-accelerated filer     ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES     ̈ NO    x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30,
2006, based upon closing sale price of the Common Stock on June 30, 2006 as reported on the Nasdaq Stock Market, was
approximately $717,525,342.

The number of shares outstanding of the registrant's Common Stock on February 9, 2007 was 69,147,758.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement relating to the registrant's 2007 Annual Meeting of
Shareholders to be held on May 18, 2007 are incorporated by reference into Part III of this Annual Report on Form 10-K where
indicated.






PDF provided as courtesy


TEKELEC
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2006

|           |  |                                                                                                              |  | Page |    | 
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|           |  |                                                                                                              |  |      |    | 
|PART I     | 
|Item 1.    |  | Business                                                                                                     |  |      | 2  | 
|Item 1A.   |  | Risk Factors                                                                                                 |  |      | 15 | 
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  |      | 29 | 
|Item 2.    |  | Properties                                                                                                   |  |      | 30 | 
|Item 3.    |  | Legal Proceedings                                                                                            |  |      | 30 | 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  |      | 31 | 
|PART II    | 
|Item 5.    |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities |  |      | 31 | 
|Item 6.    |  | Selected Financial Data                                                                                      |  |      | 32 | 
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  |      | 34 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  |      | 63 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  |      | 63 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  |      | 63 | 
|Item 9A.   |  | Controls and Procedures                                                                                      |  |      | 63 | 
|Item 9B.   |  | Other Information                                                                                            |  |      | 64 | 
|PART III   | 
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                           |  |      | 65 | 
|Item 11.   |  | Executive Compensation                                                                                       |  |      | 65 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters               |  |      | 65 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                               |  |      | 65 | 
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |  |      | 65 | 
|PART IV    | 
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  |      | 66 | 
|Signatures |  |                                                                                                              |  |      | 71 | 
|Exhibits   |  |                                                                                                              |  |      |    | 

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FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements which are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Statements that are not historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include,
among other things, statements regarding the extent and timing of future revenues and expenses, restructuring and other expenses,
customer demand, competition, statements regarding the development, deployment and potential benefits of our products, and
statements regarding relationships with, and reliance on, third parties. Words such as "expects," "anticipates," "targets," "goals,"
"projects," "intends," "plans," "believes," "seeks," "estimates," "continues," "forecasts," "may," "should," "potential," variations of such
words, and similar expressions identify forward-looking statements. In addition, any statements that refer to projections of our future
financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or
circumstances are forward-looking statements. These statements are based on our current expectations, estimates, forecasts,
information and projections about the industries in which we operate and the beliefs and assumptions of our management. Readers are
cautioned that these forward-looking statements are only predictions, are not guarantees of future performance, and are subject to
risks, events, uncertainties and assumptions that are difficult to predict, including those discussed in Item 1A entitled "Risk Factors" in
Part I of this Annual Report on Form 10-K and elsewhere in this Annual Report. Actual results may differ materially and adversely from
those expressed in any forward-looking statement. All forward-looking statements included in this Annual Report are based on
information available to us as of the date of this Annual Report. We assume no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, unless we are required to do so by law. 

PART I
Item 1. Business.
Overview
Tekelec is a leading global provider of telecommunications network systems and software applications. Our customers include
traditional landline or "wireline" telecommunications carriers, mobile or "wireless" communications operators, emerging competitive
service providers and cable television service providers who are offering communication services (collectively, "service providers"). Our
customers, including many of the largest service providers in the world, have deployed more than 1,000 Tekelec systems and software
applications in over 300 networks located in over 30 countries worldwide.
As further described below, we offer systems and software applications that include (a) high performance, network-centric, mission
critical applications for signaling and session control; (b) complementary applications that enable service providers to better measure,
manage and monetize the communication services they provide; and  (c) subscriber-centric applications that enable service providers
to deliver basic and enhanced voice and data communications services. These network applications are derived from our portfolio of
systems, software and related professional services that we design, develop, manufacture, market, sell and support. Our network
applications enable our service provider customers to optimize their network efficiency and performance and to provide basic and
enhanced voice and data services to their subscribers. Our network applications are designed to assist our customers as they transition
their traditional networks to Internet Protocol (or IP) based networks.
We deliver these network systems and software applications through the following three reportable business segments:

Network Signaling Group (NSG): Our network signaling product portfolio enables service providers to establish, control,
and terminate voice and data communications "calls" or "sessions." Over the years, we have gained considerable signaling expertise
and intellectual property. We believe that we are one of the leading vendors of network signaling applications worldwide. Historically,
our NSG business segment has accounted for the most significant portion of our revenue, representing approximately 67% of our
revenues for 2006. 
Communications Software Solutions Group (CSSG):Our CSSG business unit leverages our NSG installed customer
base, and its product portfolio complements the functionality of our NSG product portfolio. Our CSSG solutions assist our customers in
measuring network and service performance, managing network and service efficiency, and monetizing their networks and service
offerings through the reduction of revenue loss. Our CSSG business segment represented approximately 13% of our revenues for
2006.
Switching Solutions Group (SSG): Our SSG solutions control and route the actual voice or data comprising a "call" or a
"session." Our SSG network applications enable our customers to offer basic and enhanced voice and data services utilizing traditional
and IP-based networking technologies. Our SSG business segment represented approximately 20% of our revenues for
2006.2



We derive our revenues from the sale or licensing of these telecommunications network systems and software applications and the
related professional services, such as installation, training services and customer support, including customer post-warranty service
contracts and our recently announced TekelecCare offering. Payment terms for contracts with our customers are negotiated with each
customer and are based on a variety of factors, including the customer's credit standing and our history with the customer. For financial
information by operating segment, product category, and geographical area, please see Note 16 "Operating Segment Information" to
our Consolidated Financial Statements and "Results of Operations - Revenues" in the section of this Annual Report
entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We were incorporated in California in December 1971, and our headquarters are in Morrisville, North Carolina. Our Internet
address is www.tekelec.com. We are not including the information contained on our website as a part of, or incorporating it by
reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as
soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange
Commission. Copies of this Annual Report and other reports are available without charge upon written request to us.

Industry Background

Historically, landline, also known as "wireline" or "fixed," telecommunications service providers have been either government
owned or heavily regulated , and their primary objective has been to provide voice services. Their networks, often referred to as Public
Switched Telephone Networks, or PSTNs, were built and have evolved and been maintained over long periods of time, in many
instances for decades, and were primarily designed to provide seamless, reliable and secure global voice communications. The
technology upon which today's PSTN is based is commonly known as "circuit switched" and utilizes time division multiplexing (TDM)
standards for transmission of the electronic signals carrying the voice conversation. The electronic signals carrying the voice
conversations are referred to as "media," and in a circuit switched network they follow a dedicated path, or circuit.

Further evolution of the circuit switched network included the introduction of additional services, which we refer to as "intelligent
network" services, by adding both a signaling network layer and an enhanced intelligent network services layer on top of the TDM voice
switching network. The signaling network layer improved network performance by reducing call setup times, improving the efficiency of
the network, providing for interoperability between two independently owned networks, and providing access to an enhanced intelligent
network services layer. The critical technology underpinning the intelligent network is the globally accepted signaling protocol known as
Signaling System #7, or SS7. The flexibility of the three-layered intelligent network design permitted the introduction of a number of new
and enhanced services, including toll free numbers and number portability, whereby subscribers are able to retain their local phone
number, yet move their phone service to a new service provider. While SS7 was initially created to support signaling in the PSTN, it has
also become an essential element for connecting calls and delivering enhanced services in wireless networks.

Wireless networks are often referred to as Public Land Mobile Networks, or PLMNs. Wireless networks generate substantially more
SS7 signaling traffic than fixed line networks due to additional capabilities inherent in wireless telephony such as mobile registrations,
roaming, and mobile call handoffs between cellular towers and equipment. As a result, wireless operators generally invest more in
SS7-related equipment, such as signal transfer points, or STPs, than landline telecommunications service providers in order to
accommodate the unique signaling demands of mobile telephony. In addition, rapid growth in wireless subscribers, minutes of use and
increased popularity of wireless services such as voice mail, short text messaging, pre-paid billing and wireless number portability have
led to a significant increase in SS7 traffic on mobile networks in recent years, and has created a need for high capacity signaling
infrastructure. Driving the higher usage in wireless networks, particularly in the United States, are flat rate pricing plans that feature no
incremental charges for any calls up to a specified monthly limit. Innovative service offerings like camera phones, the increasing
popularity of family calling plans, and continued wireline to wireless substitution are also contributing to continuing wireless subscriber
growth. We believe that wireless usage may continue to increase in the coming years and create additional SS7 signaling traffic and
increased demand for our network applications.

In the past, networks designed primarily for data services have emerged and are commonly referred to as the Internet. The Internet
is a collection of Internet Protocol, or IP, -based networks that provide global reach for a broad range of information services such as
web browsing, e-mail, electronic commerce and research. IP networks are "packet switched" networks because the IP protocol breaks
the media into packets before transporting them, each packet often taking separate path, to the intended destination where the packets
are then reassembled prior to delivery to the intended recipient.

Increased competition among service providers has resulted in a reduction in the price per minute that service providers charge for
traditional voice services. This, in turn, has driven increased subscriber demand for voice services as well as

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demand for innovative
new services, including basic data services. With the resulting revenue and margin pressure, service providers are attempting to reduce
the expense of delivering traditional service while expanding their networks to handle the greater volume of traffic. We believe these
dynamics are a primary driver of the recent wide spread consolidation among service providers, as they attempt to take advantage of
increased economies of scale and/or position themselves to offer both wireline and wireless services. In further response to consumer
demand and declines in prices brought about by expanding competition, service providers have also begun to offer services beyond
those traditionally offered, including bundling voice, video and data services.

The Emergence of a Converged Network

Today, most service providers operate both circuit switched networks and packet networks. Currently, the majority of networks
which carry voice communications rely on TDM circuit switching technology, and, until recently, packet switching has been used almost
exclusively for data communications. Managing multiple distinct networks is not expected to be a viable economic alternative. While
circuit switching has offered reliable and high quality voice communications, packet switching is inherently more efficient and cost
effective. As a result, service providers are beginning to migrate toward a single IP network architecture, or converged network, to serve
as the foundation for their enhanced voice, video and data service offerings.

Convergence has a wide variety of meanings within the communications industry. The term convergence encompasses: (a) the
convergence of circuit and packet-based technologies to support voice services (voice transported over IP and SS7 signaling
transported over IP); (b) the convergence of mobile networks and fixed networks and the associated flexibility of accessing networks
utilizing a variety of subscriber devices; (c) the convergence of widely utilized information technologies with proprietary legacy
telecommunication technologies; and (d) the convergence of basic voice and data services and enhanced multimedia services.

In the last several years, the IP Multimedia Subsystem architecture, or IMS, has emerged as an architecture well suited for
converged IP networking. Variations of the IMS architecture have been and are being adopted by various standard-setting bodies within
the wireless, wireline and cable industries. Very much like the SS7-based intelligent networking architecture employed by circuit
switched networks, IMS includes a three-layer architecture: a media transport layer, a signaling and session control layer and an
applications layer. However, instead of employing the SS7 protocol for signaling, IMS uses a newer signaling protocol, Session
Initiation Protocol, or SIP. SIP's advantages include its ability to manage multimedia services (voice, video and data) in an IP network,
making them accessible from a wide variety of devices, such as mobile phones, personal computers, ordinary phones and personal
digital assistants, or so called "smart phones."

Transitioning to a Converged Network

The transition to a converged network poses a challenge for service providers: when and how can they cost effectively transition
from existing networking technology to the converged network, without disrupting existing services and without abandoning current and
recent investments in existing networks? We believe this transition process will evolve through three phases: the current state, the
transition state and the future state.

- We believe the current state includes basic voice and data services signaled with SS7 and transported over TDM-based
networks.
- We believe the transition state will offer basic and enhanced voice and data services signaled with SS7, but transported
over IP-based networks. Examples of network applications many service providers are evaluating and deploying include voice services
transported over IP, or VoIP, and SS7 signaling transported over IP, or SIGTRAN.
- We believe the future state will be based upon the emerging industry consensus for IMS architectures providing enhanced
multimedia service (voice, video and data) signaled with SIP and transported over an IP-based, converged network.

While this trend is global in nature, there remain considerable differences by geography in the PSTN, PLMN and Internet maturity,
as well as in the economic opportunities that service providers are attempting to capitalize upon. These differences generally affect the
decision as to when and how service providers adopt newer technologies and commence their transition to a converged network. As a
result, we expect adoption of, and, thus, demand for the networking technologies to vary from market to market, and current state,
transitional state and future state networks to overlap for a considerable period of time. We believe that there will likely be instances of
all three network states, or hybrid networks, concurrently owned and operated by a single service provider, especially the larger
providers who own networks in several markets. For example, service providers operating current state networks in emerging markets
will need to interoperate with service providers operating transitional networks and converged networks in maturing markets. Finally,
service providers must be able to measure performance, manage the quality and availability of service and monetize the newer
services in and across current, transition and future state networks.

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Tekelec's Network Applications

Our network applications assist our customers in meeting their primary challenges in the competitive communications
environment, which are differentiating their revenue generating offerings and lowering network costs. They enable the delivery of
intelligent services and facilitate transition to the converged network. We believe that our open, standards-based products and services
are highly reliable and enable us to reach a larger addressable market, while enabling service providers to more cost effectively
manage their networks and offer intelligent services that differentiate them from their competition.

Signaling Network Applications offered by our NSG business unit

With over 1,000 signaling systems in operation worldwide, we have one of the most widely deployed standalone signaling
application platforms in the telecommunications industry. Our signaling systems and software are installed in all Tier 1 North American
wireless and wireline service providers. As we expand internationally, we continue to grow our customer base among the leading
wireless and wireline service providers in Europe, Asia, Africa, Central and South America. We believe that our EAGLE 5 Integrated
Signaling System, or "EAGLE 5 ISS," is successful because of our focus on the development of a competitive, highly scalable system
that is able to meet the rigorous technological demands of rapidly growing global service providers.

Over time, we have extended the features and capabilities of our signaling systems and software to include other integrated
value-added network applications. The types of other network applications that we have targeted are those that are highly synergistic with our
signaling network applications, such as our Number Portability application for number portability in mobile and fixed networks; our
GFLEX application for improved mobility management through optimization of a service provider's Home Location Register, or HLR,
resources; our TekMedia application for more efficient, network-based Short Message Service, or SMS, and control of unwanted text
messages (commonly referred to as "SPAM" messages); as well as applications for integrated data collection used in concert with our
real time performance management network application delivered by our CSSG business unit. By integrating or bundling other
synergistic network applications with our signaling applications within our EAGLE 5 ISS platforms, we have enabled service providers to
reduce the number of signaling connections between network elements and the congestion and bottlenecks in their signaling networks
- thus enabling service providers to realize greater throughput capacity and efficiency in their communications networks.

As network traffic has grown, service providers have been looking for even more cost effective ways to handle the related increase
in SS7 traffic. One of the main features of the EAGLE 5 ISS platform is its ability to support SIGTRAN, which is essentially SS7
transported over IP, and to help our customers realize substantial efficiencies inherent in IP networking. Use of our SIGTRAN systems,
software and related applications results in a substantial increase in signaling efficiency by enabling SS7 signaling transported over IP
at faster rates than traditional SS7 signaling transported over TDM or other packet networking technologies. Customers may choose to
deploy the EAGLE 5 ISS with SIGTRAN capability to gain signaling efficiencies, among other benefits, as they transition their voice
service to VoIP networks. In addition, customers of our signaling products may upgrade their existing infrastructure to enable SS7
signaling over IP. The upgrade enables them to preserve the value of their existing SS7 infrastructure and makes them capable of
facilitating interoperability between circuit switched and next generation packet networks.

As a result of service provider challenges encountered in transitioning to the converged network, we believe that SS7 will continue
as a requirement for the foreseeable future. In order to meet the various needs of our customers as they transition to IMS, we are
developing SIP signaling systems and transitional product offerings that allow the current and future networks to interoperate. The
device within the IMS architecture that manages SIP-based communications sessions is the Call Session Control Function, or CSCF.
Our implementation of CSCF, the TekCoreTM Session Manager, is designed to enable service providers to integrate CSCF
functionality into their networks and seamlessly offer SS7, SIGTRAN and/or SIP based communications services.

As service providers adopt IMS, we believe that they will likely operate hybrid networks with both intelligent network and IMS
services for years. IMS is designed to permit service providers to orchestrate service interaction of multiple SIP-based services. NSG's
Service Mediation solution is designed to enable service interaction among legacy, mobile, VoIP and IMS networks. NSG's Service
Mediation solution simplifies the interworking of network components that utilize different protocols without having to upgrade each
network switch or re-architect the network. This allows service providers to simplify their network architecture for faster service rollout,
to deliver value-added, bundled services and to cap investments in legacy technology based equipment. It bridges technologies,
allowing SS7-based, intelligent network service platforms to coexist and interact with SIP-based, IMS network service platforms.

Network Applications offered by our CSSG business unit

We believe the synergy between our industry leading signaling platforms and performance management, revenue

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management
and service creation applications provides significant value to our customers. Our CSSG network and business applications help
service providers measure, manage and monetize the communications traffic that traverses their networks. Specifically, these
applications enhance the reliability and security of our customers' networks, reduce the time to troubleshoot problems, enable real-time
management of service quality, and help detect and correct revenue leaks due to fraud, incorrect billings, and errors in recordkeeping.
These products also help service providers deploy new services more cost effectively and improve their return on investment in existing
and new services across both legacy and next generation telecommunications networks.

We provide comprehensive real-time network and business applications measurement capability for traditional and IP networks, as
well as hybrid networks. Our CSSG solutions allow a service provider to verify overall network performance and quickly isolate
problems in the network, while reducing capital and operating expenditures.

Our real time performance management system and software applications are offered as a solution with the EAGLE 5 ISS,
complementing and leveraging the functionality of our signaling network applications. Our performance management solutions address
a variety of activities related to the service provider's end user's experience, including traffic management, quality of service and
troubleshooting. Our products allow the service providers to collect data about the operation of their networks and to graphically
analyze and pinpoint network and quality of service problems.

Our revenue service applications are designed to permit service providers to monetize their services by gathering business-critical
intelligence to make informed decisions, identifying sources of revenue loss, recovering revenue while increasing margins, and enabling
new revenue generating services. We believe our CSSG applications provide valuable data on subscriber behavior, which may be used
by marketing professionals to create highly targeted service bundles that increase profitability and customer value.

Basic and Enhanced Voice and Data Network Applications offered by our SSG business unit

Our switching solutions are focused primarily on creating and enhancing next-generation voice and data switching products and
subscriber-centric services for both traditional circuit switched networks and newer packet switched networks. We offer wireline
(Class 4 and Class 5) and wireless telephony solutions, as well as enhanced VoIP network applications. We believe that
voice and data networks will increasingly interoperate, or converge. We have designed and are designing our switching solutions
products and subscriber-centric services to enable our service provider customers to implement converged voice and data
networks.

Recently, both VoIP and voice, video and data convergence activity has increased, as leading service providers
and cable operators have begun to compete for subscribers by offering a "bundled" package of voice, data and video services, also
known as "triple-play" service offerings (e.g., phone, internet and cable services). While VoIP has been a significant factor in business
communication systems and services for many years, its growth has been limited in the broader consumer market. During 2006, new
service providers, incumbent wireline service providers (e.g., Verizon), and cable operators realized significant growth in VoIP
subscribers, which we believe is due in part to the maturing of these new technologies and the entrance of more established providers
into the market. We believe our VoIP solutions are well positioned to meet this growing VoIP market demand.

As service providers seek additional ways to improve their service offerings, we believe that they are beginning to explore ways of
achieving "continuous mobility." Continuous mobility is the ability of a mobile customer to seamlessly move from a traditional mobile
wireless network to a home or business fixed wireless network, also known as a "WiFi" network, without disrupting service. WiFi fixed
wireless networks enable access to VoIP services typically provided by a wireline service provider. This network capability is known as
"Fixed Mobile Convergence," or FMC. Demand for FMC is supported by mobile phone manufacturers who have begun delivering "dual
mode" mobile handsets that can communicate over both traditional wireless networks and over WiFi networks. Historically, consumers
have been required to maintain multiple phone devices and service plans, such as a wireline phone service for the home along with a
separate wireless service plan. The availability of "dual mode" mobile handsets combined with FMC network capabilities enables
service providers to attract and retain customers by reducing the requirement for multiple phone devices and by providing customers
with access to more economical wireline-based VoIP services while using a mobile phone handset.

Our switching solutions products are also designed to support the transition of a service provider's network to IMS through
simultaneous support of both SS7 and SIP signaling interfaces. In addition, our products are distributed and provide the media transport
and application layers in the three layer IMS architecture. This capability allows service providers to initially deploy our solutions in a
pre-IMS network to provide for cost effective VoIP and/or TDM services. When these service providers are ready, they can evolve to a
full IMS network by deploying the additional CSCF equipment to provide the session control layer in a more cost effective manner.

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Our Business Strategy

Our objective is to be a premier supplier of communications systems, software and related professional services, delivering
high performance, mission critical network applications for existing, transitional and converged voice and data communications
networks. Key elements of our strategy to achieve this objective include:

Leveraging Our Installed Base and Established Customer Relationships. With over 1,000 signaling systems in operation
worldwide, we have one of the most widely deployed, standalone signaling application platforms in the telecommunications industry.
Our strategy is to leverage our worldwide installed base and our well established relationships with our customers in order to deepen
our market penetration globally and to pursue selected emerging new market segments. We believe that we can leverage our installed
base and established customer relationships by offering network applications that function not only in today's networks, but that also
enable our customers to transition to converged IMS networks in the future.

Maintaining Technology Expertise and Knowledge. We believe that one of our core competitive strengths is the breadth of
our knowledge and expertise in communications technologies, particularly in signaling and session control; in high performance,
mission critical applications which utilize real time or near-real time data (especially data derived from signaling networks); and in voice
call control. We have developed this expertise over more than two decades and, during 2006, we filed a significant number of new
patent applications. We intend to enhance our existing products, develop new products and expand our portfolio of patented intellectual
property by continuing to make significant investments in research and development. As part of our commitment to technology
leadership, we were an early leader in developing solutions for SS7 signaling over IP; using real time database applications (including
number portability and integrated network monitoring); as well as our offering of packet-based voice switching solutions.

Focusing on Continued Operating Improvements. We intend to continue to identify and implement new ways to improve our
operating efficiency and business processes to enhance our profitability. We lowered our unit material costs and improved our margins
through the use of contract manufacturing and improved supplier relationships. In 2005 and 2006, we continued to expand our sourcing
of raw materials and services globally to lower our unit costs and increase our labor rate productivity. This included the sourcing of
printed circuit boards from China, the assembly of our printed circuit boards in Thailand and Guadalajara, Mexico and the off-shoring of
certain product development efforts to India, China and the Czech Republic. In 2006, in connection with the creation of our EAAA regional sales
and marketing organization, comprised of Europe, the Middle East, Asia Pacific (including India and China), Africa and Australia, we
combined seven regional sales and marketing teams into three. From time to time, we review our organizational and operating structure
to determine whether new or expanded job functions or business processes can be assumed by existing personnel or reengineered,
resulting in higher productivity.

Expanding Globally. We sell our products internationally through our direct sales force, sales agents, partnerships and distributor
relationships. We also sell directly from our wholly owned subsidiaries in Argentina, Brazil, Canada, Colombia, the Czech Republic,
France, Germany, India, Italy, Malaysia, Mexico, Singapore, Spain, Taiwan and the United Kingdom and from our sales offices in
China, Dubai, the Russian Federation and South Africa. Total international revenues for 2006, 2005, and 2004 were $241.5 million,
$134.0 million, and $87.1 million, respectively, representing 44%, 28%, and 27% of our total revenues, respectively.

Pursuing Opportunities with Strategic Partners. We intend to complement our product offerings and extend our market reach
through selected strategic partnering relationships, including original equipment manufacturer, or "OEM," partners, referral
arrangements, teaming agreements and distribution agreements. Our existing strategic relationships include technology development,
outbound OEM and collaboration relationships with companies such as Alcatel-Lucent, NEC and ZTE. In addition to these strategic
partnerships, from time-to-time we have also made acquisitions of technologies, competencies and businesses, where we sought to
leverage synergies with our existing technologies, competencies and commercial opportunities. In 2005, we acquired privately-held iptelorg GmbH ("iptelorg")
to augment our signaling portfolio with SIP routing software and additional SIP expertise. In 2006, we entered into a worldwide license to
certain technologies and intellectual property rights that we believe will form the core software platform for our service mediation
product family.  We believe this technology provides key capabilities, which will provide our customers with a smooth evolution
from SS7 to SIP-based signaling and next-generation high performance network applications once we complete development of the
product offerings based on this technology.  We anticipate that, from time to time, we may make additional acquisitions where we
believe synergies with our existing business can be leveraged.

Recent Acquisitions and Dispositions

In July 2006, we completed the sale of IEX Corporation ("IEX"), a wholly owned subsidiary, to NICE-Systems Ltd. for
approximately $201.5 million in cash, which included a $1.5 million working capital adjustment. IEX provided workforce

7



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management and intelligent call routing systems for single- and multiple-site contact centers. IEX sold its products primarily to
customers in industries with significant contact center operations such as airlines, financial services, telecommunications and retail.
Prior to our decision to sell IEX, the results of IEX's operations were reported as the IEX Contact Center Group reporting segment.

During 2005, we completed the acquisition of iptelorg, a developer of SIP routing software, which is
now included within our NSG reporting segment. In October 2004, we acquired Steleus Group Inc. ("Steleus"), a real time performance
management supplier that provides business related intelligence products and services to telecommunications service providers.
During the fourth quarter of 2004, Steleus' telecommunications product line was combined with certain of our existing business
intelligence applications, such as billing verification and other network element independent applications to form our CSSG reporting
segment.

In October 2005, we acquired the remaining minority ownership interest in Santera Systems Inc. ("Santera"), a developer of
integrated voice and data switching solutions, which had become a majority owned subsidiary in June 2003. In April 2004, we acquired
Taqua, Inc. ("Taqua"), a privately held provider of next generation packet switching systems. In September 2004, we acquired privately
held VocalData, Inc. ("VocalData"), a provider of hosted IP telephony applications that enable the delivery of advanced telecom
services and applications to business and residential customers. The former Santera, Taqua and the VocalData businesses form our
SSG reporting segment.

Our Sales and Marketing Strategy

Our sales and marketing strategies include selling directly through our sales force and indirectly through distributors and other
resellers, entering into strategic alliances, and targeting certain markets and customers. To promote awareness of Tekelec and our
products, we also advertise in trade journals, exhibit at trade shows, participate in industry forums and panels, maintain a presence on
the Internet, and use direct mail. From time to time, our employees author articles for trade journals.

Distribution. We sell our products in the United States principally through our direct sales force and indirectly through
strategic relationships with various third parties. Our North American direct sales force operates out of our regional offices located
throughout the United States. Internationally, we sell our products through our direct sales force, sales agents, partnerships and distributor
relationships. As market conditions warrant, we may increase our direct sales and marketing activities worldwide.

Strategic Relationships. We believe that our current and future strategic relationships with other leading communication
solution providers will improve market penetration and acceptance for our network applications. Many of these system integrators have
long-standing relationships with public telecommunications service providers and offer a broad range of services to these service
providers through their existing sales and support networks. We seek strategic relationships that:

- enhance our presence and strengthen our competitive position in our target markets;
- offer products that complement our network applications to provide value-added networking products and services; and
- leverage our core technologies to enable communications equipment suppliers to develop enhanced products with market
differentiation that can be integrated with Tekelec's products and services.

We believe that our strategic third-party relationships present us with additional opportunities to penetrate the communications
network application market and demonstrate our strategic partners' recognition of the technical advantages of our network products.
Through our relationships with, among others, Alcatel-Lucent, FiberHome, NEC Neva and NEC do Brazil we are enhancing our market
presence and the ability to access leading network service providers. Although our current sales through these relationships are not
significant (other than Alcatel-Lucent), a termination of one or more of our relationships, or the sale of competing products by any of these strategic
partners could have a material adverse effect on our future operating results.

8



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Our Systems and Software

We currently offer systems and software through our three business units. Our principal Network Signaling Group
solutions are described below:



|                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Solution                       |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Signaling and Session Control  |  | Our EAGLE®5 Integrated Signaling System (ISS) provides global signaling and real time, transaction-based
applications from a single platform. Substantial database size, signaling capacity and transaction speed are coupled with next
generation IP connectivity, providing a transition path to the converged network.
The same platform delivers full signal transfer point, or STP, capabilities and a portfolio of integrated applications. Applications
integrated with the platform provide the delivery of an array of intelligent routing and other value-added services. Service providers are
able to optimize the use of network resources, deploy number portability, manage subscribers and services, migrate to new
technologies, control fraud and interoperate networks with disparate technologies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                              
|Transitional and IMS Solutions |  | We offer a portfolio of products to support IMS and the transition to IMS networks. By leveraging our
expertise in SS7 signaling and SIP session control, we provide a signaling bridge that enables interoperability between circuit and
packet switched technologies. Our systems and software thus permit our customers to approach the transition to converged
networking through the signaling layer. We also offer core session control for SIP-based, IMS networks.
Our IMS solution enables service providers to gradually migrate to IMS at the signaling layer. We believe this transitional
approach allows service providers to control the pace of evolution and provides a cost effective approach for migrating to IMS and for
managing a hybrid SS7-SIP signaling network.
Specific IMS-transitional systems and software include:
Service Mediation
Our Service Mediation solutions are designed to enable service interaction among legacy, mobile, VoIP and IMS networks.
These solutions bridge technologies and enable unified service delivery across SS7 and SIP-based networks. Transitional benefits
include:

Reduced investment in legacy technologies
Service continuity across hybrid networks
Leveraging of existing intelligent network applications, like number portability, to support IMS subscribers
Offering of new SIP-based services to customers with SS7-based handsets, improving our service provider customer return on
investmentTekCore Session Manager
Our open, standards-based CSCF is designed to support high performance SIP-signaling and session control in core IMS networks,
enabling multimedia services. TekCore also supports SIP aggregation in VoIP networks, allowing service providers to cost effectively
scale their VoIP networks, while laying the groundwork for the eventual migration to IMS.
Service Dispatch and Control
High performance "Pre-IMS" server enables certain new services such as prepaid or enhanced voice services to be deployed
to all subscribers, whether served by the IMS or the legacy network.
|                              

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|Number Portability  |  | We simplify number portability by integrating advanced database management and signaling functions on a
single network platform, providing advantages over solutions that rely on external service control points. We provide a full suite of
number portability solutions for fixed and mobile networks in the U.S. and international markets.
The convergence of the PSTN with IP networks requires a new type of number portability/translation with the ability to map
telephone numbers to IP addresses. This new number portability/translation is known as Electronic Number Mapping, or ENUM. Next
generation services such as VoIP, multimedia service, push-to-talk and instant messaging will possibly require high ENUM transaction
rates. We have leveraged our experience in high capacity, low latency database applications to develop our ENUM
solution.
|------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Mobility Management |  | Wireless voice and data communications generate substantially more signaling traffic than fixed-line calls. Our
mobile service provider customers benefit from our intelligent routing applications ability to handle network expansion in a
reliable, cost effective manner. Applications such as HLR (Home Location Register) optimization, Equipment Identity Register (EIR) and
voice mail redirection help service providers to manage network growth, improve network efficiency, reduce costs and meet regulatory
requirements.                                                                                                                                                                                                                                                                                                                                   
|                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Messaging           |  | Our short text messaging solutions are designed to span both traditional SS7 based TDM, or "2G" networks
and SIP-based IP, or 3G networks. The access-independent solution enables the delivery of text messaging — from simple
store-and-forward short message service (SMS) to more advanced networked messaging services.
TekMedia SMS is an innovative, modular solution, which enables service providers to deliver advanced networked messaging.
Service providers can grow capacity and capabilities incrementally or create a complete, end-to-end SMS solution.                                                                                                                                                                                                                                                                                                 

Our principal Communications Software Solutions Group solutions are described below:



|                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Solution                         |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Performance Management Solutions |  | Our portfolio of Performance Management solutions provides real time or historical information based on network
traffic. Service providers can gain insight into the performance of the network, roaming activity, service usage, and customer behavior.
Our solutions deliver network visibility to service providers, assisting them in managing and routing traffic in an efficient and cost
effective manner. By monitoring network transactions, service providers can improve service delivery and more accurately bill their
subscribers for content downloads. They can verify the successful delivery of content from third-party providers and pay only for
successful downloads.
Applications include:                     
|                                 |  | •   troubleshooting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                 |  | •   network management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                 |  | •   roaming management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                 |  | •   services management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                 |  | •   revenue leakage discovery                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                 |  | •   revenue recovery and generation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                 |  | •   market intelligence and analytics                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                 |  | Our Performance Management solution collects, correlates, processes, and stores data from the network. Various
applications use this data to enable network operators to ensure the performance, reliability and security of the network; to detect and
track revenue leaks and potential recovery; and to provide timely market and business intelligence needed to drive business
improvement. The solution supports wireline and wireless service providers across both the traditional TDM-based networks and IP-based
networks. This solution can be deployed on a stand-alone basis or as an integrated feature of the EAGLE 5 ISS. Our
Performance Management solution is installed in a number of service providers' networks.
|                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Service Creation Solutions       |  | Our Service Creation Solutions, or SCS, offer service providers an alternative to traditional, legacy service
platforms. Our SCS are supplied with pre-packaged solutions permitting service providers to launch their own services thus reducing
lengthy development cycles. At the same time, a creation environment is provided which allows our customers to customize their
existing services as well as to create new services themselves.                                                                                                                                                                                                                                                                                      

10



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|                   |  | Applications include:
    •   number screening
   •   routing 
   •   number translation
   •   charging
   •   content and marketing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Revenue Management |  | Tekelec's Revenue Management portfolio is designed to help service providers gather business-critical
intelligence to make informed decisions, identify sources of revenue loss and increase margins.
These solutions give service providers visibility into network traffic data that is specific to inter-carrier compensation and subscriber
activities. Service providers can identify possible sources of revenue leakage and recover lost revenues caused by fraudulent abuse,
poor network planning or network attacks. Valuable data provided on subscriber behavior and service preferences enables marketing
professionals to create highly targeted service bundles that increase profitability and customer value.



Our principal Switching Solutions Group solutions are described below:



|                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Solution                          |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Enhanced VoIP Solution            |  | Our Enhanced VoIP Solution (EVS) offers service providers a fully integrated way to offer a wide set of advanced
IP-based features and services to both their VoIP and traditional voice service customers. EVS can be deployed by both small and
large service providers. New service providers, also known as competitive service providers, and cable television network service
providers can use EVS to upgrade their networks for broadband services. EVS consists of the Tekelec 7000 and 6000 products
packaged as a solution.                                                                                                                  
|                                 
|Hosted VoIP Solution              |  | Our Hosted VoIP Solution (HVS) provides a wide set of feature-rich business and residential VoIP services. HVS
consists of the Tekelec 6000 combined with an optional set of Tekelec media gateways - T9000, T8000, T7000, or a combination
thereof. Our HVS enables VoIP service providers to start small and grow while offering voice and video services that can both replace
PBXs and economically serve home users. HVS offers high quality VoIP services with reduced service provider integration efforts,
thereby lowering operating expense for service providers.                                                                            
|                                 
|Transit Network Solution          |  | Our Transit Network Solution (TNS) brings new capabilities and cost savings to service providers which operate
large and geographically distributed networks. TNS allows service providers to achieve improved network survivability through
geographic diversity and distributed processing. Our Transit Network Solution consists of the Tekelec 9000 Distributed Switching
System deployed with one or more T3000 Media Gateway Controllers, and multiple T8000 Media Gateways.                                                                                                                                                                      
|                                 
|Fixed Mobile Convergence Solution |  | Our Fixed Mobile Convergence (FMC) solutions are designed to help mobile and fixed service providers gain new
revenues from their current networks. Service providers can offer features that help them lower customer turnover and gain subscribers
without complex network replacement. Our FMC solutions allow end users to have a single number identity with the ability to originate
and answer calls from their wireless or wireline phones. Our FMC consists of a Tekelec 6000 combined with a Tekelec 9000 and a
convergence gateway. This solution allows mobile and fixed service providers to gain new revenues from their current
networks.
|                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Converged Media Gateway (CMG)     |  | Our Converged Media Gateway solution (CMG) is typically offered to large equipment vendors, such as Alcatel-Lucent,
and system integrators who combine our CMG with other equipment they provide. Our CMG consists of the Tekelec 8000
family of media gateways and offers a flexible, scalable, cost effective media gateway platform that can be deployed in wireless or
wireline networks.                                                                                                                                                                                                                                                           

11



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Systems and Software Development
The communications market is characterized by rapidly changing technology, evolving industry standards and frequent new
product introductions. Standards for new technologies and services such as Third Generation, or "3G" wireless services, softswitching,
signaling for packet networks, internet protocol and IMS architectures are still evolving. As these standards evolve and the demand for
services and applications increases, we intend to adapt and enhance our products and develop and support new products. We solicit
product development input through discussions with our customers and participation in
various industry organizations and standards
committees, such as the Telecommunications Industry Association, the Internet Engineering Task Force, the Softswitch Consortium,
the 3rdGeneration Partnership Project ("3GPP"), and the IMS Forum, and by closely monitoring the activities of the
International Telecommunications Union, the European Telecommunications Standards Institute, and the International Organization for
Standardization and Alliance for Telecommunications Industry Solutions ("ATIS").
We continue to invest in research and development in order to expand the technological capability, functionality and breadth of our
applications. From 2004 to 2006 we invested over $350 million-approximately $148.4 million, $119.2 million, and $93.7 million during
2006, 2005, and 2004, respectively, in product development.

We currently expect that a substantial portion of our development of new products and enhancements to existing and future
products will be developed internally or through outsourced development contractors, with the possibility of selective acquisitions to
complement and supplement our product development pipeline when deemed prudent. Our product development efforts to date have
resulted in leading telecommunication network applications, and we believe that our current and future product development efforts will
continue to yield leading telecommunication network applications. There are risks associated with the development of our products,
which are discussed further in the section entitled "Risk Factors" in this Annual Report.

Service, Support and Warranty
We believe that customer service, support and training are important to building and maintaining strong customer
relationships. We service, repair and provide technical support for our products. Our support services include:

24-hour technical support,
remote access diagnostics and servicing capabilities,
extended maintenance and support programs,
comprehensive technical customer training,
extensive customer documentation,
field installation, emergency replacement and regular software maintenance releases, and
limited upgrades and enhancements.To our customers and certain resellers of our products, we also offer technical training with respect to the proper use, support and
maintenance of our products.
We maintain in-house repair facilities and provide ongoing training and technical assistance to customers and international
distributors and other resellers at our technical assistance centers in Morrisville, North Carolina; Plano, Texas; Egham, United Kingdom
and Singapore. These centers also support our network signaling and switching products on a 24 hour-a-day, seven day-a-week
basis. In addition, we have invested in providing in-country service and support in Brazil, France, India, and Mexico.
We also offer network implementation services in connection with our effort to supply a complete solution for our network
application deployments, including products from our vendor partners. In such instances, we offer specific service contracts to support
the needs of our service provider customers that choose to migrate their network to, for example, packet technologies.

We typically warrant our products against defects in materials and workmanship for one year after delivery and installation, which
period may not exceed 15 months following shipment, and thereafter offer extended service warranties.

Customers
Customers for our NSG products consist primarily of network service providers. Wireless service providers accounted for over
50% of NSG's revenues in 2006. Customers for CSSG products are generally the same as those for our NSG products, but typically
are a different department (e.g., finance, marketing and sales). Customers for SSG products currently consist12



primarily of rural service
providers, independent operating companies, competitive access providers and large international public telephone and telegraph
companies. Alcatel-Lucent is also a customer of SSG. Alcatel-Lucent resells certain SSG products on an OEM basis together
with its own systems directly to service providers.

Historically, a limited number of customers have accounted for greater than 10% of our annual revenues. In 2006 and 2005,
Cingular, including AT&T prior to the merger of Cingular and AT&T Wireless, represented approximately 10% and 18%,
respectively, of our annual revenues. In 2005, Alcatel represented approximately 19% of our revenues. We anticipate that our operating
results in any given period will continue to depend, to a significant extent, upon revenues from a small
percentage of our customers.

Backlog

Backlog for our products typically consists of contracts or purchase orders for both product deliveries scheduled within the next
12 months and extended service warranty to be provided generally over periods of up to three years. Our backlog at any
particular date may not be a meaningful or accurate indicator of future financial results primarily because (i) we account for our
customer contracts under the residual method prescribed by Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and (ii) the size and duration of orders and customer delivery and installation requirements vary and may be
cancelled or rescheduled by the customer.

At December 31, 2006, our total backlog amounted to approximately $455.3 million, compared to total backlog of approximately
$520.2 million at December 31, 2005. We regularly review our backlog to ensure that our customers continue to honor
their purchase commitments and have the financial means to purchase and deploy our products and services in accordance with the
terms of their purchase contracts.

Competition

Network Signaling Group. The market for our network signaling products is competitive and has been highly
concentrated among a limited number of suppliers. We presently compete in the network signaling market primarily with Siemens,
Cisco Systems and Huawei. We expect that competition will increase in the future from both existing and new competitors.

We believe that the principal competitive factors in the high performance, mission critical network signaling systems and software
market are system performance, scalability and functionality, system quality and reliability, customer service and support, price and the
supplier's financial resources and marketing and distribution capability. We anticipate that responsiveness in adding new features and
functionality will become an increasingly important competitive factor. New entrants or established competitors may offer systems that
are superior to our systems in performance, quality, service and support and/or are priced lower than our systems.

We believe that our ability to compete successfully in the network signaling market also depends in part on our distribution and
marketing relationships with leading communications equipment suppliers and resellers. If we cannot successfully enter into these
relationships on terms that are favorable to us, or if we cannot maintain these relationships, our business could suffer.

Communications Software Solutions Group. The market for monitoring and revenue management software
solutions is very competitive. Our major competitors include Tektronix, Agilent and Anritsu, as well as a number of smaller competitors
existing in different geographic markets. We believe the market will remain very competitive with a number of smaller competitors
continuing to enter this market.

We believe the integration of CSSG's products with NSG's products, including the EAGLE 5 ISS, provides a key competitive
advantage. The added simplicity and reliability of our integrated approach provides a direct benefit to our customers. We also offer a
non-integrated, probe-based solution where needed to allow our customers to derive additional value from our applications. Our
applications offer an array of configuration tools and a Web-based user interface for ease of use. Our applications have the added
benefit of supporting both existing protocols and newer protocols such as SIP, GPRS, and UMTS from a common architecture. We
provide critical network capabilities, such as the ability to continuously trace a call end-to-end as it traverses both traditional circuit and
newer packet network domains. Our real time capabilities allow an operator to discover and correct network and related business
issues quickly.

Switching Solutions Group. The market for our switching solutions is extremely competitive and is highly
fragmented. We presently compete in the next-generation switching market with numerous public and private companies. The public
companies include, among others, Nortel, Cisco, Alcatel-Lucent, Sonus Networks and

13



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Siemens. The private companies include, among
others, Veraz Networks, MetaSwitch, BroadSoft and CopperCom. We expect competition to remain intense, particularly as this market
matures and until the number of competitors is reduced or rationalized.

We believe that the principal competitive factors in the next-generation switching market are product performance, scalability,
functionality, quality and reliability, customer service and support, price and the supplier's financial resources and marketing and
distribution capabilities. We believe that our ability to compete successfully in the next-generation switching market will, in part, depend
on our ability to secure large and leading wireline or
wireless service providers as reference accounts for our next-generation switching
products. Because a number of our competitors have existing relationships with these large and leading service providers as their
legacy switching providers, it may be difficult for us to displace these incumbent suppliers with our next-generation products.

Intellectual Property

Our success depends, to a significant degree, on our proprietary technology and other intellectual property. We rely on a
combination of patents, copyrights, trademarks, trade secrets, non-disclosure policies, confidentiality agreements and contractual
restrictions to establish and protect our proprietary rights both in the United States and abroad. In 2006, we filed a significant number of
new patent applications. Inventions by members of our research and engineering staff have been, and continue to be, important to our
growth and success. Patents have been granted to us on many of these inventions in the United States and other countries. Our patent
portfolio has been developed over time and, accordingly, the remaining terms of our patents vary. Some of the earlier issued patents
have now expired or are approaching expiration. Between 2007 and 2010, less than 1% of our patents will expire. However, we
intend to continue to seek and obtain patents protecting our newer innovations. Each business segment possesses its own patent
portfolio that provides certain competitive advantages in protecting our innovations. Although we believe that our patents will become
increasingly important in maintaining and improving our competitive position, no single patent is essential to our business as a whole,
and no one patent is considered material to any of our business segments.

The measures discussed above afford only limited protection and may not prevent third parties from misappropriating our
technology or other intellectual property. In addition, the laws of certain foreign countries do not protect our proprietary rights to the
same extent as do the laws of the United States and the possibility of misappropriation of our technology and other intellectual property
is more likely in these countries. If we fail to successfully enforce or defend our intellectual property rights, or if we fail to detect
misappropriation of our proprietary rights, our ability to effectively compete could be seriously impaired.

Our pending patent and trademark registration applications may not be approved and our competitors may challenge the validity or
scope of our patent or trademark registration applications. In addition, we may face challenges to the validity or enforceability of our
proprietary rights, and litigation may be necessary to enforce and protect our rights, to determine the validity and scope of our
proprietary rights and the rights of others, or to defend against claims of infringement, misappropriation or invalidity. Any such litigation
would be expensive and time consuming, would divert the attention of our management and key personnel from business operations
and would likely harm our business and operating results. We cannot be assured that our efforts to defend such challenges would be
successful.

We also license software and other intellectual property from third parties. Based on experience, we believe that such licenses can
generally be obtained or renewed on commercially acceptable terms. Nonetheless, there can be no assurances that such licenses can
be obtained or renewed on acceptable terms, or at all. Our inability to obtain or renew certain licenses or to obtain or renew such
licenses on favorable terms could have a material adverse effect on our business, operating results and financial condition. The
communications industry is characterized by the existence of rapidly changing technology, an increasingly large number of patents and
frequent claims and litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are important to us. There can be no assurance that our patent
rights will not be challenged, invalidated or circumvented. From time to time, we receive notices from, or are sued by, third parties
regarding patent claims. Any claims made against us regarding patents or other intellectual property rights could be expensive and time
consuming to resolve or defend, would divert the attention of our management and key personnel from our business operations and
may require us to modify or cease marketing our products, develop new technologies or products, acquire licenses to proprietary rights
that are the subject of the infringement claim or refund to our customers all or a portion of the amounts paid for infringing products. If
such claims are asserted, there can be no assurances that the dispute could be resolved without litigation or that we would prevail or be
able to acquire any necessary licenses on acceptable terms, or at all. In addition, we may be requested to defend and indemnify certain
of our customers, resellers and partners against claims that our products infringe the proprietary rights of others. We may also be
subject to potentially significant damages or injunctions against the sale of certain products or use of certain technologies. See "Legal
Proceedings" in Part I, Item 3, of this Annual Report.

14



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Environmental Matters

Our operations are subject to a wide range of environmental laws in various jurisdictions around the world. We seek to operate
our business in compliance with such laws. Tekelec is and will continue to be subject to various product content laws and product
takeback and recycling requirements that will require full compliance in the coming years. We expect that these laws will require us to
incur additional compliance costs. Although costs relating to environmental matters have not resulted in a material adverse effect on our
business, results of operations, financial condition and liquidity in the past, there can be no
assurance that we will not incur increased
environmental costs in the future, which may have a material adverse effect
on our business, results of operations, financial condition and liquidity.

Working Capital

For a discussion of our working capital practices, see section entitled "Application of Critical Accounting Policies and Use of
Estimates" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual
Report.

Employees

At December 31, 2006, we employed 1,409 regular full time employees. The classification of our employees by business
segment and corporate function as of that date is as follows:

|Network Signaling Group                 | 266  
|--------------------------------------- | -----
|Communications Software Solutions Group | 111  
|Switching Solutions Group               | 296  
|Sales, Marketing and Customer Support   | 433  
|Operations                              | 151  
|Management, Administration and Finance  | 152  
|Total                                   | 1,409

We also employ individuals on a regular part-time basis and on a temporary full-time basis, as well as utilize the
services of contractors as required. Many of our employees hold stock options, restricted stock units and/or stock appreciation rights
under our equity compensation plans. None of our employees are represented by a labor union, except for certain employees in
France, and we have not experienced any work stoppages.

We believe that our relations with our employees are good. Employee morale, job satisfaction and career development continue to
be important areas of our focus. We believe that it is increasingly important to our future success to recruit and retain skilled employees.
For more information on this subject, see the "Risk Factors" section of this Annual Report under the heading "Failure to recruit and
retain key personnel could harm our ability to meet key objectives and adversely affect our business and the price of our common
stock."

Available Information

We intend to make this Annual Report, as well as our quarterly reports on Form 10-Q, our current reports on Form 8-K and, if
applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, publicly available on our website (www.tekelec.com) without charge as soon as reasonably practicable
following our filing of such reports with the Securities and Exchange Commission ("SEC"). Our SEC reports can be accessed through
the investor relations section of our website. The information found on our website is not part of this or any other report we file with or
furnish to the SEC. We assume no obligation to update or revise any forward looking statements in this Annual Report or in other
reports filed with the SEC, whether as a result of new information, future events or otherwise, unless we are required to do so by law. A
copy of this Annual Report and our other reports is available without charge upon written request to James Chiafery, Director, Investor
Relations, Tekelec, 5200 Paramount Parkway, Morrisville, North Carolina 27560.

Further, a copy of this Annual Report is obtainable from the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The
SEC maintains an internet site that contains reports, proxy and information statements and our other filings at www.sec.gov.

Item 1A. Risk Factors.

As indicated above in this Annual Report under "Forward-Looking Statements," the statements that are not historical facts
contained in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform

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Act of 1995. These statements reflect the current belief, expectations, estimates, forecast or intent of our management and are subject to and
involve certain risks and uncertainties. Many of these risks and uncertainties are outside of our control and are difficult for us to forecast
or mitigate. In addition to the risks described elsewhere in this Annual Report and in certain of our other filings with the SEC, the
following risks and uncertainties, among others, could cause our actual results to differ materially from those contemplated by us or by
any forward-looking statement contained herein. Prospective and existing investors are strongly urged to carefully consider the various
cautionary statements and risks set forth in this Annual Report and our other public filings.

Our operating results have historically fluctuated and are expected to fluctuate in future periods, which may adversely affect
the market price of our common stock.

Our quarterly and annual operating results are difficult to predict and may fluctuate significantly. We have failed to achieve
our revenue and net income expectations for certain prior periods, and it is possible that we will fail to meet these expectations in the
future.

Our product revenues in any quarter depend in part on orders booked and shipped in that quarter. A significant portion of our
product shipments in each quarter occurs at or near the end of the quarter. Since individual orders can represent a meaningful
percentage of our revenues and net income in any quarter, the deferral, cancellation of or failure to ship an entire order in a quarter can
result in a revenue and net income shortfall that causes us to fail to meet securities analysts' expectations or our business plan for that
period. We base our current and future expense levels on our internal operating plans and revenue forecasts, and our operating costs in the short term
are fixed to a large extent. As a result, we may not be able to sufficiently reduce our costs in any quarter to adequately compensate for
an unexpected near-term shortfall in revenues, and even a small shortfall could disproportionately and adversely affect our operating
results for that quarter. In addition, a number of other factors, many of which are outside our control, can cause fluctuations in our
quarterly and annual operating results, including among others:

- fluctuations in demand for our products and services, especially by service providers, in part due to a changing global economic
environment;
- price and product competition in the telecommunications industry which can change rapidly due to technological innovation;
- the success or failure of our strategic alliances, acquisitions, or disposals of or exits from certain businesses;
- the ability to enforce our intellectual property rights and to defend claims that our offerings may infringe another company's
intellectual property;
- the introduction and market acceptance of our and our competitors' new products, services and technologies;
- the timing of the purchase and deployment by our customers of new technologies and services, including VoIP, SIGTRAN and SIP;
- changes in general economic conditions and specific market conditions in the telecommunications industry;
- the ability of telecommunications service providers to utilize excess capacity of signaling infrastructure and related products in their
networks;
- the progress and timing of the convergence of voice and data networks and other convergence-related risks described below;
- the trend toward industry consolidation among our customers and our competitors which may result in reduced demand and pricing
pressure on our products;
- the size, timing, terms and conditions of customer orders and shipments;
- sudden or unanticipated shortages of components provided by our vendors;
- the lengthy sales cycle of our products, especially with respect to our international customers, and the reduced visibility into our
customers' spending plans for those products and associated revenue;
- the capital and operating spending patterns of our customers, including deferrals or cancellations of purchases by customers;
- the ability of our customers to obtain financing or to otherwise fund capital expenditures;
- our ability to achieve targeted cost and expense reductions;
- our dependence on wireless telecommunications service providers for a significant percentage of our revenues;
- unanticipated delays or problems in developing or releasing new products or services;
- variations in sales channels, product costs, or mix of products sold;

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- the geographic mix of our revenues and the associated impact on our gross margins;
- the mix of our product sales across product lines (i.e., between our higher margin signaling products and lower margin switching
products), which can have significant impact on our gross margins;
- the expense and other potential negative impact of current and future litigation;
- actual events, circumstances, outcomes, and amounts differing from judgments, assumptions, and estimates used in determining
the values of certain assets, including the amounts of related valuation allowances, liabilities, and other items reflected in our
Consolidated Financial Statements;
- changes in accounting rules, such as recently adopted rules regarding stock-based compensation, which require the expensing of
employee equity-based awards, as well as recent income tax accounting pronouncements;
- our judgments regarding the recognition and deferral of revenues in accordance with GAAP, including as to whether an
arrangement includes multiple elements and if so, whether vendor specific objective evidence of fair value exists for those elements,
which judgments impact the amount and timing of product and service revenue recognized;
- our ability to fund and sustain our research and development activities and their impact on the development of new products;
- the expansion of our sales, marketing and support operations, both domestically and internationally;
- changes in our pricing policies and those of our competitors;
- our ability to successfully comply with increased and complex regulations affecting our business;
- further restructuring costs;
- failure of certain customers to successfully and timely reorganize their operations, including emerging from bankruptcy;
- worldwide economic or political instability; and
- foreign currency exchange rate fluctuations.

The factors described above are difficult to forecast and mitigate and could have a material adverse effect on our business,
operating results and financial condition. We may experience a shortfall in revenues or an increase in operating expenses in the future,
which would adversely affect our operating results. As a consequence, operating results for a particular period are difficult to predict,
and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing factors, or any
other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations, and financial
condition that could adversely affect our stock price.

Our operating results may be adversely affected by unfavorable economic and market conditions and the uncertain
geopolitical environment.

Economic conditions worldwide have contributed to slowdowns in the telecommunications industry and may impact our
business resulting in:

- reduced demand for our products and services as a result of continued constraints on capital expenditures by our customers;
- increased price competition for our products;
- risk of excess and obsolete inventories; and
- higher overhead costs as a percentage of our revenues.

Recent turmoil in the geopolitical environment in many parts of the world, including terrorist activities and military actions,
particularly the continuing tension in and around Iraq and the plans to nationalize privately owned telecommunications, oil and utility
companies in Venezuela, as well as changes in energy, natural resources and precious metal costs, may continue to adversely affect
global economic conditions. If the economic and market conditions in the United States or internationally deteriorate, we may
experience material adverse impacts on our business, operating results, and financial condition.

We expect our gross margins to vary over time and our recent level of gross margins may not be sustainable, which may
have a material adverse effect on our future profitability.

Our recent level of gross margins may not be sustainable and may continue to be adversely affected by numerous factors,
including:

- increased price competition, including competitors from Asia, especially China;
- increased industry consolidation among our customers, which may lead to decreased demand for and downward pricing pressure
on our products;

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- changes in customer, geographic, or product mix, including mix of configurations within each product group;
- an increase in sales of our SSG products (which typically carry lower margins than sales of our NSG products) as a percentage of
total revenues;
- our ability to reduce and control production costs;
- increases in material or labor costs;
- excess inventory and inventory holding costs;
- obsolescence charges;
- changes in shipment volume;
- reductions in cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts
ordering does not correctly anticipate product demand;
- changes in distribution channels;
- losses on customer contracts; and
- increased warranty costs.

Our Switching Solutions Group business unit has a history of operating losses and we may continue to incur losses and not
achieve profitability in this business unit in the future, which may negatively affect our operating results, financial condition and the price
of our common stock.

In 2006, we continued to experience significant operating losses in SSG. A comprehensive evaluation in 2006 of SSG's
operations showed that both revenues and orders for fiscal year 2007 were expected to fall short of our previous projections, and
resulted in material impairment charges in 2006 related to write-downs of acquired technology and of goodwill. As a result of this
assessment, we expanded the scope of the restructuring of SSG's operations initiated earlier in 2006 to reduce the cost structure of the
SSG business and to better align the cost structure with the business opportunities. There can be no assurance, however, that we will
realize all of the anticipated benefits of our restructuring activities. Please refer to the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" sections of this Annual Report for a
more detailed discussion of this matter.

We may continue to incur losses in SSG, which may have a material adverse effect on our operating results, our financial condition
and the market value of our common stock.

The markets in which we compete are intensely competitive, which could adversely affect our revenue and net income
growth.

For information regarding our competition and the risks arising out of the competitive environment in which we operate,
see the section entitled "Competition" contained in Item 1 of Part 1 of this Annual Report. Please also see the risk factor below entitled
"If our products do not satisfy customer demand for performance or price, our customers could purchase products from our
competitors."

Telecommunications industry consolidation may lead to increased competition and fewer customers and may harm our
operating results.

There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as
companies attempt to strengthen or hold their market positions in an evolving industry, and as companies are acquired or are unable to
continue or expand operations. We believe that industry consolidation may result in stronger competitors and fewer customers.
Consolidation among our customers may cause delays or reductions in capital expenditure plans and/or increased competitive pricing
pressures as the number of available customers declines and their relative purchasing power increases. Also, consolidation among our
customers may increase their leverage in contract negotiations which may require us to agree to terms that are less favorable to our
company than the terms of our prior agreements. This could have a material adverse effect on our gross margins, operating results, and
financial condition.

We have limited product offerings, and our revenues may suffer if demand for any of our products declines or fails to
develop as we expect or if we are not able to develop and market additional and enhanced products.

We derive a substantial portion of our revenues from sales of NSG products. In each of 2006, 2005, and 2004, our NSG
products and services generated over 50% of our revenues, and we expect that these products and services will continue to account for
a majority of our revenues for the foreseeable future. As a result, factors adversely affecting the pricing of or demand for these
products, such as competition, technological change or a slower than anticipated rate of development or deployment of new products,
features and technologies, could cause a significant decrease in our revenues and profitability. Continued and widespread market
acceptance of these products is therefore critical to our future success. Moreover, our future financial performance will depend in
significant part on the successful and timely development, introduction and customer

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acceptance of new and enhanced versions of our
EAGLE 5 ISS product line as well as our other products. Introducing new and enhanced products such as these requires a significant
commitment to research and development that may entail substantial risk and may not result in success. There are no assurances that
we will be successful in developing and marketing additional products and related services.

If wireless service providers do not continue to grow and to buy our NSG products and services, our network signaling
related business would be harmed.

The success of our NSG business unit will depend in large part on the continued growth of wireless network operators and
their purchases of our products and services. We derive a substantial portion of our revenues from the sale of our NSG products and
services to wireless network operators. In each of 2006, 2005, and 2004, our sales to the wireless market accounted for more than 50%
of NSG revenues. We expect that our sales of NSG products and services to wireless service providers will continue to account for a
majority of NSG revenues for the foreseeable future. The continued growth of the domestic and international wireless markets is subject
to a number of risks that could adversely affect our revenues and profitability, including:

- a downturn in the domestic or global economy;
- a slowdown in capital spending by wireless network operators;
- adverse changes in the debt and equity markets and in the ability of wireless service providers to obtain financing on favorable
terms;
- delays in or scaling back of plans for the deployment by wireless network operators of new wireless broadband technologies and
applications;
- slowing growth of wireless network subscribers, minutes of use or adoption of new services; and
- increased competition.

Consequently, there can be no assurances that wireless service providers will continue to purchase our Network Signaling products
or services for the build-out or expansion of their networks. A decrease in such purchases could have a material adverse impact on our
revenues and net income.

If the convergence of voice and data networks does not fully occur, or takes longer than anticipated, sales of our products
and our profitability may decrease.

The market for our products is evolving. Currently, voice communications are carried primarily over circuit switched
networks. Another type of network, packet switched networks, carries primarily data. Circuit and packet networks use fundamentally
different technologies. Although we expect a substantial portion of our future revenues to result from the continuing interconnection, or
convergence, of circuit and packet networks, we cannot accurately predict when such convergence will occur or whether it will fully
occur. Therefore, this convergence presents several significant and related risks to our business.

If the convergence of circuit and packet networks does not fully occur or takes longer than anticipated, sales of our products, and
our profitability, would be adversely affected. Any factor that might prevent or slow the convergence of circuit and packet networks
could materially and adversely affect growth opportunities for our business. Such factors include:

- the failure to solve or difficulty in solving certain technical obstacles to the transmission of voice communications over a packet
network;
- delays in the formulation of standards for the transmission of voice communications over a packet network; and
- the imposition of access fees on packet network operators, which are not currently charged.

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

We cannot accurately predict when these technical problems will be solved, when uniform standards will be agreed upon or when
market acceptance of such products and services will occur. Convergence may, however, take much longer than we expect or, as
noted above, not fully occur at all. Moreover, uncertainty regarding the technology or standards (e.g. the IP Multimedia Subsystem
architecture, or IMS) to be employed in converged networks may cause service providers to abandon or

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delay their purchasing plans.

Finally, the imposition of access fees on packet networks might slow the convergence of circuit and packet networks. In the future,
access fees may be imposed on service providers using packet networks to transmit voice calls. These access fees might also be
imposed on the termination of "pure" data messages by operators of packet networks. The imposition of these access fees would
reduce the economic advantages of using packet networks for voice and other transmissions, which may slow the convergence of
circuit and packet networks.

We may not realize the anticipated benefits of past or future acquisitions, which could materially and adversely affect our
operations, financial position and market value of our common stock, and the integration of acquisitions may disrupt our business and
management.

Our growth is dependent on a number of factors, including market growth, our ability to enhance existing products, our
ability to introduce new products on a timely basis and market acceptance of our existing and new products. Our strategy includes
acquiring new products and technologies through acquisitions, strategic alliances and joint ventures, and may also include divesting all
or a portion of our interests in some business units.

We have in the past and may in the future grow through the acquisition of companies, products or technologies. During the last four
years, we have engaged in a number of acquisitions, including our acquisitions of Santera, Taqua, Steleus, VocalData and iptelorg.
Acquisitions are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful or will not
materially and adversely affect our business, operating results or financial condition. We may not realize the expected benefits of an
acquisition. In addition, acquisitions may also lead to potential write-downs, restructuring, or other one-time charges due to unforeseen
business developments and other factors, and these charges may adversely affect our operating results, financial condition and the
market value of our common stock.

For example, at the time of our acquisition of Taqua, we, along with several of our competitors, expected the market for small
switch service providers to grow rapidly in the coming years. We acquired Taqua in 2004 in order to expand our next-generation
switching product line to address this market. This market to date has failed to meet the growth projections estimated by us and, as a
result, this product line has consistently underperformed against our expectations. As a result of a significant shortfall in orders for these
products compared with our expectations, in the fourth quarter of 2005, we reassessed our forecast of Taqua's future revenues and
cash flows and concluded that an impairment existed. Therefore, we wrote off approximately $49.9 million of impaired purchased
technology and goodwill that was originally recorded in connection with our acquisition of Taqua in 2004.

In addition, during the third quarter of 2006, it became apparent that future revenues, cash flows and expected orders related to the
other SSG reporting unit, consisting of our Santera and VocalData product lines, would underperform our previous expectations. As a
result, we lowered our forecasts of this reporting unit's revenues and cash flows and concluded that an impairment existed. Therefore,
we wrote off a total of approximately $100.6 million of impaired purchased technology and goodwill that was originally recorded in
connection with our initial investment in Santera in 2003, our acquisition of the remaining minority interest in Santera in 2005, and our
acquisition of VocalData in 2004.

If we make any further acquisitions, we may issue stock that would dilute our existing shareholders' percentage ownership or our
earnings per share, incur substantial debt or assume contingent or unknown liabilities. We have only limited experience in acquiring and
integrating other businesses and technologies. Acquisitions involve numerous risks, including the following:

- the industry may develop in a different direction than we anticipated, and the technologies we acquire may not prove to be those
we need or the business model of acquired companies may become obsolete;
- the future valuations of acquired businesses may decrease from the market price we paid for these acquisitions;
- problems or delays in integrating or assimilating the acquired operations, technologies or products;
- difficulty in maintaining controls, procedures and policies during the transition and integration;
- unanticipated costs associated with the acquisition;
- disruption of our ongoing business and distraction of our management and employees due to integration issues;
- inability to retain key customers, distributors, vendors and other business partners of the acquired business;
- inability to achieve the financial and strategic goals for the acquired and combined businesses;
- acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
- our relationships with existing customers, partners or third-party providers of technology or products could be impaired;
- the due diligence processes may fail to identify significant issues with product quality, architecture and development, or legal and
financial contingencies, among other things;
- we may incur significant exit or restructuring charges if the products acquired in business combinations do not meet our sales
expectations or are unsuccessful;

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- risks associated with entering new markets in which we have no or limited prior experience; and
- potential loss of the acquired organization's or our own key employees.

Ultimately, if we do not successfully complete the integration of acquired businesses in a timely manner, or at all, we may not
realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial
condition or results of operations. We cannot assure that we will be successful in overcoming problems in connection with our past or
future acquisitions, and our inability to do so could significantly harm our assets acquired in such acquisitions,
revenues and results of
operations. In addition, if we attempt to divest some of our business units, we may not successfully complete this activity or we may not
realize the benefits of any divesting activities which could adversely affect our business, financial condition and results of
operations.

We may undertake further restructurings which may adversely impact our operations, and we may not realize all of the
anticipated benefits of our prior or any future restructurings.

We continue to restructure and transform our business to realign resources and achieve desired cost savings in an
increasingly competitive market. During 2004, 2005, and 2006, we undertook a series of restructurings of our operations involving,
among other things, the reduction of our workforce, the relocation of our corporate headquarters, and the consolidation of certain of our
manufacturing facilities (the "Restructurings"), as described more fully in Note 4 to the accompanying Consolidated Financial
Statements. As part of the Restructurings, we ceased to use certain of our leased facilities. If we consolidate additional facilities in the
future, we may incur additional restructuring and related expenses, which could have a material adverse effect on our business,
financial condition or results of operations.

We have based our restructuring efforts on certain assumptions regarding the cost structure of our businesses and our
assumptions may or may not be correct and we may also determine that further restructuring will be needed in the future. We therefore
cannot assure you that we will realize all of the anticipated benefits of the Restructurings or that we will not further reduce or otherwise
adjust our workforce or exit, or dispose of, certain businesses. Any decision by management to further limit investment or to exit, or
dispose of, businesses may result in the recording of additional restructuring charges. As a result, the costs actually incurred in
connection with the restructuring efforts may be higher than originally planned and may not lead to the anticipated cost savings and/or
improved results.

In addition, employees, whether or not directly affected by restructurings, may seek future employment with our business partners,
customers or competitors. We cannot assure you that the confidential nature of our proprietary information will not be compromised by
any such employees who terminate their employment with us. Further, we believe that our future success will depend in large part upon
our ability to attract, incent and retain highly skilled personnel. We may have difficulty attracting and retaining such personnel as a result
of a perceived risk of future workforce reductions.

If we do not successfully manage the size of our operations, our profitability may be negatively impacted, and we may incur
future restructuring charges which may adversely impact our operations.

If we fail to manage the size of our operations effectively, our business, financial condition and operating results could be
materially and adversely affected. From 2003 to 2005, our business grew rapidly as a result of strategic acquisitions and other factors.
This growth in our business placed a significant strain on our management systems and resources. In connection with integrating these
acquisitions into our operations, we identified certain cost synergies, primarily facility consolidations and headcount reductions, in order
to positively affect future operating income. As a result of these decisions, management completed a series of Restructurings, as
described more fully in Note 4 "Restructuring and Other Costs" to the accompanying Consolidated Financial Statements. Restructurings
have particular risks, many of which are discussed above under the risk factor entitled "We may incur future restructuring charges,
which may adversely impact our operations." In addition, as our operations continue to grow, we may need to implement new systems
or upgrade current systems. The failure to successfully implement such new or improved systems could materially and adversely affect
our business, financial condition and operating results.

The majority of our operating expenses are personnel-related costs such as employee compensation and benefits, along with the
cost of the infrastructure (facility space and equipment) to support our operations and employee base. The failure to adjust our
employee base to the appropriate level to support our revenues could materially and adversely affect our business, operating results
and financial condition. In addition, expanding the distribution of our products may place new and increased demands on our direct
sales force, professional services staff, and technical and sales support staff. Although we currently believe that we invest sufficient
resources in our direct sales force, professional services staff, and our technical and sales support staff, there are only a limited number
of qualified personnel in these areas. Our ability to achieve expanded distribution and revenue growth in the future will depend, in part,
on our success in recruiting and training sufficient direct sales, professional services, and technical and sales support personnel. If we
are not able to expand our direct sales force,

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professional services staff, and technical and sales support staff as may be necessary to
support our operations, our business and operations could be harmed.

Commencing in 2006, we recognized expense for stock-based compensation, and there is no assurance that the expense
measures accurately the value of the stock-based compensation awards, and, as a result, the recognition of this expense could
adversely affect our earnings and the price of our common stock.

Effective January 1, 2006, we adopted the provisions of, and account for stock-based compensation in accordance
with, Statement of Financial Accounting Standards No. 123 - revised 2004 "Share-Based Payment" ("SFAS 123R"). As a result,
our operating results for periods subsequent to December 31, 2005 contain charges for stock-based compensation expense related to
employee equity-based incentives and employee stock purchases under our equity incentive plans.

The application of SFAS 123R requires the use of an option-pricing model to determine the fair value of stock-based compensation
awards. The fair value calculation is affected by our stock price as well as assumptions regarding a number of highly complex and
subjective variables, including, but not limited to, expected stock price volatility over the term of the awards and projected employee
stock option exercise behaviors. Stock option valuation models were developed to assist with estimating the fair value of traded options
that have no vesting or transfer restrictions. Because our employee stock options have certain characteristics that are different from
traded options, and because changes in the assumptions used can materially affect the estimated value of the awards, the existing
valuation models may not provide an accurate measure of the fair value of our stock-based compensation. Although the fair value of
our stock-based compensation expense was determined in accordance with SFAS 123R, it may not represent an accurate measure of
the fair value of the awards granted for the purposes of determining our net income and results of operations.

Prior to the adoption of SFAS 123R, we accounted for our stock-based compensation using the
intrinsic value method prescribed by APB No. 25 " Accounting for Stock Issued to Employees" and related Interpretations and provided
the pro forma disclosures required by SFAS 123. Applying the intrinsic value method generally resulted in no compensation expense
being recognized related to our employee stock option grants in periods prior to our adoption of SFAS 123R. The adoption of SFAS
123R has had a material impact on our consolidated financial position and results of operations and will continue to have a material
impact in future periods as a result of our continuing recognition of expense for stock-based compensation. We cannot predict the effect
that this impact on our earnings will have on the price of our common stock, but such impact could be adverse.

If our products do not satisfy customer demand for performance or price, our customers could purchase products from our
competitors.

The telecommunications equipment industry in which we operate is highly competitive, and we expect that the level of
competition on pricing and product offerings will continue to be intense. If we are not able to compete successfully against our current
and future competitors, our current and potential customers may choose to purchase similar products offered by our competitors, which
would negatively affect our revenues. We face formidable competition from a number of companies offering a variety of network
signaling, next-generation switching and monitoring products. The markets for our products are subject to rapid technological changes,
evolving industry standards and regulatory developments, and our operating results depend to a significant extent on our ability to
adapt to these changes. Our competitors include many large domestic and international companies as well as many smaller
established and emerging technology companies. We compete principally on the basis of:

- product performance and functionality;
- product quality and reliability;
- customer service and support; and
- price.

Many of our competitors have substantially broader product portfolios and greater financial and technological resources, product
development, marketing, distribution and support capabilities, name recognition, established relationships with telecommunications
service providers, and other resources than we have. In addition, new competitors may enter our markets as a result of shifts in
technology, and these competitors may include entrants from the telecommunications, computer software, computer services, data
networking and semiconductor industries. The industries in which we operate are also undergoing consolidation which may result in
stronger competitors and a change in our relative market position.

We anticipate that competition will continue to intensify with the ongoing convergence of voice and data networks. We may not be
able to compete effectively against existing or future competitors or to maintain or capture meaningful market share, and our business
could be harmed if our competitors' products and services provide higher performance, offer additional features and functionality or are
more reliable or less expensive than our products. Increased competition could force us to

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lower our prices or take other actions to
differentiate our products, which could adversely affect our operating results.

Less than 10% of our customers account for a majority of our revenues, and the loss of one or more of these customers and
our failure to attract additional customers could adversely affect our operating results.

In 2006, 12 of our customers accounted for over 50% of our revenues. We anticipate that our operating results in any
given period will continue to depend to a significant extent upon revenues from a small number of customers. In 2006 and 2005,
Cingular, including AT&T prior to the merger of Cingular and AT&T Wireless, represented approximately 10% and 18%,
respectively, of our annual revenues. In 2005, Alcatel represented approximately 19% of our revenues. Reductions, delays or
cancellations of orders from one or more of our significant customers or the loss of one or more of our significant customers in any
period could have a material adverse effect on our operating results. In addition, the telecommunications industry has recently
experienced a consolidation of both U.S. and non-U.S. companies. This consolidation leads to fewer customers which means
that the loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of more
numerous participants. In order to increase our revenues, we will need to attract additional significant customers on an ongoing basis.
Our failure to attract a sufficient number of such customers during a particular period, or our inability to replace a
significant customer lost in a consolidation or merger,
could adversely affect our revenues, profitability and cash flow.

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions
that may have an adverse effect on our business.

Large telecommunications providers have substantial purchasing power and leverage in negotiating contractual
arrangements with us. These customers may require us to develop additional features and may impose penalties on us for failure to
deliver such features on a timely basis, or failure to meet performance standards. As we seek to sell more products to large service
providers, we may be required to agree to such terms and conditions, which may affect the timing of revenue recognition and amount of
deferred revenues and may adversely affect our profitability and financial condition in the applicable periods affected.

If we fail to develop or introduce new products in a timely fashion, our business will suffer.

If we fail to develop or introduce on a timely basis new products or product enhancements or features that achieve market
acceptance, our business will suffer. Rapidly changing technology, frequent new product introductions and enhancements, short
product life cycles, changes in customer requirements and evolving industry standards characterize the markets for our products. Our
success will depend to a significant extent upon our ability to accurately anticipate the evolution of new products, technologies and
market trends and to enhance our existing products. It will also depend on our ability to timely develop and introduce innovative new
products and enhancements that gain market acceptance. Finally, sales of our products depend in part on the continuing development
and deployment of emerging technology and network architecture standards (including IMS) and our ability to offer new products and
services that comply with these standards. We may not be successful in forecasting future customer requirements or in selecting,
developing, manufacturing and marketing new products or enhancing our existing products on a timely or cost-effective basis.
Moreover, we may encounter technical problems in connection with our product development that could result in the delayed
introduction of or inability to introduce new products or product enhancements and the cancellation of customer orders or delays in
fulfilling customer orders. Such cancellations or delays could result in the imposition of penalties or other liabilities on us, a decrease in
sales and/or a loss of customers. Our products may also experience technical difficulties when deployed by our customers in their
networks which may subject us to penalties and damages. We may also focus on technologies that do not function as expected or are
not widely adopted. In addition, products or technologies developed by others may render our products noncompetitive or obsolete and
result in a significant reduction in orders from our customers and the loss of existing and prospective customers.

We outsource substantial portions of our research and development activities to a third party vendor, and a loss of or
deterioration in this relationship could adversely affect our revenues and profitability.

Significant portions of our research and development work are carried out by one third party vendor operating in India. The
loss of or deterioration in the relationship with this vendor for any reason could result in a delay or failure to complete research and
development projects, which could adversely affect our ability to introduce new products or product enhancements and negatively affect
our revenues and profitability.

Our products are complex and may have errors that are not detected until deployment, and litigation related to warranty and
product liability claims could be expensive and could negatively affect our reputation and profitability.

We may be exposed to warranty, breach of contract, product liability, fraud and other claims if our products fail to perform
as expected or if the use of our products results in property damage or bodily injury. Our highly complex products may contain

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undetected defects or errors when first introduced or as new versions are released, and those defects or errors may not be detected
until deployment or long after a product has been deployed. Such defects or errors, particularly those that result in service interruptions
or a failure of telecommunications networks, could harm our customer relationships, business and reputation, and/or result in material
warranty or product liability losses. There can be no assurances that our products will not have defects or errors. A warranty or product
liability claim brought against us could result in costly, protracted, highly disruptive and time consuming litigation, which would harm our
business. In addition, we may be subject to claims arising from our failure to properly service or maintain our products or to adequately
remedy defects in our products once such defects
have been detected. Although our agreements with our customers typically contain
provisions designed to limit our exposure to potential warranty and product liability claims, it is possible that these limitations may not be
effective under the laws of some jurisdictions, particularly since we have significant international sales. Although we maintain product
liability insurance and a warranty reserve, they may not be sufficient to cover all claims to which we may be subject. The successful
assertion against us of one or more large uninsured claims would harm our business reputation, our profitability and our financial
condition.

Our relationships with strategic partners and distributors and other resellers are important to our future growth, and any
inability to sustain these relationships or business failures by such third parties could harm our business.

We believe that our ability to compete successfully depends in part on distribution and marketing relationships with leading
telecommunications equipment suppliers. If we cannot successfully enter into these types of relationships on terms favorable to us or
maintain these relationships, our business may suffer.

In addition, we expect to increasingly rely on the deployment of our products with those of other manufacturers, systems integrators
and resellers, both domestically and internationally. To the extent our products are so incorporated, we depend on the timely and
successful development and market acceptance of those other products.

Our business is subject to changing regulation of corporate governance and public disclosure that has resulted in increased
costs and may continue to result in additional costs in the future.

We are subject to rules and regulations of federal and state regulatory authorities, The Nasdaq Stock Market and financial
market entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. During the
past few years, these entities, including the Public Company Accounting Oversight Board, the SEC and Nasdaq, have issued new
requirements and regulations and continue to develop additional regulations and requirements partly in response to laws enacted by
Congress, most notably the Sarbanes-Oxley Act of 2002 ("SOX"). Our efforts to comply with these requirements and regulations have
resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of substantial
management time and attention from revenue-generating activities to compliance activities.

In particular, our efforts to comply with Section 404 of SOX and the related regulations regarding our required assessment of our
internal control over financial reporting and our external auditors' audit of our assessment and the internal control over financial
reporting, has required, and continues to require, the commitment of significant financial and managerial resources. Moreover, because
these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new
guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs
necessitated by ongoing revisions to our disclosure and governance practices.

Uncertainties associated with and implications of the changing regulatory landscape in the telecommunications industry may
adversely affect our business, operating results and financial condition. Our compliance with telecommunications regulations and
standards, as well as ensuring the interoperability of our products with our customers' networks, may be time consuming, difficult and
costly, and if we fail to comply, our product sales would decrease.

In order to maintain market acceptance, our products must continue to meet a significant number of regulations and
standards. In the United States, our products must comply with various regulations defined by the Federal Communications
Commission (the "FCC") and Underwriters Laboratories, as well as standards established by Telcordia (formerly Bell
Telecommunications Research). Internationally, our products must comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the International Telecommunications Union. As these standards
evolve and if new standards are implemented, we will be required to modify our products or develop and support new versions of our
products, and this may negatively affect the sales of our products and increase our costs. The failure of our products to comply, or
delays in compliance, with the various existing and evolving industry standards could prevent or delay introduction of our products,
which could harm our business.

Government regulatory policies are likely to continue to have a major impact on the pricing of existing as well as new public network
services and, therefore, are expected to affect demand for such services and the communications products,

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including our products,
which support such services. Tariff rates, the rates charged by service providers to their customers, whether determined autonomously
by service providers or in response to regulatory directives, may affect cost effectiveness of deploying public network services. Tariff
policies are under continuous review and are subject to change. Future changes in tariffs by regulatory agencies or application of tariff
requirements to additional services could adversely affect the sales of our products for certain classes of customers.

There may be future changes in U.S. telecommunications regulations that could slow the expansion of the service
providers' network infrastructures and materially adversely affect our business, operating results, and financial condition. User uncertainty
regarding future policies may also affect demand for communications products, including our products. In addition, the convergence of
circuit and packet networks could be subject to governmental regulation. Regulatory initiatives in this area could adversely affect our
business.

In addition, in order to penetrate new target markets, it is important that we ensure the interoperability of our products with the
operations, administration, maintenance and provisioning systems used by our customers. Our failure or delay in achieving such
interoperability could adversely affect our ability to sell products to some segments of the communications market.

We have significant international sales, and international markets have inherent risks, which could adversely affect our
business.

Doing business overseas is generally more costly than doing business in the United States. International opportunities may
require significant investments for an extended period before returns on such investments, if any, are realized, and such investments
may result in expenses growing at a faster rate than revenues. Telecommunications networks outside of the United States generally
have a different structure than do networks inside the United States, and our products may not be completely compatible with this
different structure. As a result, our products may not be competitive with those of our competitors in those markets. In addition, access
to foreign markets is often difficult due to the established relationships between a government-owned or controlled communications
operating company and its traditional suppliers of communications equipment. These foreign communications networks are in many
cases owned or strictly regulated by government. There can be no assurances that we will be able to successfully penetrate these
markets, particularly for our switching products.

Internationally, we sell our products through our direct sales force, sales agents and distribution relationships. We also sell direct
through our wholly owned subsidiaries in Argentina, Brazil, Canada, Colombia, the Czech Republic, France, Germany, India, Italy,
Malaysia, Mexico, Singapore, South Africa, Spain, Taiwan and the United Kingdom and our sales offices in China, Dubai and the Russian
Federation. Total international revenues for 2006, 2005 and 2004 were $241.5 million, $134.0 million, and $87.1 million,
respectively, representing 44%, 28% and 27% of our total revenues, respectively. We expect that international sales will continue to
account for a significant portion of our revenues in future periods.

International sales are subject to inherent risks, including:

- unexpected changes in local regulatory requirements, tariffs and duties;
- changes in a country's political or economic conditions including military conflicts or political or social unrest;
- difficulties in staffing and managing foreign operations and distributors;
- longer accounts receivable cycles and difficulty in accounts receivable collection;
- differing technology standards and customer requirements;
- greater, trade regulations, nationalization of business, economic instability;
- potentially adverse tax consequences;
- import regulations and price controls imposed by local governments;
- restrictions on foreign currencies and trade barriers imposed by foreign countries;
- possible terrorist attacks against American interests; and
- exchange rate fluctuations and exchange controls.

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

We intend to continue pursuing international and emerging market growth opportunities. An inability to maintain or to continue to
expand our business in international and emerging markets, including Europe, Asia Pacific and Latin America, could have a material
adverse effect on our business, results of operations and financial condition. In particular, we currently have limited operations in Asia
Pacific and Latin America, and we may have difficulty establishing relationships, building

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name recognition or penetrating these markets, which could adversely affect our performance in these markets.

Failure to recruit and retain key personnel could harm our ability to meet key objectives and adversely affect our business
and the price of our common stock.

We depend to a significant extent upon the continuing services and contributions of our senior management team and
other key employees. We generally do not have long-term employment agreements or other arrangements with our employees that
would prevent them from leaving Tekelec. Our success also has depended in large part on our ability to attract and retain highly skilled
technical, managerial, sales, and marketing personnel. Competition for these personnel is intense. The loss of services of any of our
key personnel, or inability to attract, assimilate and retain qualified personnel in the future, or delays in hiring required personnel,
particularly engineering and sales personnel, could make it difficult to meet our key objectives, such as timely and effective product
introductions, and could have a negative impact on the price of our common stock. There can be no assurance that we will continue to
be successful in attracting and retaining highly qualified employees in the future and any inability to do so could have a material
adverse effect on our business.

In recent years, we have had all but one member of our senior management depart from our company. We have replaced or are
seeking to replace these individuals with either internal candidates or individuals from outside our organization. While our internal
candidates understand our business model, they must learn a new position and take on additional or new responsibilities, which could
take time and disrupt our on-going operations. To integrate into our company, new senior personnel must spend a significant amount of
time learning our business model and management systems, in addition to performing their regular duties. Accordingly, until new senior
personnel become familiar with our business model and systems, their integration may result in some disruption to our on-going
operations. We may need to hire additional personnel to fill newly created positions or to replace internal candidates who have been
promoted and, as a result, we may experience increased compensation costs that are not offset by either improved productivity or
higher revenues. We may also incur significant severance costs in the event that additional members of our senior management or
other key employees leave Tekelec in the future.

Adverse resolution of litigation may harm our operating results and financial condition.

We are a party to lawsuits from time to time in the normal course of our business, including lawsuits involving allegations of product
liability, product defects, quality problems, breach of contract, and intellectual property infringement. Litigation can be expensive,
lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An
unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, reputation, operating results, or
financial condition. We maintain liability insurance for certain legal risks and also accrue for litigation risks when it is probable that an
obligation has been incurred and the amount can be reasonably estimated. We may, however, incur losses relating to litigation beyond
the limits, or outside the coverage, of our insurance, and our provisions for litigation related losses may not be sufficient to cover our
ultimate losses or expenditures. Losses in litigation may therefore have a material adverse effect on our operating results and financial
condition. For additional information regarding certain of the lawsuits in which we are involved, see Item 3, "Legal Proceedings,"
contained in Part I of this Annual Report. In particular, an unfavorable resolution of the litigation commenced against us by Bouygues
Telecom, S.A., as described in Item 3 of this Part I, could have a material adverse effect on our business, operating results and
financial condition.

An unfavorable government review of our federal income tax returns or changes in our effective tax rates could adversely
affect our operating results.

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have
lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our
deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. For example,
our future effective tax rates may be adversely impacted as a result of our adoption of SFAS 123R because no tax benefit is recorded
for stock-based compensation expense related to incentive stock options or ISOs, except where shares acquired through the exercise
of an ISO are disposed of prior to meeting the statutory holding period requirements under the Internal Revenue Code.

In addition, we are subject to the periodic examination of our income tax returns by the IRS and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income
taxes. The outcomes from these examinations may have an adverse effect on our operating results and financial condition. Our U.S.
Federal income tax returns for 2002 and 2004 have been selected for audit by the Internal Revenue Service. While we believe that we
have made adequate provisions related to the audits of these tax returns, the final determination of our obligations may exceed the
amounts provided for by us in the accompanying Consolidated Financial Statements. Specifically, we may receive assessments related
to the audits and/or reviews of our U.S. income tax returns that

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exceed amounts provided for by us. In the event we are unsuccessful in
reducing the amount of such assessments, our business, financial condition or results of operations could be adversely affected.
Further, if additional taxes and/or penalties are assessed as a result of these audits, there could be a material effect on our income tax
provision, operating expenses and net income in the period or periods for which that determination is made.

In July 2006, the FASB issued FASB Interpretation No. 48,"Accounting for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income taxes
recognized in an
enterprise's financial statements. We will adopt FIN 48 in the first quarter of 2007. We are currently evaluating the impact on our
financial statements of adopting FIN 48, which could result in a charge to earnings, increases in future effective tax rates, and/or
increases in future interperiod effective tax rate volatility, all of which could have a material adverse affect on our net income.

Failure or circumvention of our controls and procedures could seriously harm our business.

During 2006, we made significant changes in our internal controls over financial reporting and our disclosure controls and
procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only
reasonable, and not absolute, assurances that the objectives of the internal controls are met. The failure or circumvention of our
controls, policies and procedures could have a material adverse effect on our business, results of operations and financial position.

Problems such as computer viruses or terrorism may disrupt our operations and harm our operating results.

Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and
similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on
our business, operating results, and financial condition. In addition, the continued threat of terrorism and heightened security and
military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the economies of the U.S. and
other countries and create further uncertainties or otherwise materially harm our business, operating results, and financial condition.
Similarly, events such as widespread blackouts could have similar negative impacts. To the extent that such disruptions or uncertainties
result in delays or cancellations of customer orders or in the manufacture or shipment of our products, our business, operating results
and financial condition could be materially and adversely affected.

We are exposed to fluctuations in the market values of our portfolio investments and in interest rates and, therefore,
impairment of our investments could harm our earnings.

We maintain an investment portfolio of various holdings, types and maturities. These securities are generally classified as
available-for-sale and, consequently, are recorded on the consolidated balance sheets at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income (loss), net of tax. Part of this portfolio includes equity
investments in publicly traded companies, the values of which are subject to market price volatility. If there is an economic slowdown
which adversely affects the public equities market, we may recognize in earnings the decline in fair value of our publicly traded equity
investments below the cost basis when the decline is judged to be other-than-temporary. For information regarding the sensitivity of and
risks associated with the market value of portfolio investments and interest rates, see Item 7A. "Quantitative and Qualitative Disclosures
About Market Risk" contained in Part II of this Annual Report. Part of this portfolio also includes an equity investment in a privately-held
company that is subject to risk of loss of investment capital. This investment is inherently risky because the markets for the
technologies or products it offers are typically in the early stages and may never fully materialize. We may not be able to recover our
$7.3 million investment in this company.

There can be no assurances that our measures to protect our proprietary technology and other intellectual property rights
are adequate, and if we fail to protect those rights, our business would be harmed.

Our success depends to a significant degree on our proprietary technology and other intellectual property. Although we
regard our technology as proprietary, we have sought only limited patent protection. We rely on a combination of patents, copyrights,
trademarks, trade secrets, confidentiality agreements and contractual restrictions to establish and protect our proprietary rights. These
measures, however, afford only limited protection and may not provide us with any competitive advantage or effectively prevent third
parties from misappropriating our technology or other intellectual property. In addition, the laws of certain foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United States, which makes misappropriation of our technology
and other intellectual property more likely. It is possible that others will independently develop similar products or design around our
patents and other proprietary rights. If we fail to successfully enforce or defend our intellectual property rights or if we fail to detect
misappropriation of our proprietary rights, our ability to effectively compete could be seriously impaired which would limit our future
revenues and harm our prospects.

Our pending patent and trademark registration applications may not be approved, and our competitors and others

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may challenge the validity or scope of our patent or trademark registration applications. If we do not receive the patents or trademark registrations we
seek, or if other problems arise with our intellectual property, our competitiveness could be significantly impaired and our business,
operations and prospects may suffer. In addition, from time to time we face challenges to the validity or enforceability of our proprietary
rights and litigation may be necessary to enforce and protect our rights, to determine the validity and scope of our proprietary rights and
the rights of others, or to defend against claims of infringement or invalidity. Any such litigation would be expensive and time
consuming, would divert the attention of our management and key personnel from business operations and would likely harm our
business and operating results.

Because we are subject to third parties' claims that we are infringing their intellectual property and may become subject
to additional such claims in the future, we may be prevented from selling certain products and we may incur significant expenses in
resolving these claims.

We receive from time to time claims of infringement from third parties or we may otherwise become aware of relevant
patents or other intellectual property rights of third parties that may lead to disputes and litigation. Any claims made against us
regarding patents or other intellectual property rights could be expensive and time consuming to resolve or defend and could have a
material adverse effect on our business. In addition, any such claims would divert the attention of our management and key personnel
from our business operations. A claim by a third party may require us to modify or cease marketing our products, develop new
technologies or products, enter into costly royalty or license agreements with respect to the proprietary rights that are the subject of the
infringement claim or refund to our customers all or a portion of the amounts they have paid for infringing products. If such claims are
asserted, there can be no assurances that we would prevail, successfully modify our products or be able to acquire any necessary
licenses on acceptable terms, or at all. In addition, we may be requested to defend and indemnify certain of our customers and resellers
against claims that our products infringe the proprietary rights of others. In the event of the unfavorable outcome of such claim we may
be required to pay significant damages or be subject to injunctions against the sale of certain products or use of certain technologies,
and there can be no assurances that any such claims or litigation can be avoided or successfully resolved. There can be no assurances
that our technologies or products do not infringe on the proprietary rights of third parties or that such parties will not initiate or prevail in
infringement actions against us.

If we fail to accurately forecast our manufacturing requirements or customer demand or fail to effectively manage our
contract manufacturer relationships, we could incur additional costs or be unable to timely fulfill our customer commitments, which in
either case would adversely affect our business and results of operations and, in the event of an inability to fulfill commitments, would
harm our customer relationships.

We outsource a substantial portion of our manufacturing and repair service operations to independent contract
manufacturers and other third parties. Our contract manufacturers typically manufacture our products based on rolling forecasts of our
product needs that we provide to them on a regular basis. The contract manufacturers are responsible for procuring components
necessary to build our products based on our rolling forecasts, building and assembling the products, testing the products in
accordance with our specifications and then shipping the products to us. We configure the products to our customer requirements,
conduct final testing and then ship the products to our customers. Although we currently partner with multiple major contract
manufacturers, there can be no assurance that we will not encounter problems as we become increasingly dependent on contract
manufacturers to provide these manufacturing services or that we will be able to replace a contract manufacturer that is not able to
meet our demand.

If we fail to accurately predict our manufacturing requirements or forecast customer demand, we may incur additional costs of
manufacturing and our gross margins and financial results could be adversely affected. If we overestimate our requirements, our
contract manufacturers may experience an oversupply of components and assess us charges for excess or obsolete components that
could adversely affect our gross margins. If we underestimate our requirements, our contract manufacturers may have inadequate
inventory or components, which could interrupt manufacturing and result in higher manufacturing costs, shipment delays, damage
customer relationships and/or our payment of penalties to our customers. Our contract manufacturers may also have other customers
and may not have sufficient capacity to meet all of their customers' needs, including ours, during periods of excess demand.

In addition, if we fail to effectively manage our relationships with our contract manufacturers or other service providers, or if one or
more of them should not fully comply with their contractual obligations or should experience delays, disruptions, component
procurement problems or quality control problems, then our ability to ship products to our customers or otherwise fulfill our contractual
obligations to our customers could be delayed or impaired which would adversely affect our business, financial results and customer
relationships.

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We rely on third parties to provide many of our subsystems, components, software licenses and other intellectual property
included in our products. If we are unable to obtain these subsystems, components and licenses from these parties at reasonable
prices or on a timely basis, we may not be able to obtain substitute subsystems or components on terms that
are as favorable.

Many of our products contain software or other intellectual property, subsystems or components licensed or acquired from
third parties. It may be necessary in the future to seek or renew licenses and supplies relating to various aspects of these products.
These licenses and components are often available only from a limited number of vendors and manufacturers. There can be no
assurance that the necessary licenses or components would be available on acceptable terms, or at all. In the event that a product
becomes obsolete or otherwise unavailable from a current third party vendor, second sourcing would be required.
This sourcing may not be available on reasonable terms, or at all, and our problems in securing second sources could delay or prevent customer
deliveries, resulting in penalties and/or other adverse impacts on our business.

We are exposed to the credit risk of some of our customers and to credit exposures in certain markets which could result in
material losses and harm our business.

We are vulnerable to downturns in the economy and the telecommunications industry and to adverse changes in our
customers' businesses and financial condition. Periodic slowdowns in the economy in general and in the telecommunications market in
particular have weakened the financial condition of many of our customers, which has adversely affected their creditworthiness.
Although we have programs in place to monitor and mitigate the associated risks, there can be no assurance that such programs will be
effective in reducing our credit risks and avoiding credit losses. We also continue to monitor credit exposure from weakened financial
conditions in certain geographic regions, and the impact that such conditions may have on the worldwide economy. We have
periodically experienced losses due to customers' failing to meet their obligations. Although these losses have not been significant,
future losses, if incurred and if material, could harm our business and have a material adverse effect on our operating results and
financial condition.

Our business and operations are subject to the risks of earthquakes, floods, hurricanes and other natural
disasters.

Our operations could be subject to natural disasters and other business disruptions, which could adversely affect our
business and financial results. A number of our facilities and those of our suppliers, our contract manufacturers, and our customers are
located in areas that have been affected by natural disasters such as earthquakes, floods or hurricanes in the past. A significant natural
disaster could therefore have a material adverse impact on our business, operating results, and financial condition. We are
predominantly self-insured for losses and interruptions caused by earthquakes, floods, hurricanes and other natural or manmade
disasters.

Our stock price may continue to be volatile.

The trading price of our common stock has fluctuated substantially in recent years. The trading price may be subject to
significant fluctuations in response to, among other events and factors: (i) variations in quarterly operating results; (ii) the gain or loss of
significant orders; (iii) changes in earnings estimates by analysts; (iv) changes in our revenue and/or earnings guidance as announced
in our earnings calls; (v) announcements of technological innovations or new products by us or our competitors; (vi) changes in
domestic and international economic, political and business conditions; and (vii) consolidation and general conditions in the
telecommunication industry. In addition, the stock market in general has experienced extreme price and volume fluctuations that have
affected the market prices for many companies in our industry and in industries similar or related to ours and that have been unrelated
to the operating performance of these companies. These market fluctuations have adversely affected and may continue to adversely
affect the market price of our common stock.

Our shareholder rights plan may make it more difficult for a third party to acquire us, despite the possible benefits of such an
acquisition to our shareholders.

Our shareholder rights plan may have the effect of delaying, deferring or preventing a change in control of Tekelec despite
possible benefits to our shareholders.

Item 1B. Unresolved Staff Comments.

None.

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Item 2. Properties.

Our headquarters are located in Morrisville, North Carolina in facilities consisting of approximately 316,000 square
feet under leases expiring in 2013. This facility is used primarily for our corporate offices and for the engineering, product development,
sales, customer support and principal internal manufacturing operations of our Network Signaling Group and Communication Software
Solutions Group. Prior to 2006, our corporate headquarters were located in Calabasas, California.
Our Communications Software Solutions
Group also occupies a total of approximately 42,000 square feet in Mulhouse, France
and Lyon, France under leases expiring in
2008. Our Switching Solutions Group occupies two facilities in Plano, Texas consisting of approximately 100,000 square feet and
137,000 square feet under leases expiring in 2013.

In addition, we currently occupy a number of domestic and international sales and support offices pursuant to leases that expire
between March 2007 and February 2016. Specifically, our international subsidiaries, sales and customer service locations are in Sao
Paulo, Brazil; Buenos Aires, Argentina; Beijing and Shanghai, China; Singapore; St. Petersburg, the Russian Federation; Guadalajara
and Mexico City, Mexico; New Delhi, India; Madrid, Spain; Berlin and Griesheim, Germany;
Rome, Italy; Prague, Czech Republic; Kuala
Lumpur, Malaysia; Trappes, France; Egham, the United Kingdom; Dubai, UAE; Amsterdam, the Netherlands; Johannesburg, South Africa;
and Taipei, Taiwan. We also have regional sales offices domestically in Miami, Florida, San Diego, California; Englewood,
Colorado; Irving, Texas; Bethesda, Maryland; and Marietta, Georgia.

We believe that our existing facilities will be adequate to meet our needs at least through 2007, and that we will be able to obtain
additional space when, where and as needed on acceptable terms. See Note 13 to the Consolidated Financial Statements for more
information regarding our lease obligations.

Item 3. Legal Proceedings.

From time to time, various claims and litigation are asserted or commenced against us arising from or related to
contractual matters, intellectual property matters, product warranties and personnel and employment disputes. As to such claims and
litigation, we can give no assurance that we will prevail. However, we currently do not believe that the ultimate outcome of any pending
matters, other than possibly the litigation with Bouygues Telecom, S.A. as described below, will have a material adverse effect on our
consolidated financial position, results of operations or cash flows.

Bouygues Telecom, S.A., vs. Tekelec

In February 2005, Bouygues Telecom, S.A. ("Bouygues"), a French telecommunications operator, filed a lawsuit against
Tekelec in a United States District Court in California seeking damages for losses caused by a service interruption that Bouygues
experienced in its cellular telephone network in November 2004. Bouygues originally sought damages of $81 million plus
unspecified punitive damages and attorneys' fees. In its complaint, Bouygues alleged that the service interruption was caused by the
malfunctioning of certain virtual home location register servers (i.e., servers that store and provide information about subscribers in a
cellular network) provided by Tekelec to Bouygues.

In June 2005, the Court granted our motion to transfer the lawsuit to the United States District Court for the Eastern District of North
Carolina.

In October 2005, Bouygues filed an amended complaint alleging claims for strict products liability, negligence, breach of
express warranty, negligent interference with contract, negligent interference with economic advantage, intentional misrepresentation,
negligent misrepresentation, fraud based on concealment, breach of fiduciary duty, equitable indemnity, unfair competition under
California Business and Professions Code section 17200, unfair and deceptive trade practices, breach of contract, alter ego liability,
and promissory estoppel and a direct claim under French law.

In April 2006, in responses to some of our discovery requests, Bouygues increased its estimated damages to at least
$106 million, not including interest, punitive damages, and attorneys' fees or costs. Bouygues has since provided a claim
summary suggesting that its damages may range from $127 million to $179 million.

The parties participated in a Court-ordered mediation in May 2006, but did not resolve the litigation at that time.

Each party's expert reports were filed in August 2006, and all discovery concluded in October 2006. In October 2006, we filed a
motion seeking summary judgment in our favor with respect to all claims, and Bouygues filed a motion seeking summary judgment in its
favor with respect to a particular issue. Both parties also filed motions to exclude certain testimony and expert reports offered by the
other party in the case.

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On January 5, 2007, we presented Bouygues with an Offer of Judgment in response to a request from our insurance carrier. 
The offer of $6.2 million was based on our best estimate of the maximum amount of damages that could be recoverable by Bouygues
under the relevant contract.  Bouygues did not respond to the offer, and it expired ten days after it was presented.  The
amount of this specific settlement offer was recorded both as a liability and an offsetting receivable (from our insurance carrier) in our
2006 financial statements. We are currently unable to estimate any additional potential financial impact this matter could have on the
Company.

On January 10, 2007, the Court denied our motion for summary judgment. On February 12, 2007, the Court denied
Bouygues' motion for partial summary judgment. The court has also issued orders denying, to date, motions to exclude certain testimony and
expert reports.

Jury selection is currently scheduled to begin on February 27, 2007, with a trial scheduled to commence on March 5, 2007 in
Greenville, North Carolina. Each party has been limited to 45 hours to present its case and respond to the other side.

Although we are still evaluating the claims asserted by Bouygues, we intend to defend vigorously against the action
and believe Bouygues' claims could not support the damage figures alleged in the amended complaint. At this stage of the litigation, management
cannot assess the likely outcome of this matter; however, it is possible that an unfavorable outcome could have a material adverse
effect on our financial condition, operating results or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.

Market Information

Our common stock is traded on the Nasdaq Global Market under the symbol TKLC. The following table sets forth the range of
high and low sales prices for our common stock for the periods indicated. As of February 9, 2007, there were 188 shareholders of
record of our common stock. This number does not include shareholders for whom shares are held in "nominee" or "street" name.

|               |  |   | High  |  |   | Low  
|-------------- |  | - | ----- |  | - | -----
|2005           |  |   |       |  |   |      
|First Quarter  |  | $ | 20.85 |  | $ | 15.14
|Second Quarter |  |   | 17.19 |  |   | 11.77
|Third Quarter  |  |   | 21.15 |  |   | 15.45
|Fourth Quarter |  |   | 21.01 |  |   | 12.00
|               |  |   |       |  |   |      
|2006           |  |   |       |  |   |      
|First Quarter  |  | $ | 16.45 |  | $ | 12.68
|Second Quarter |  |   | 14.98 |  |   | 10.87
|Third Quarter  |  |   | 13.71 |  |   | 9.50 
|Fourth Quarter |  |   | 16.50 |  |   | 12.56

We have never paid a cash dividend on our common stock. It is our present policy to retain earnings to finance the
growth and development of our business and, therefore, we do not anticipate paying cash dividends on our common stock in the
foreseeable future.

Equity Compensation Plans

The equity compensation plan information required to be provided in this Annual Report on Form 10-K is incorporated
by reference to the section of our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on May 18, 2007,
entitled "Executive Compensation and Other Information — Equity Compensation Plan Information," to be filed with the
Commission.

31



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Performance Graph

The following graph compares the cumulative total
return on the Company's common stock with the cumulative total return of the Total Return Index for The Nasdaq Stock Market (U.S.
Companies), the Nasdaq Computer Manufacturers Index and the Nasdaq Telecommunications Index for the five-year period
commencing January 1, 2002. The stock price performance shown on the graph below is not necessarily indicative of future price
performance.

Comparison of Five-Year Cumulative Total Return*
                  among Tekelec, Total Return Index for The Nasdaq Stock Market (U.S. Companies),
                  Nasdaq Computer Manufacturers Index and Nasdaq Telecommunications Index





|                                |  | 12/31/01 |        | 12/31/02 |  | 12/31/03 |       | 12/31/04 |  | 12/31/05 |        | 12/31/06
|------------------------------- |  | -------- | ------ | -------- |  | -------- | ----- | -------- |  | -------- | ------ | --------
|Tekelec                         |  |          | 100.00 |          |  |          | 57.70 |          |  |          | 85.86  |         
|The Nasdaq Stock Market (U.S.)  |  |          | 100.00 |          |  |          | 69.75 |          |  |          | 104.88 |         
|Nasdaq Computer Mfrs. Index     |  |          | 100.00 |          |  |          | 77.07 |          |  |          | 126.99 |         
|Nasdaq Telecommunications Index |  |          | 100.00 |          |  |          | 60.66 |          |  |          | 108.50 |         



|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* |  | Assumes (i) $100 invested on December 31, 2001 in Tekelec Common Stock, the Total Return Index for
The Nasdaq Stock Market (U.S. Companies), the Nasdaq Computer Manufacturers Index and the Nasdaq Telecommunications Index
and (ii) immediate reinvestment of all dividends.
Tekelec is one of the companies that make up the NASDAQ Telecommunications Index. The Company believes that peer
comparisons are best done against the NASDAQ Telecommunications Index and will use this index for benchmark comparisons in the future.

Item 6. Selected Financial Data.

The statement of operations data included in the selected consolidated financial data set forth below for the years ended
December 31, 2006, 2005 and 2004 and the balance sheet data set forth below at December 31, 2006 and 2005 are derived from, and
are qualified in their entirety by reference to, our audited Consolidated Financial Statements and notes thereto included in this Annual
Report. The statement of operations data set forth below for the year ended December 31, 2003 and the balance sheet data set
forth below at December 31, 2004 are derived from our audited Consolidated Financial Statements, which are not included
herein. The statement of operations data set forth below for the year ended December 31, 2002 and the balance sheet data set
forth below at December 31, 2003 and 2002 is presented herein on an unaudited basis. The following selected financial data
should be read in conjunction with our Consolidated Financial Statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report.

32



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The statements of operations data set forth below are adjusted to reflect the sale of our Network Diagnostics Division ("NDD") in
August 2002, which was accounted for as a discontinued operation. In addition, the statements of operations data set forth below are
adjusted to reflect the sale of IEX in July 2006, which was accounted for as a discontinued operation. Accordingly, the historical
statements of operations data for periods prior to the sale of IEX have been revised to reflect IEX as a discontinued operation.

For the year ended December 31, 2003, the statement of operations data set forth below reflects the financial results of
Santera after the date of acquisition (i.e., June 10, 2003), less minority interest. For the year ended December 31, 2004,
the statement of operations data set forth below includes the financial results of Taqua after the date of acquisition (i.e., April 8,
2004), the results of VocalData after the date of acquisition (i.e., September 20, 2004), and the results of Steleus after the date of
acquisition (i.e., October 14, 2004). For the year ended December 31, 2005, the statement of operations data set forth below
includes the financial results of iptelorg GmbH after the date of acquisition, July 13, 2005, and 100% of the results of Santera
after the date of acquisition (October 3, 2005) of all of the shares of Santera previously held by Santera's minority stockholders.

|                                                             |  |   | Year Ended December 31,           
|------------------------------------------------------------ |  | - | ----------------------------------
|                                                             |  |   | 2006(1)(2)                        
|                                                             |  |   | (Thousands, except per share data)
|Statement of Operations Data:                                |  |   |                                   
|Revenues                                                     |  | $ | 553,647                           
|Income (loss) from continuing operations before              |  |   |                                   
|provision for income taxes                                   |  |   | (125,094)                         
|Income (loss) from continuing operations                     |  |   | (103,153)                         
|Income from discontinued operations,                         |  |   |                                   
|net of income taxes                                          |  |   | 11,751                            
|Gain on sale of discontinued operations, net of income taxes |  |   | 177,458                           
|Net income (loss)                                            |  |   | 86,056                            
|                                                             |  |   |                                   
|Earnings (loss) per share from continuing operations:        |  |   |                                   
|Basic                                                        |  | $ | (1.53)                            
|Diluted                                                      |  |   | (1.53)                            
|                                                             |  |   |                                   
|Earnings per share from discontinued operations:             |  |   |                                   
|Basic                                                        |  | $ | 0.17                              
|Diluted                                                      |  |   | 0.17                              
|                                                             |  |   |                                   
|Earnings per share from gain on sale of                      |  |   |                                   
|discontinued operations:                                     |  |   |                                   
|Basic                                                        |  | $ | 2.64                              
|Diluted                                                      |  |   | 2.64                              
|                                                             |  |   |                                   
|Earnings (loss) per share:                                   |  |   |                                   
|Basic                                                        |  | $ | 1.28                              
|Diluted                                                      |  |   | 1.28                              
|                                                             |  |   |                                   
|Statement of Cash Flows Data:                                |  |   |                                   
|Net cash provided by operating activities                    |  | $ | 11,332                            



|                                       |  |   | Year Ended December 31,
|-------------------------------------- |  | - | -----------------------
|                                       |  |   | 2006                   
|                                       |  |   | (Thousands)            
|Balance Sheet Data (at December 31):   |  |   |                        
|Cash, cash equivalents and investments |  | $ | 424,496                
|Working capital                        |  |   | 435,390                
|Total assets                           |  |   | 969,257                
|Total deferred revenues                |  |   | 222,154                
|Long-term liabilities                  |  |   | 132,612                
|Shareholders' equity                   |  |   | 494,241                

33



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(1)    During the third quarter of 2006, in connection with our annual budgeting process, we performed a comprehensive evaluation of
the outlook for one of our SSG reporting units, consisting of our Santera and VocalData product lines. As a result of this assessment
and the anticipated significant shortfall in forecasted orders for these products in the second half of 2006, we significantly lowered our
forecasts of this reporting unit's future revenues and cash flows.
These revised projections indicated that certain identifiable intangible
assets acquired as part of the original acquisitions of Santera and VocalData, specifically the purchased technology, may be impaired.
We determined that impairment indicators were present within the meaning of SFAS 144, and therefore performed an impairment
test during the third quarter of 2006. In addition, the testing for recoverability of the purchased technology acquired as part of the
original acquisitions of Santera and VocalData discussed above is a triggering event under SFAS 142, requiring that the goodwill
related to the reporting unit within SSG that is comprised of Santera and Vocal Data be tested for impairment as well. We evaluated
these intangible assets and goodwill for impairment during the third
quarter of 2006. As a result of our evaluation, we determined that
certain intangible assets and the goodwill associated with this reporting unit were impaired. Accordingly, the operating results for 2006
reflect certain significant and unusual charges totaling $100.6 million related to the impaired technology ($25.6 million) and impaired
goodwill ($75.0 million) associated with this reporting unit. Please refer to Note 10 to the accompanying Consolidated Financial
Statements for a further discussion of these impairments.

(2)    Our results of operations for 2006 include approximately $34.7 million of pre-tax equity-based compensation expense
(approximately $22.6 million on an after-tax basis) related to continuing operations and $0.6 million of after-tax stock-based
compensation expense related to discontinued operations.

(3)    In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") and SFAS No.
142 "Goodwill and Other Intangible Assets" ("SFAS 142"), we evaluated our intangible assets and goodwill for impairment during the
fourth quarter of 2005. As a result of our evaluation, we determined that certain intangible assets and the goodwill associated with our
Taqua reporting unit were impaired. Accordingly, the operating results for 2005 reflect certain significant and unusual charges totaling
$49.9 million related to the impaired technology ($22.7 million) and impaired goodwill ($27.2 million) associated with our Taqua
reporting unit. Please refer to Note 10 to the accompanying Consolidated Financial Statements for a further discussion of these
impairments.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.

Executive Summary

The following discussion is designed to provide a better understanding of our Consolidated Financial Statements,
including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating
results. This executive summary should be read in conjunction with the more detailed discussion and analysis of our financial condition
and results of operations in this Item 7, "Risk Factors" in Item 1A and our Consolidated Financial Statements and the notes thereto
included in Item 15 of this Annual Report.

Overview of our Business and Products

We are a global provider of telecommunications network systems and software applications, which we design, develop,
manufacture, market, sell and support. Our applications include: (a) high performance, network-centric, mission critical applications for
signaling and session control; (b) complementary applications that enable service providers to better measure, manage, and monetize
the communication services they provide; and (c) subscriber-centric applications that enable service providers to deliver basic and
enhanced voice and data communication services. Our network applications enable our customers to optimize their network efficiency
and performance and to provide basic and enhanced voice and data services to their subscribers. Our customers include traditional
landline telecommunications carriers, mobile communications operators, emerging competitive service providers and cable television
service providers who are offering communication services.

We derive our revenues primarily from the sale or license of telecommunications network systems and software applications and
related professional services, such as installation, training, and customer support, including customer post-warranty service contracts
and our recently announced TekelecCare offering. Payment terms for contracts with our customers are negotiated with each customer
and are based on a variety of factors, including the customer's credit standing and our history with the customer.

Our corporate headquarters are located in Morrisville, North Carolina, with research and development facilities and sales offices
located throughout the world. We sell our products and services in three geographic regions: North America, comprised of the United
States and Canada; "EAAA," comprised of Europe and the Middle East, Asia Pacific (including India and China), Africa and Australia;
and "CALA," comprised of the Caribbean and Latin America, including Mexico.

34



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Operating Segments

We are organized into three operating segments: the Network Signaling Group, the Communications Software Solutions
Group and the Switching Solutions Group.

Network Signaling Group or NSG. Our NSG products enable service providers to establish, control and terminate voice
and data communications "calls" or "sessions." They also enable service providers to offer intelligent services, which include any services
other than the call or data transmission itself, such as voice messaging, toll free calls (e.g., "800" calls), prepaid calling cards, text
messaging and number portability (i.e., the ability to take a phone number to another carrier).

Communications Software Solutions Group or CSSG. Our CSSG business unit leverages our NSG installed customer
base, and its product portfolio complements the functionality of the NSG product portfolio. CSSG network and business applications help
service providers measure, manage and monetize the communications traffic that traverses their networks. Specifically, these
applications help enhance the reliability and security of our customers' networks, reduce the time to troubleshoot problems, enable
real-time management of service quality, and help detect and correct revenue leaks due to fraud, incorrect billings, and errors in
recordkeeping. These products also help service providers deploy new services more cost effectively and improve their return on the
investment in existing and new services across both legacy and next generation telecommunications networks. We provide
comprehensive real-time network and business applications measurement capability for traditional and IP networks, as well as hybrid
networks.

Switching Solutions Group or SSG. Our SSG solutions control and route the actual voice or data comprising a "call" or a
"session." Our SSG business unit is focused primarily on creating and enhancing next-generation voice and data switching products
and subscriber-centric services for both traditional circuit switched networks and newer packet switched networks. SSG offers wireline
and wireless telephony solutions, as well as enhanced VoIP network applications. We believe that voice and data networks will
increasingly interoperate, or converge, and our switching solutions products and subscriber-centric services will help enable our service
provider customers to implement converged voice and data networks.

Discontinued Operations

On April 27, 2006, we entered into a Stock Purchase Agreement pursuant to which we agreed to sell to NICE-Systems Ltd.
(or its subsidiary) all of the outstanding shares of capital stock of IEX Corporation (the "IEX Shares"), our then wholly
owned subsidiary ("IEX"). The sale price for the IEX Shares was approximately $201.5 million in cash, which includes a $1.5
million post-closing adjustment based on the working capital of IEX as of the closing date. The closing of the sale of the IEX Shares
occurred on July 6, 2006, resulting in total proceeds of $201.5 million and a pre-tax gain of approximately $200.1 million ($177.5
million after tax) in the year ended December 31, 2006.

Prior to the sale, IEX provided workforce management and intelligent call routing systems for single- and multiple-site contact
centers. We sold our products primarily to customers in industries with significant contact center operations such as airlines, financial
services, telecommunications and retail. Prior to our decision to sell IEX, the results of IEX's operations were reported as the IEX
Contact Center Group operating segment.

IEX is classified as discontinued operations in our Consolidated Financial Statements, and its results of operations, financial
condition and cash flows are separately reported for all periods presented. Summarized financial information for IEX is as follows (in
thousands):

|                                                      | December 31,
|----------------------------------------------------- | ------------
|                                                      | 2006        
|                                                      |             
|Revenues                                              | $           
|Income from discontinued operations before            |             
|provision of income taxes                             | $           
|Provision for income taxes                            |             
|Income from discontinued operations, net of           |             
|income taxes                                          |             
|Gain on sale of discontinued operations, net of taxes |             
|Income from discontinued operations, net of taxes     | $           

As more fully described in Note 13 to the accompanying Consolidated Financial Statements, in April 2006 IEX settled

35



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litigation with Blue Pumpkin Software, Inc. ("Blue Pumpkin"). Pursuant to the settlement agreement, each party granted to the other a release and
cross-license of the patents asserted in the lawsuits. Blue Pumpkin made a balancing license payment to IEX in the amount of
$8.25 million on April 7, 2006, and Blue Pumpkin is obligated to make six additional annual payments of $500,000 each to
Tekelec beginning April 1, 2007 and ending April 1, 2012. Included in IEX's operations for the year ended December 31,
2006 is revenue of $8.25 million from this settlement. The remaining six annual installments of $500,000 have been assigned by IEX to
Tekelec and will be recorded as income in future periods as realized.

Internal Control and Corporate Governance

We consider our internal control over financial reporting a high priority and continually review all aspects and make
improvements in our internal control. Our executive management is committed to ensuring that our internal control over
financial reporting is complete, effective and appropriately documented. In the course of our evaluation of our internal control, we sought to
identify material errors or control problems and to confirm that the appropriate corrective actions, including process improvements, were
being undertaken. We also sought to deal with any control matters in this evaluation, and in each case if a problem was identified, we
considered what revision, improvement or correction to make in accordance with our ongoing procedures. Our continued objective is to
maintain our internal control as a set of dynamic systems that change (including improvements and corrections) as conditions warrant.

In addition to striving to maintain an effective system of internal control over financial reporting, we follow high professional
standards in measuring and reporting our financial performance. Specifically, we have adopted a code of conduct for all of our
employees and directors that requires a high level of professionalism and ethical behavior. We believe that our accounting policies are
prudent and provide a clear view of our financial performance. We utilize our internal audit function to help ensure that we follow these
accounting policies and maintain our internal control. Further, our Disclosure Committee, composed primarily of senior financial and
legal personnel, helps ensure the completeness and accuracy of the reporting of our financial results and our other disclosures. Prior to
the release of our financial results, key members of our management review our operating results and significant accounting policies
and estimates with our Audit Committee, which consists solely of independent members of our Board of Directors.

Operating Environment and Key Factors Impacting our 2006 Results

Today, most service providers operate both circuit switched networks and packet networks. Currently, the majority of
networks which carry voice communications rely on TDM circuit switching technology, and, until recently, packet switching has been
used almost exclusively for data communications. Managing multiple distinct networks in the future is not expected to be a viable
economic alternative for service providers. While circuit switching has offered reliable and high quality voice communications, packet
switching is inherently more efficient and cost effective. As a result, service providers are beginning to migrate toward a single IP
network architecture, or converged network, to serve as the foundation for their enhanced voice, video and data service offerings.

Convergence has a wide variety of meanings within the communications industry. The term convergence encompasses: (a) the
convergence of circuit and packet-based technologies to support voice services (voice transported over IP and SS7 signaling
transported over IP); (b) the convergence of mobile networks and fixed networks and the associated flexibility of accessing networks
utilizing a variety of subscriber devices; (c) the convergence of widely utilized information technologies with proprietary legacy
telecommunication technologies; and (d) the convergence of basic voice and data services and enhanced multimedia services.

In the last several years, the IP Multimedia Subsystem architecture, or IMS, has emerged as an architecture well suited for
converged IP networking. Variations of the IMS architecture have been and are being adopted by various standard-setting bodies within
the wireless, wireline and cable industries. Very much like the SS7-based intelligent networking architecture employed by circuit
switched networks, IMS includes a three-layer architecture: a media transport layer, a signaling and session control layer and an
applications layer. However, instead of employing the SS7 protocol for signaling, IMS uses a newer signaling protocol, Session
Initiation Protocol, or SIP. SIP's advantages include its ability to manage multimedia services (voice, video and data) in an IP network,
making them accessible from a wide variety of devices, such as mobile phones, personal computers, ordinary phones and personal
digital assistants, or so called "smart phones."

The transition to a converged network poses a challenge for service providers: when and how can they cost effectively transition
from existing networking technology to the converged network, without disrupting existing services and without abandoning current and
recent investments in existing networks. We believe this transition process will evolve through three phases: the current state, the
transition state and the future state.

- We believe the current state includes basic voice and data services signaled with SS7 and transported over TDM-based
networks.

36



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- We believe the transition state will offer basic and enhanced voice and data services signaled with SS7, but transported
over IP-based networks. Examples of network applications many service providers are evaluating and deploying include voice services
transported over IP, or VoIP, and SS7 signaling transported over IP, or SIGTRAN.
- We believe the future state will be based upon the emerging industry consensus for IMS architectures providing enhanced
multimedia service (voice, video and data) signaled with SIP and transported over an IP-based, converged network.

While this trend is global in nature, there remain considerable differences by geography in the PSTN, PLMN and Internet maturity,
as well as in the economic opportunities that service providers are attempting to capitalize upon. These differences generally affect the
decision as to when and how service providers adopt newer technologies and commence their transition to a converged network. As a
result, we expect adoption and, thus, demand for the networking technologies to vary from market
to market, and current state,
transitional state and future state networks to overlap for a considerable period of time. We believe that there will likely be instances of
all three network states, or hybrid networks, concurrently owned and operated by a single service provider, especially the larger
providers who own networks in several markets. For example, service providers operating current state networks in emerging markets
will need to interoperate with service providers operating transitional networks and converged networks in maturing markets. Finally,
service providers must be able to measure performance, manage the quality and availability of service and monetize the newer
services in and across current, transition and future state networks.

Our products and services provide our customers with what we believe to be key components to successfully migrate to IMS. In
2006, while we experienced significant growth in overall revenues from our products and services deployed in traditional network
structures, we experienced an even more pronounced increase in revenues from our products and services for deployment in
next-generation networks. We believe this trend may continue as the core technologies underlying IMS mature and as our customers
increasingly commit to a migration strategy. We believe our expertise in network signaling, coupled with our increasing abilities to
provide our customers expanded products and services geared for a next-generation network environment, positions us well to pursue
the opportunities that the migration to IMS presents.

Also impacting our results in 2006 has been the recent wide spread consolidation among service providers, as they attempt to take
advantage of increased economies of scale or position themselves to offer both wireline and wireless services at reduced costs. We
believe the recent consolidation among service providers may have resulted in the delay of orders from our customers during 2006,
particularly in North America. We believe this is a short term consequence and may actually provide us with increased opportunities to
expand our presence in the merged companies and a resulting increase in future orders once our customers complete the integration of
the merged companies.

Summary of our Operating Results for 2006 and Certain Key Financial Metrics from Continuing Operations

The following is a brief summary of our performance relative to certain key financial metrics for our continuing operations
(i.e., excluding IEX) for the year ended December 31, 2006 compared to the year ended December 31, 2005 (in thousands, except
diluted loss per share and net days sales outstanding or DSO):

|                                       |  |   | Years Ended December 31,
|-------------------------------------- |  | - | ------------------------
|                                       |  |   | 2006                    
|Statement of operations statistics:    |  |   |                         
|Revenues                               |  | $ | 553,647                 
|Impairment of purchased technology     |  | $ | 25,615                  
|Impairment of goodwill                 |  | $ | 75,000                  
|Operating loss                         |  | $ | (135,310)               
|Diluted loss per share                 |  | $ | (1.53)                  
|Cash flows from operations             |  | $ | 28,095                  
|                                       |  |   |                         
|Balance sheet statistics:              |  |   |                         
|Cash, cash equivalents and investments |  | $ | 424,496                 
|Accounts receivable, net               |  | $ | 162,622                 
|Net days sales outstanding (DSO)       |  |   | 62 days                 
|Deferred revenue                       |  | $ | 222,154                 
|Working capital                        |  | $ | 435,390                 
|Shareholders' equity                   |  | $ | 494,241                 

37



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Revenuesincreased by 14% in 2006 to $553.6 million primarily due to (i) the growth in international
revenues, representing an increase of $107.6 million; and (ii) the increased demand for our NSG and CSSG product offerings
domestically, partially offset by a decline in North American revenues of $33.6 million principally within our SSG product offerings.

Operating loss increased from $61.4 million in 2005 to $135.3 million in 2006. This increase was primarily due to: (i)
increases in certain significant and unusual charges relating to impaired technology ($25.6 million in 2006
compared to $22.7 million in 2005) and impaired goodwill ($75.0 million in 2006 compared to $27.2 million in 2005); (ii) an increase in
stock-based compensation expense of $31.3 million due to our adoption of SFAS 123R on January 1, 2006; and (iii) higher operating
expenses, partially offset by an increase in both revenues and gross profit (exclusive of the increase in purchased technology
impairment charges).

Diluted loss per share for 2006 was also negatively impacted by the increase in impairment charges, increasing
from a loss per share of $0.68 in 2005 to a loss per share of $1.53 in 2006.

Cash Flows from Operations of continuing operations decreased by 45% in 2006 to $28.1 million from $50.9 million
in 2005, due primarily to changes in operating assets and liabilities, such as larger increases in accounts receivable during 2006 than in
2005 and smaller increases in deferred revenues in 2006 than in 2005, offset by reductions in deferred costs.

Cash, Cash Equivalents and Investments increased during 2006 by $198.2 million. The majority of this increase
was driven by: (i) proceeds of $200.0 million from the sale of IEX; (ii) proceeds from the issuance of common stock under our equity
compensation plans of $17.5 million; and (iii) operating cash flows of $28.1 million from continuing operations, offset by capital
expenditures of $36.5 million and negative cash flows from discontinued operations of $16.8 million, primarily related to payments of
income tax liabilities associated with the gain on the sale of IEX.

Accounts Receivable increased by $46.8 million to $162.6 million as of December 31, 2006. This increase was
primarily attributable to a $59.4 million year-over-year increase in accounts receivable which are also reflected in deferred revenues,
partially offset by stronger collections in accounts receivable for which we have recognized revenue. In addition, we typically invoice a
higher percentage of our customers for our extended warranty offering late in the fourth quarter of each year compared to other
quarters. As a result, we typically see an increase in accounts receivable as of each year end. While overall accounts receivable has
increased from 2005 to 2006, our Net Days Sales Outstanding, or DSO, has decreased from 75 days as of December
31, 2005 to 62 days as of December 31, 2006, primarily due to increased collection efforts throughout 2006. Note that upon the
achievement of certain milestones as defined in our customer contracts, we invoice our customers for deliverables according to the
terms of the contract, which results in the recognition of a receivable prior to the recognition of revenue. As a result, a corresponding
amount of deferred revenue is recorded related to the billing. For purposes of calculating DSO, amounts included in deferred revenue
related to accounts receivable are netted against such accounts receivable.

Deferred Revenue increased by $8.7 million, or 4%, from $213.5 million as of December 31, 2005 to $222.2 million
as of December 31, 2006, primarily due to an increase in sales arrangements that require the deferral of revenue (e.g., partial
shipments of a sales order) and increases related to our installed base of customers under our extended warranty offerings.

Working Capital increased by 130% from $189.1 million as of December 31, 2005 to $435.4 million as of
December 31, 2006, primarily due to a net increase in cash, cash equivalents and investments from the sale of IEX, along with an
increase in accounts receivable and income taxes receivable.

Shareholders' Equity increased by 40% in 2006 from $353.2 million as of December 31, 2005 to $494.2 million as
of December 31, 2006, primarily due to: (i) net income of $86.1 million; (ii) proceeds from the issuance of our common stock under our
equity compensation plans of $17.5 million; and (iii) increases in common stock resulting from stock-based compensation of $35.7
million, including approximately $1.0 million of stock-based compensation expense attributable to discontinued operations.

Results of Operations

Historically, the focus of our sales order management and contracting processes and related personnel has been on
obtaining large sales orders that, in most cases, included multiple product and/or software deliverables, which we normally deliver over
a period of time. NSG customers, in particular, placed large orders and we historically focused on customer satisfaction by making
partial shipments to meet our customers' requirements. Title and risk of loss passed to the customer prior to the recognition of revenue.
In addition, the compensation structure under which our sales force operates was designed to support and promote the pursuit of large
orders without regard to the timing of shipments or the timing of revenue recognition dictated by these orders.

38



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Because the software component of our products is more than incidental to the functionality of our products, we recognize revenue
under the residual method prescribed by SOP 97-2. As a result, under arrangements with multiple product deliverables, we defer
revenue recognition related to partial shipments until all products under the arrangement are shipped and title and risk of loss have
passed to the customer.

Fluctuations in revenue between quarters are not necessarily indicative of future trends, principally due to our use of the
residual method of accounting for revenue recognition. Throughout 2006 and early 2007, we evaluated our sales and order processes, and
related sales compensation plans, in order to determine how to best align these business processes and plans with our current revenue
recognition policies. While we have implemented several new polices and procedures, including a new sales compensation plan
designed to better meet the needs of our customers and shareholders, the timing of revenue recognition may continue to vary
significantly from quarter to quarter depending on the shipment arrangements and other terms
of the orders.

Because a majority of the costs incurred within our customer service organization are fixed and do not necessarily fluctuate directly
with revenues recognized, a decline in revenues is likely to result in a decrease in our gross margins. In addition, because a significant
portion of our operating expenses, such as research and development expenses, sales and marketing expenses and general and
administrative expenses, is fixed and does not fluctuate proportionally with revenue recognized, the amount of such operating expenses
as a percentage of revenues may vary significantly from period to period.

Please refer to Note 1 to the accompanying Consolidated Financial Statements and the section entitled "Critical Accounting Policies
and Estimates" in the following pages for a description of our significant accounting policies and our use of estimates.

Revenues

Revenues in 2006 were $553.6 million, compared with $486.5 million and $326.9 million in 2005 and 2004, respectively,
representing growth of 14% in 2006 and 49% in 2005. As described further below, our revenues have increased from 2004 to 2006 due
primarily to: (i) increased geographical expansion and penetration into new markets internationally and (ii) the continued growth of our
NSG and CSSG product lines. Increases in revenues from our NSG and CSSG products offset declines in revenues from our SSG
products in 2006, whereas in 2005, we experienced growth in revenues from all three of our business units. As discussed in more detail
below, the decline in our SSG revenues in 2006 is due primarily to decreased sales and per unit prices of our T8000 media gateway product,
particularly through Alcatel-Lucent, an OEM customer.

As previously discussed, in situations where we sell multiple products or sell a combination of integrated products and services that
we cannot separate into multiple elements, we may defer revenue recognition until all product shipments are complete and until
services essential to the functionality of the product are fulfilled, due to the fact that we follow the residual method of accounting as
prescribed by SOP 97-2. As of December 31, 2006, we had a backlog of orders totaling $455.3 million, down from
$520.2 million as of December 31, 2005. Backlog has decreased from December 31, 2005 primarily due to:
(i) an $84.8 million year-over-year decline in orders from $573.6 million for the year ended December 31, 2005 to
$488.8 million for the year ended December 31, 2006, the majority of which is attributable to our SSG business unit and
(ii) our continued focus on implementing new business practices to convert our backlog to revenue in a more expeditious
manner.

We believe that our future revenue growth depends in large part upon a number of factors affecting the demand for our signaling
and switching products. For our switching products, future revenue growth, both domestically and internationally, depends on the
increasing adoption and deployment of packet switching technology, along with the success of our channel partners to resell our
products and penetrate new markets. Due to the fact that we follow the residual method of accounting as prescribed by SOP 97-2, our
revenue may vary significantly from period to period. Specifically, no revenue related to a sales arrangement may be recognized until all
products in the sales arrangement are delivered, regardless of whether the undelivered product represents an insignificant portion of
the arrangement fee.

39



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The following table sets forth revenues from the three geographic regions in which we generate sales of our products: (i) North
America; (ii) Europe, the Middle East, Asia Pacific (including India and China), Africa and Australia ("EAAA"); and (iii) the Caribbean
and Latin America, including Mexico ("CALA").

|               |  |   | For the Years Ended December 31, |  |   | Year-Over-Year Change
|-------------- |  | - | -------------------------------- |  | - | ---------------------
|               |  |   | 2006                             |  |   | 2005                 
|North America  |  | $ | 335,250                          |  | $ | 368,812              
|EAAA           |  |   | 140,396                          |  |   | 84,512               
|CALA           |  |   | 78,001                           |  |   | 33,181               
|Total revenues |  | $ | 553,647                          |  | $ | 486,505              

As the above table indicates, in 2006 we continued to expand internationally, resulting in significant year over year growth in both
the EAAA and CALA regions. Increases in revenues from sales of initial systems within the EAAA and CALA regions during 2006 and
2005 provide a solid base for future revenues from sales of upgrades and extensions. As discussed further below, the decline in
revenues in North America in 2006 is primarily attributable to a decline in sales and per unit prices of our
T8000 media gateway product to our OEM partner, Alcatel-Lucent.

We currently operate in three distinct business segments; NSG, SSG, and CSSG. In order to provide a better understanding of the
year-over-year changes and the underlying trends in our revenues, we have provided a discussion of revenues from each of our
operating segments. Revenues from each of our operating segments for 2006, 2005 and 2004 are as
follows (in thousands, except percentages):

|                                  |  |   | For the Years Ended December 31, |   |   | Year-Over-Year Change
|--------------------------------- |  | - | -------------------------------- | - | - | ---------------------
|                                  |  |   | 2006                             |   |   | 2005                 
|                                  |  |   |                                  |   |   |                      
|Network Signaling                 |  | $ | 368,862                          |   | $ | 314,605              
|% of total revenues               |  |   | 67                               | % |   | 65                   
|Switching Solutions               |  | $ | 110,301                          |   | $ | 139,893              
|% of total revenues               |  |   | 20                               | % |   | 29                   
|Communications Software Solutions |  | $ | 74,484                           |   | $ | 32,007               
|% of total revenues               |  |   | 13                               | % |   | 6                    
|Total revenues                    |  | $ | 553,647                          |   | $ | 486,505              

Network Signaling Group

NSG revenues for 2006, 2005 and 2004 were comprised of sales of the following products and services (in thousands,
except percentages):

|                                    |  |   | For the Years Ended December 31, |  |   | Year-Over-Year Change
|----------------------------------- |  | - | -------------------------------- |  | - | ---------------------
|                                    |  |   | 2006                             |  |   | 2005                 
|Eagle ISS initial systems           |  | $ | 84,130                           |  | $ | 68,166               
|Eagle ISS upgrades and extensions   |  |   | 189,433                          |  |   | 151,643              
|Number portability products         |  |   | 31,902                           |  |   | 47,999               
|Customer extended warranty services |  |   | 37,033                           |  |   | 36,289               
|Other professional services         |  |   | 19,200                           |  |   | 7,298                
|Other                               |  |   | 7,164                            |  |   | 3,210                
|Total NSG revenues                  |  | $ | 368,862                          |  | $ | 314,605              

Our NSG revenues grew 17% and 23% in 2006 and 2005, respectively, due primarily to increased sales of ISS upgrades and
extensions, ISS initial systems, and other professional services. Domestically, we derive the majority of NSG revenue from wireless
operators, as wireless networks generate significantly more signaling traffic than wireline networks and, as a result, require significantly
more signaling infrastructure. Signaling traffic on our wireless customers' networks in recent years has increased significantly due to
several factors, including growth in the number of subscribers, the number of calls made per subscriber, roaming, and the use of
advanced features, such as text messaging. These factors have required wireless operators to expand their network capacity, leading
to increased sales of our signaling products.

Internationally, in addition to the factors affecting our domestic sales growth described above, NSG's product revenue growth
depends on our ability to successfully penetrate new international markets, which often involves displacing an

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incumbent signaling vendor, and our ongoing ability to meet the signaling requirements of our new customers. As indicated previously, we continue to
expand internationally, with significant growth in our international revenues in both 2006 and 2005. As much of this growth is derived
from sales of ISS initial systems, we believe we are building a base for future revenues from our higher margin ISS upgrades and
extension products.

Switching Solutions Group

SSG revenues for 2006, 2005 and 2004 were comprised of the following product lines (in thousands, except
percentages):

|                   |  |   | For the Years Ended December 31, |  |   | Year-Over-Year Change
|------------------ |  | - | -------------------------------- |  | - | ---------------------
|                   |  |   | 2006                             |  |   | 2005                 
|T9000 / T8000      |  | $ | 89,540                           |  | $ | 122,628              
|T7000              |  |   | 9,318                            |  |   | 9,838                
|T6000              |  |   | 11,443                           |  |   | 7,427                
|Total SSG revenues |  | $ | 110,301                          |  | $ | 139,893              

In 2006, revenues from our switching products decreased primarily due to lower sales volume and per unit prices of our T8000
media gateway product, particularly to Alcatel-Lucent, and slightly lower revenues from our T7000 products, partially offset by an
increase in revenues from our T6000 products. A significant portion of our switching revenues is derived from sales to Alcatel-Lucent. In
2005, revenues from sales of our switching products increased primarily due to increased sales of our T9000 product offerings,
increased sales of our T8000 media gateway product, particularly to Alcatel-Lucent, and a full
year of sales from the T7000 and T6000
product offerings, which were obtained in our acquisitions of Taqua in April 2004 and Vocal Data in September 2004, respectively.
Sales of SSG products to Alcatel for 2006, 2005 and 2004 were as follows (in thousands, except percentages):

|                            |  |   | For the Years Ended December 31, |  |   | Year-Over-Year Change
|--------------------------- |  | - | -------------------------------- |  | - | ---------------------
|                            |  |   | 2006                             |  |   | 2005                 
|SSG sales to Alcatel-Lucent |  | $ | 51,072                           |  | $ | 93,225               

Communications Software Solutions Group

CSSG revenues for 2006, 2005 and 2004 were principally derived from sales of our Integrated Applications Solutions ("IAS")
and related transitional products from our Sentinel product line. During 2005 and 2006, revenues from sales of our CSSG products
increased by $14.0 million, or 77%, and $42.5 million, or 133%, respectively, primarily as a result of continued success in integrating the
former Steleus products into our offerings and in selling these solutions to our existing NSG customer base. In addition, revenues for
2005 include a full year of IAS revenues compared to only approximately three months of IAS revenues in 2004 following our
acquisition of Steleus.

Cost of Sales

In order to provide a better understanding of the year-over-year changes within our cost of sales, the following is a
discussion of each of the components that comprise our cost of sales:

Cost of Goods Sold

Cost of goods sold includes (i) materials, labor, and overhead costs incurred internally or paid to contract manufacturers to
produce our products; (ii) personnel and other costs incurred to install our products; and (iii) customer service costs to provide
continuing support to our customers under our warranty offerings. Cost of goods sold in dollars and as a percentage of revenues for
2006, 2005 and 2004 were as follows (in thousands, except percentages):

|                                   |  |   | For the Years Ended December 31, |   |   | Year-Over-Year Change
|---------------------------------- |  | - | -------------------------------- | - | - | ---------------------
|                                   |  |   | 2006                             |   |   | 2005                 
|Cost of goods sold                 |  | $ | 256,789                          |   | $ | 210,584              
|Revenues                           |  |   | 553,647                          |   |   | 486,505              
|Cost of goods sold as a percentage |  |   |                                  |   |   |                      
|of revenues                        |  |   | 46                               | % |   | 43                   

Cost of goods sold in dollars and as a percentage of revenues increased in both 2005 and 2006. In 2006, the increases were
primarily due to: (i) a proportionate increase in cost of goods resulting from the year-over-year increase in revenues of 14%; and
(ii) increased costs associated with our customer service and sales order management organizations. Costs increased

41



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within our customer service and sales order management organizations primarily due to (i) $4.6 million of stock-based compensation
expense recorded in connection with the adoption of Statement of Financial Accounting Standards No. 123-revised 2004, "Share-Based
Payment" ("SFAS 123R") during the year ended December 31, 2006; and (ii) an increase in the number of customer services
and sales order management personnel and outside installation vendor costs. We increased our customer service and sales order
management organizations and increased related outside vendor costs primarily as a result of the growth in our order fulfillment
activities, installation services and warranty related services, each of which may precede the recognition of revenue associated with
these activities under the residual method of accounting.

In 2005, the increases in cost of goods sold in dollars and as a percentage of revenues were primarily driven by increases in
revenues and changes in the composition of our revenues. While revenues in all of our business segments increased during 2005, the
increase in cost of goods sold as a percentage of revenues is due primarily to revenues from our lower margin SSG products growing
at a higher rate than revenues from our higher margin NSG and other products. In addition, during the fourth quarter of 2005 we
incurred approximately $18.7 million, or 3% of revenues, of significant and unusual charges that we had not historically incurred or, to the
extent these charges had been incurred in the past, had been insignificant. Specifically, during the fourth quarter of 2005, we incurred
certain warranty obligations aggregating $8.7 million associated with (i) two Class A defects (i.e., a warranty obligation resulting from
our determination that we were obligated to correct a known product defect) within our NSG product portfolio and (ii) a commitment to
remedy an additional product warranty matter within our
SSG product portfolio. Further, we determined that the costs associated with
two of our customer contracts would exceed the expected revenues, resulting in an expected loss on these contracts upon completion
of our delivery obligations in 2006. As required by the accounting literature, we accrued the expected loss on these arrangements in the
amount of approximately $9.9 million in the fourth quarter of 2005 as an increase in cost of goods sold.

In addition, growth in revenues from the EAAA and CALA regions outpaced the growth in North America in both 2006 and 2005.
Sales of "initial" systems in international markets typically carry lower margins than the same sales domestically and as our sales
internationally have increased at a rate greater than sales within the United States, cost of goods sold as a percentage of revenues has
increased from 2004 to 2006. As we enter new markets, particularly international markets, our cost of goods sold as a percentage of
revenues may continue to increase as the result of our decision to develop new sales channels and customer relationships in these
emerging markets. While this growth in initial systems sales in international markets has had a negative impact on gross margins, we
expect to achieve improved gross margins as sales of extensions increase in these markets.

Pricing competition in the next-generation switching market has been intense and the competitive environment within this market
has and may continue to negatively impact our gross margins. In addition, changes in the following factors may also affect margins:
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; pricing pressure as we expand
internationally; additional loss contracts, if any; and general economic conditions.

Amortization of Purchased Technology

We treat amortization of purchased technology as part of general corporate expenses and therefore do not allocate the
amortization of purchased technology to individual operating segments. Amortization of purchased technology for 2006, 2005 and 2004
was as follows (in thousands):

|                                                 |  |   | For the Years Ended December 31,
|------------------------------------------------ |  | - | --------------------------------
|                                                 |  |   | 2006                            
|Amortization of purchased technology related to: |  |   |                                 
|iptelorg GmbH                                    |  | $ | 419                             
|Santera                                          |  |   | 1,311                           
|Taqua                                            |  |   | 220                             
|VocalData                                        |  |   | 339                             
|Steleus                                          |  |   | 1,930                           
|Total                                            |  | $ | 4,219                           

The decrease in amortization of purchased technology in 2006 compared to 2005 was due primarily to lower amortization expense
related to technology purchased from Taqua, Santera and VocalData. This decrease was a result of: (i) the write-down in the
value of the Taqua purchased technology in the fourth quarter of 2005; and (ii) the write-down in the value of the Santera
purchased technology and VocalData purchased technology as of August 1, 2006, as discussed below under "Impairment of
Purchased Technology," offset by additional amortization of purchased technology related to our acquisitions of: (i) iptelorg
in July 2005; and (ii) the remaining minority interest in Santera in October 2005. Amortization of purchased
technology decreased slightly in 2005 compared to 2004 due to certain technology relating to Santera becoming fully amortized in 2004,

42



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offset by additional amortization related to our acquisitions of Taqua, VocalData and Steleus in 2004.

Impairment of Purchased Technology

In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), we
evaluate long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. During the fourth quarter of 2005, it became
apparent that both revenues and expected orders for the fourth quarter of 2005 and early 2006 related to our Taqua reporting unit
would underperform our previous expectations. Accordingly, in connection with our annual budgeting process performed during the
fourth quarter of 2005, we performed a comprehensive evaluation of the outlook for our Taqua product line and the outlook for the small
switch market, which is the focus of our Taqua product line. As a result of this assessment and the significant shortfall in orders for
these products in the fourth quarter of 2005, we significantly lowered our forecast of Taqua's future revenues and cash flows. These
revised projections, combined with the historical underperformance of the Taqua product line, indicated that certain identifiable
intangible assets acquired as part of the original acquisition of Taqua, specifically the purchased technology, may be impaired. We
determined that impairment indicators were present within the meaning of SFAS 144, and therefore performed an impairment test in
accordance with SFAS 144 during the fourth quarter of 2005.

In accordance with SFAS 144, we first determined if the future expected undiscounted cash flows related to the Taqua purchased
technology were less than the current carrying value of the technology. Applying this initial test, we determined that such cash flows
were less than such carrying value, which indicated that an impairment of the asset existed. To measure the impairment, we
determined the fair value of the purchased technology using a discounted cash flow approach. Using this
approach, the purchased
technology was valued at approximately $1.1 million which, when compared to its carrying value of $23.8 million, indicated an
impairment of $22.7 million. Accordingly, we recognized a non-cash impairment charge in the amount of $22.7 million in
the fourth quarter of 2005 related to the Taqua purchased technology.

In addition, during the third quarter of 2006, it became apparent that both revenues and expected orders for the second half of 2006
and fiscal year 2007 related to another of our SSG reporting units, consisting of our Santera and VocalData product lines, would
underperform our previous expectations. Accordingly, in connection with our annual budgeting process initiated during the third quarter
of 2006, we performed a comprehensive evaluation of the outlook for this reporting unit and the outlook for the markets that are the
focus of this reporting unit. As a result of this assessment and the anticipated significant shortfall in forecasted orders for these products
in the second half of 2006, we significantly lowered our forecasts of this reporting unit's future revenues and cash flows. These revised
projections indicated that certain identifiable intangible assets acquired as part of the original acquisitions of Santera and VocalData,
specifically the purchased technology, may be impaired. We determined that impairment indicators were present within the meaning of
SFAS 144, and therefore performed an impairment test during the third quarter of 2006.

In applying the initial test in accordance with SFAS 144, we determined that the cash flows related to the purchased technology
within this reporting unit were less than the carrying value, indicating that an impairment of the purchased technology assets existed.
We then determined the associated fair value using a discounted cash flow approach. Using this approach, the purchased technology
was valued at approximately $1.8 million which, when compared to its carrying value of $27.4 million, indicated an
impairment of $25.6 million. Accordingly, we recognized a non-cash impairment charge of $25.6 million in the third quarter
of 2006.

No impairment losses were recognized in the year ended December 31, 2004.

Research and Development

Research and development expenses include costs associated with the development of new products, enhancements of
existing products and quality assurance activities. These costs consist primarily of employee salaries and benefits, occupancy costs,
consulting costs, and the cost of development equipment and supplies. The following sets forth our research and development
expenses in dollars and as a percentage of revenues for 2006, 2005 and 2004 (in thousands, except percentages):

|                         |  |   | For the Years Ended December 31, |   |   | Year-Over-Year Change
|------------------------ |  | - | -------------------------------- | - | - | ---------------------
|                         |  |   | 2006                             |   |   | 2005                 
|Research and development |  | $ | 148,443                          |   | $ | 119,234              
|Percentage of revenues   |  |   | 27                               | % |   | 25                   

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The following is a summary of the year-over-year changes in our research and development expenses during 2006 and 2005 (in
thousands):

|                                     |  |   | Year-Over-Year Change
|------------------------------------ |  | - | ---------------------
|                                     |  |   | 2005 to 2006         
|Cost component:                      |  |   |                      
|Salaries and benefits                |  | $ | 8,565                
|Incentive compensation               |  |   | (2,323)              
|Stock-based compensation             |  |   | 14,294               
|Consulting and professional services |  |   | 5,106                
|Supplies                             |  |   | (1,524)              
|Facilities and depreciation          |  |   | 5,428                
|Other                                |  |   | (337)                
|Total                                |  | $ | 29,209               

A significant portion of the increase in research and development expenses in 2006 was attributable to our adoption of SFAS 123R
on January 1, 2006 as discussed below under "Recent Accounting Pronouncements." Prior to the adoption of SFAS 123R, we
accounted for our stock-based compensation using the intrinsic value method which generally resulted in no
compensation expense being recognized related to our employee stock option grants in periods prior to our adoption of SFAS 123R.

We have made and intend to continue to make substantial investments in product and technology development, and we believe
that our future success depends in a large part upon our ability to continue to enhance existing products and to develop
or acquire new products that maintain our technological competitiveness. The increases from 2004 to 2006 in salaries and benefits and consulting and
professional services included in research and development expenses reflect our commitment to this growing investment. Also, facilities
and depreciation costs included in research and development expenses increased in 2005 and 2006 due to additional leased space at
our SSG facilities and the expansion of our occupied space within our corporate headquarters dedicated to research and development
activities, along with additional depreciation related to equipment acquired for use in research and development during 2004, 2005 and
2006.

Partially offsetting the above increases in research and development expenses during 2006 was a decline of $2.3 million in
incentive compensation, which varies based on our performance during a given period. Due to the decline in revenues and gross
margin during the first quarter of 2006, the majority of our business units did not achieve the levels required to earn incentive
compensation for that quarter, which resulted in overall lower incentive compensation in 2006 as compared to 2005. In addition, as
discussed below under "Restructuring and Other Charges," in the third and fourth quarters of 2006, we terminated the employment of
152 employees and decided not to replace 22 employees who left Tekelec during the third quarter of 2006. As a result, these
employees were not eligible to receive any incentive compensation related to the second half of 2006, which resulted in overall lower
incentive compensation expense for 2006.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of costs associated with our sales force and marketing personnel,
including: (i) salaries, commissions and related costs; (ii) outside contract personnel; (iii) facilities costs; and
(iv) travel and other costs. The following table sets forth our sales and marketing expenses in dollars and as a percentage of
revenues for 2006, 2005 and 2004 (in thousands, except percentages):

|                       |  |   | For the Years Ended December 31, |   |   | Year-Over-Year Change
|---------------------- |  | - | -------------------------------- | - | - | ---------------------
|                       |  |   | 2006                             |   |   | 2005                 
|Sales and marketing    |  | $ | 92,961                           |   | $ | 83,775               
|Percentage of revenues |  |   | 17                               | % |   | 17                   

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The following is a summary of the year-over-year changes in our sales and marketing expenses during 2006 and 2005 (in
thousands):

|                                     |  |   | Year-Over-Year Change
|------------------------------------ |  | - | ---------------------
|                                     |  |   | 2005 to 2006         
|Cost component:                      |  |   |                      
|Salaries and benefits                |  | $ | 133                  
|Incentive compensation               |  |   | (602)                
|Stock-based compensation             |  |   | 6,690                
|Sales commissions                    |  |   | 1,392                
|Consulting and professional services |  |   | 593                  
|Supplies                             |  |   | (1,057)              
|Facilities                           |  |   | (376)                
|Travel                               |  |   | 923                  
|Marketing and advertising            |  |   | 1,444                
|Other                                |  |   | 46                   
|                                     |  | $ | 9,186                

The increase in sales and marketing expenses in terms of dollars in 2006 was primarily attributable to our adoption of SFAS 123R
on January 1, 2006 as discussed below under "Recent Accounting Pronouncements." Also, contributing to the increase in sales
and marketing expense during both 2005 and 2006 were increases in sales commissions as a result of the increase in revenues and an
increase in marketing and advertising expense to support our global expansion.

During 2005, sales and marketing expenses also increased primarily due to: (i) our expanding global sales force and related
expenses (e.g., facilities, travel, office supplies, etc.) and the resulting increase in revenues; and (ii) increases in personnel following
our April 2004 acquisition of Taqua, our September 2004 acquisition of VocalData, and our October 2004
acquisition of Steleus.
Accordingly, each of the above expenses, particularly direct and indirect personnel-related costs (salaries/benefits, travel and facilities),
increased on a year-over-year basis during 2005.

The size of our sales and marketing workforce and related expenses vary to a greater degree in response to the growth in our
orders and backlog than to the growth in revenues. We intend to continue to focus on improving the efficiency of our
operations by examining the way in which we operate in order to identify opportunities for cost reductions.

General and Administrative Expenses

General and administrative expenses are composed primarily of costs associated with our executive and administrative
personnel (e.g., legal, finance, information technology and human resources personnel) and consist of: (i) salaries and related
compensation costs; (ii) consulting and other professional services (e.g., litigation and other outside legal counsel fees, audit fees and costs
associated with compliance with the Sarbanes-Oxley Act of 2002); (iii) facilities and insurance costs; and (iv) travel and other costs.
The following table sets forth our general and administrative expenses in absolute dollars and as a percentage of revenues for 2006,
2005 and 2004 (in thousands, except percentages):

|                           |  |   | For the Years Ended December 31, |   |   | Year-Over-Year Change
|-------------------------- |  | - | -------------------------------- | - | - | ---------------------
|                           |  |   | 2006                             |   |   | 2005                 
|General and administrative |  | $ | 74,719                           |   | $ | 64,366               
|Percentage of revenues     |  |   | 13                               | % |   | 13                   

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The following is a summary of the year-over-year changes inour general and administrative expenses during 2006 and 2005 (in
thousands):

|                                     |  |   | Year-Over-Year Change
|------------------------------------ |  | - | ---------------------
|                                     |  |   | 2005 to 2006         
|Cost component:                      |  |   |                      
|Salaries and benefits                |  | $ | 6,151                
|Incentive compensation               |  |   | (1,271)              
|Stock-based compensation             |  |   | 5,771                
|Consulting and professional services |  |   | (675)                
|Restatement-related costs            |  |   | (3,318)              
|Supplies                             |  |   | 393                  
|Facilities                           |  |   | (2,737)              
|Travel                               |  |   | (320)                
|Bad debt expense                     |  |   | 3,131                
|Other                                |  |   | 3,228                
|                                     |  | $ | 10,353               

A significant portion of the increase in general and administrative expenses in 2006 was attributable in part to our adoption of SFAS
123R on January 1, 2006 as discussed below under "Recent Accounting Pronouncements." In addition, salaries and benefits
increased in 2005 and 2006 due primarily to the increase in headcount within our general and administrative organization to support the
continued growth of our operations, both domestically and internationally. Also contributing to the increase in general and administrative
expense during 2006 is an increase in bad debt expense of $3.1 million.

Partially offsetting the above increases in general and administrative expenses in 2006 was a
decline of $1.3 million in incentive compensation, which varies based on our performance within a given period. Due to the
decline in revenues and gross margin during the first quarter of 2006, the majority of our business units did not achieve the levels
required to earn incentive compensation for that quarter, which resulted in lower incentive compensation in 2006. In addition, in 2005,
we incurred approximately $3.5 million in restatement-related costs compared to only approximately $0.2 million in 2006, resulting in a
year over year decline of $3.3 million. Finally, as a result of the reduction in facilities utilized by our general and administrative
personnel during 2006, facilities expense declined on year-over-year basis during 2006.

The increases in general and administrative expenses during 2005 were also partially attributable to increases in personnel
following our April 2004 acquisition of Taqua, our September 2004 acquisition of VocalData, and our October 2004 acquisition of
Steleus. Accordingly, each of the above expenses, particularly direct and indirect personnel-related costs (salaries/benefits, travel and
facilities), increased on a year-over-year basis during 2005.

While general and administrative costs have increased from 2004 through 2006, these costs have remained fairly constant
as a percentage of revenues.  We continuously focus on improving the efficiency of our operations by examining the way in which we
operate in order to identify opportunities for cost savings and improvement.

Acquired In-Process Research and Development

During 2006, 2005 and 2004 we made selective strategic acquisitions of entities and technologies in order to enhance and
expand our product offerings. At the time of each acquisition, certain technology, products and functionality were under development
that had not yet reached technological feasibility and had no alternative future use. Accordingly, such technology, products and
functionality were considered by us to be in-process research and development ("IPR&D") and the fair value of these items was
expensed at the acquisition date.

2006 - In December 2006, we entered into a worldwide license to certain technologies and intellectual property
rights owned by a third-party provider.  We believe this technology will form the core software platform for our service
mediation product family.  We believe this technology provides key capabilities which will provide our customers with a smooth
evolution from SS7 to SIP-based signaling and next-generation high performance network applications once we complete development
of the product offerings based on this technology.  The license fee for this technology was $2.1 million.  Because the
technology obtained in this license had no alternative use, we have reflected a charge of $2.1 million as acquired in-process research
and development expense during 2006.  We expect to complete the development of this technology and resulting service
mediation product family during the second half of 2007 and estimate that we will incur an additional $2.0 million in development
expense associated with completing the development of this product family.

46



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2005 - Acquired in-process research and development expense of $3.6 million in 2005 consisted of: (i) the
write-off of $1.2 million of acquired in-process research and development related to our acquisition of iptelorg in July 2005; and (ii) the
write-off of $2.4 million of acquired in-process research and development related to our acquisition of the remaining shares of Santera
owned by Santera's minority shareholders in October 2005.

2004 - Acquired in-process research and development expense of $14.2 million in 2004 consisted of: (i) the
write-off of $8.0 million of acquired in-process research and development related to our acquisition of Taqua in April 2004; (ii) the
write-off of $2.4 million of acquired in-process research and development related to our acquisition of VocalData in September 2004; and (iii)
the write-off of $3.8 million of acquired in-process research and development related to our acquisition of Steleus in October 2004.

For a more detailed discussion of these acquisitions and related valuation assumptions, please refer to Note 3 to our Consolidated
Financial Statements.

Restructuring Charges

2006 Restructuring

In 2006, we committed to a restructuring plan as part of our ongoing efforts to align our cost structure with our business
opportunities in certain business units and operating groups. This restructuring plan involved: (i) the termination of the employment of
152 employees across our business units and related customer service, operations and other personnel; (ii) the decision not to replace
22 employees who left Tekelec during the third quarter of 2006; and (iii) the termination of approximately 25 contractors. The majority
of the terminated employees worked directly for, or in support of, our Switching Solutions Group in Plano, Texas. In addition, as a result
of the relocation of our corporate headquarters to North Carolina from California, our California-based Senior Vice President, Corporate
Affairs and General Counsel resigned effective December 31, 2006. We incurred charges under a retention agreement with the General
Counsel and are also obligated to pay severance benefits to him under our Officer Severance Plan due to the relocation of our
headquarters. We recorded pre-tax restructuring charges in the year ended December 31, 2006 of approximately $7.4 million
related to employee severance arrangements entered into in connection with the 2006 Restructuring and the resignation of our Senior
Vice President, Corporate Affairs and General Counsel. All of such severance payments are expected to be paid in 2007.

Corporate Headquarters and Taqua Relocations

In April 2005, we announced the relocation of our corporate headquarters from Calabasas, California to our facilities in
Morrisville, North Carolina. The relocation provided us a significant opportunity to improve our operations by integrating our finance,
accounting, corporate and information technology functions into the business units they support. In October 2005, we entered into an
employment severance agreement with our former CEO in connection with his resignation as an executive officer and employee
effective January 1, 2006. In connection with this agreement, we incurred approximately $1.6 million in severance costs that were paid
in 2006 in scheduled monthly installments. Also in 2005, we announced the Taqua Relocation, which involved the relocation of our
Taqua facility from Hyannis, Massachusetts, to our Plano, Texas facilities. These
relocations resulted in employee terminations and
relocation costs, along with lease termination costs related to the termination of the lease in Hyannis. The termination costs included
retention bonuses, severance pay and benefit costs extended through
the required service period and for up to one year after
termination. Other costs related to the management of the relocation projects and the costs to relocate equipment were expensed as
incurred.

Manufacturing Relocation

In January 2004, we announced the Manufacturing Restructuring, which included the outsourcing of the majority of our
manufacturing operations and the relocation of our remaining signaling product manufacturing operations from Calabasas, California to
our facilities in Morrisville, North Carolina. The Manufacturing Restructuring included the elimination of approximately 23 positions
during 2004 and one position in 2005, resulting in restructuring costs such as employee severance and relocation costs. We incurred a
charge of $1.7 million during 2004 related to this restructuring.

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The following table summarizes the restructuring and related expenses incurred in connection with the restructurings discussed
above and the remaining obligations as of and for the years ended December 31, 2005 and 2006 (in thousands):

|                                                       |  |   | Severance |  |   |            |  |   |            |  |   |          |  |   |        
|------------------------------------------------------ |  | - | --------- |  | - | ---------- |  | - | ---------- |  | - | -------- |  | - | -------
|                                                       |  |   | Costs     |  |   |            |  |   |            |  |   |          |  |   |        
|                                                       |  |   | and       |  |   | Employee   |  |   | Facility   |  |   |          |  |   |        
|                                                       |  |   | Retention |  |   | Relocation |  |   | Relocation |  |   |          |  |   |        
|                                                       |  |   | Bonuses   |  |   | Costs      |  |   | Costs      |  |   | Other(2) |  |   | Total  
|Restructuring obligations, January 1, 2005             |  | $ | 76        |  | $ | -          |  | $ | -          |  | $ | -        |  | $ | 76     
|Restructuring and related expenses recognized in 2005: |  |   |           |  |   |            |  |   |            |  |   |          |  |   |        
|Manufacturing relocation                               |  |   | -         |  |   | 53         |  |   | 47         |  |   | -        |  |   | 100    
|Corporate Headquarters and Taqua relocation (1)        |  |   | 4,962     |  |   | 265        |  |   | 1,113      |  |   | 1,295    |  |   | 7,635  
|Total restructuring and related expenses               |  |   | 4,962     |  |   | 318        |  |   | 1,160      |  |   | 1,295    |  |   | 7,735  
|Cash payments                                          |  |   | (2,015)   |  |   | (163)      |  |   | (869)      |  |   | (1,295)  |  |   | (4,342)
|Non-cash charges                                       |  |   | -         |  |   | -          |  |   | (191)      |  |   | -        |  |   | (191)  
|Restructuring obligations, December 31, 2005           |  |   | 3,023     |  |   | 155        |  |   | 100        |  |   | -        |  |   | 3,278  
|Restructuring and related expenses recognized in 2006: |  |   |           |  |   |            |  |   |            |  |   |          |  |   |        
|Corporate Headquarters and Taqua relocation            |  |   | (127)     |  |   | -          |  |   | (100)      |  |   | 41       |  |   | (186)  
|2006 Restructuring                                     |  |   | 7,359     |  |   | -          |  |   | -          |  |   | -        |  |   | 7,359  
|Total restructuring and related expenses               |  |   | 7,232     |  |   | -          |  |   | (100)      |  |   | 41       |  |   | 7,173  
|Cash payments                                          |  |   | (7,659)   |  |   | (155)      |  |   | -          |  |   | (41)     |  |   | (7,855)
|Restructuring obligations, December 31, 2006           |  | $ | 2,596     |  | $ | -          |  | $ | -          |  | $ | -        |  | $ | 2,596  

(1)    Severance costs and retention bonuses include approximately $1.6 million in severance costs related to the employment
separation agreement between us and our former Chief Executive Officer, who resigned from Tekelec effective January 1, 2006. All
employee retention bonuses are expensed as incurred.

(2)    Consists of costs related to the transition of our corporate headquarters, including recruitment, signing bonuses and training costs
related to the hiring of finance and administrative personnel in Morrisville, as well as travel costs during the transition period. In addition,
other costs include salary costs for duplicative employees during the transition of job responsibilities from employees located in
Calabasas to the successor employees in Morrisville. These transition costs are expensed as incurred.

Amortization of Intangible Assets

As a result of our acquisitions, we have recorded various intangible assets including trademarks, customer relationships and
non-compete agreements. Amortization of intangible assets related to our acquisitions is as follows (in thousands):

|          |  |   | For the Years Ended December 31, |  |   | Year-Over-Year Change
|--------- |  | - | -------------------------------- |  | - | ---------------------
|          |  |   | 2006                             |  |   | 2005                 
|Santera   |  |   | 243                              |  |   | 92                   
|Taqua     |  |   | 127                              |  |   | 304                  
|VocalData |  |   | 50                               |  |   | 555                  
|Steleus   |  |   | 1,405                            |  |   | 1,872                
|iptelorg  |  |   | 113                              |  |   | 64                   
|          |  | $ | 1,938                            |  | $ | 2,887                

The decrease in amortization of intangible assets in 2006 as compared with 2005 was due primarily to certain intangibles relating to
Taqua, VocalData and Steleus becoming fully amortized in 2005 and 2006. The decrease was partially offset by additional amortization
of intangibles in 2006 related to our acquisitions of iptelorg in July 2005 and the remaining minority interest in Santera in
October 2005. The increase in amortization of intangible assets in 2005 was due primarily to recording a full year of amortization
of intangibles related to the VocalData and Steleus acquisitions in 2005 compared to only a partial year in 2004, partially offset by a
decrease in amortization of the intangibles arising from the acquisition of a majority interest in Santera in 2003. The intangibles relating
to the 2003 Santera acquisition became fully amortized in 2005.

48



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Impairment of Goodwill

As required by SFAS 142, we do not amortize our goodwill balances, but instead test our goodwill for impairment annually
on October 1st and more frequently upon the occurrence of certain events in accordance with the provisions of SFAS
142. The testing for recoverability of the purchased technology acquired as part of the original acquisitions of Santera and VocalData
discussed above was a triggering event in the third quarter of 2006 under SFAS 142. The impairment of the purchased technology,
coupled with a significant shortfall in orders for the second half of 2006 compared to our earlier expectations, resulted in a significantly
lowered forecast for the reporting unit's future revenues and cash flows. Accordingly, we tested the goodwill related to the reporting unit
within SSG that is comprised of Santera and Vocal Data for impairment as of August 1, 2006. As a result of this testing, we
recorded a non-cash charge of $75.0 million related to the impairment of the goodwill associated with this reporting unit in the
third quarter of 2006. We determined the amount of this charge using an estimate of the fair value of the reporting unit. This fair value
estimate was calculated using a discounted cash flows approach and a revenue based market multiples approach. In addition, we also
performed our annual impairment test of goodwill required by SFAS 142 on October 1, 2006, which indicated no additional impairment
existed.

We performed our required 2005 annual impairment test of goodwill as of October 1, 2005. As a result of this testing, in the fourth
quarter of 2005, we recorded a non-cash impairment charge of $27.2 million related to the impairment of the goodwill associated with
our Taqua reporting unit, which is a component of our SSG reporting segment. We determined the amount of the charge using an
estimate of the fair value of our Taqua reporting unit. This fair value estimate was calculated using a discounted cash flows approach
and a revenue based market multiples approach. As previously noted, our Taqua product line has underperformed due primarily to the
lack of market growth and, as a consequence, projections for the business have been significantly lowered.

The Company tested goodwill for impairment as of October 1, 2004 and no impairment was indicated.

Other Income and Expense

For 2006, 2005 and 2004, other income and expenses were as follows (in thousands):

|                               |  |   | For the Years Ended December 31, |  |   | Year-Over-Year Change
|------------------------------ |  | - | -------------------------------- |  | - | ---------------------
|                               |  |   | 2006                             |  |   | 2005                 
|Interest income                |  | $ | 10,936                           |  | $ | 6,157                
|Interest expense               |  |   | (3,813)                          |  |   | (4,069)              
|Gain on sale of Catapult stock |  |   | -                                |  |   | -                    
|Gain on sale of investment     |  |   |                                  |  |   |                      
|in privately held company      |  |   | 1,794                            |  |   | -                    
|Gain on warrants in privately  |  |   |                                  |  |   |                      
|held company                   |  |   | 1,275                            |  |   | -                    
|Loss on sale of investments    |  |   | -                                |  |   | (1,346)              
|Other, net                     |  |   | 24                               |  |   | (1,237)              
|                               |  | $ | 10,216                           |  | $ | (495)                

Interest Income and Expense. Interest income increased in 2006 and 2005 due to (i) higher average cash and short-term
investment balances and (ii) increases in interest rates. Interest expense decreased in 2006 and 2005 due to the February 2005
repayment of Santera's notes payable that bore interest at 10%.

Gain on Sale of Catapult Stock. In 2002 we sold our NDD division to Catapult Communications Corporation ("Catapult") for
$59.8 million consisting of $42.5 million in cash and convertible promissory notes ("Notes") valued at $17.3 million.
We exercised our option to convert the Notes into Catapult common stock in September 2004. In September 2004, we sold our
Catapult shares resulting in a pre-tax gain of approximately $2.2 million.

Gain on Sale of Investment in Privately Held Company. In August 2004 following the acquisition of Telica by Lucent
Technologies Inc. ("Lucent"), we received freely tradable common stock of Lucent in exchange for our investment in Telica, resulting in
a pre-tax gain of $7.9 million in 2004. We sold these shares in September 2004. In the first quarter of 2006, we received an
additional 642,610 shares of Lucent stock that were released from escrow, resulting in an additional gain of approximately $1.8
million upon distribution of these shares. In connection with the merger of Lucent and Alcatel in the fourth quarter of 2006, these shares
were converted into 125,437 shares of Alcatel-Lucent.

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Gain on Warrants in Privately Held Company. In December 2004, following the acquisition of Spatial Communications
Technologies ("Spatial") by Alcatel, we exercised warrants convertible into 1,363,380 shares of freely tradable Alcatel shares
valued at $14.91 per share. As a result of this transaction, Santera recognized a gain of $20.3 million in 2004. In addition,
in December 2006, we received 89,642 shares of Alcatel-Lucent previously held in escrow pending the resolution of certain acquisition
related indemnification claims made by Alcatel against the former Spatial shareholders, resulting in a $1.3 million gain upon distribution
of these shares.

Loss on sale of investments. During the first quarter of 2005, we sold 1,263,380 Alcatel shares for proceeds of $17.5 million,
resulting in a realized loss of $1.3 million in 2005.

Other Income (Expense). Other expense in 2005 consisted primarily of foreign currency exchange losses resulting from
transactions in foreign currencies where our exposures to foreign currency risks were not mitigated through the use of foreign currency
forward contracts and bank fees related to our bank accounts and unused line of credit. As we expand our international business
further, we will continue to enter into a greater number of transactions denominated in currencies other than the U.S. dollar, and will
therefore be exposed to greater risk related to foreign currency fluctuation.

Provision for Income Taxes

During 2006, 2005 and 2004, we recognized income tax expense (benefit) related to continuing operations of $(21.9)
million, $(6.8) million and $18.1 million, respectively. Provisions for income taxes as a percentage of income (loss) from continuing
operations were 17.5%, 10.9% and 280.9% for 2006, 2005 and 2004, respectively. Please refer to Note 9 to our Consolidated Financial
Statements for a reconciliation of the federal statutory rate to our effective tax rate for 2006, 2005 and 2004.

Minority Interest

Minority interest represents the losses of Santera allocable to Santera's minority stockholders. Prior to October 3, 2005,
the date of our acquisition of all of the shares of capital stock of Santera then owned by Santera's minority stockholders, the net income and
losses of Santera were allocated between Tekelec and the minority interest based on their relative interests in the equity of Santera and
the related liquidation preferences. This approach required net losses to be allocated first to the Series A Preferred Stock, held
primarily by the minority interest, until fully absorbed and then to the Series B Preferred Stock held by us. Subsequent net income
was allocated first to the Series B Preferred Stock to the extent of previously recognized net losses allocated to Series B
Preferred Stock. Additional net income was then allocated to the Series A Preferred Stock to the extent of previously recognized
losses allocated to Series A Preferred Stock and then to common stock in proportion to their relative ownership interests in the
equity of Santera. The losses allocated to minority interest of Santera prior to October 3, 2005 for 2005 and 2004 was computed as
follows (in thousands, except percentages):

|                                                                    |  |  |  |  |   | For the Years Ended |  
|------------------------------------------------------------------- |  |  |  |  | - | ------------------- | -
|                                                                    |  |  |  |  |   | December 31,        |  
|                                                                    |  |  |  |  |   | 2005                |  
|Santera net loss                                                    |  |  |  |  | $ | 16,529              |  
|Percentage of losses attributable to the minority interest based on |  |  |  |  |   |                     |  
|capital structure and liquidation preferences                       |  |  |  |  |   | 62                  | %
|Net loss allocated to minority interest                             |  |  |  |  | $ | 10,248              |  

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Discontinued Operations

As more fully described in Note 2 to the accompanying Consolidated Financial Statements, on July 6, 2006, we sold to
NICE-Systems Ltd. (or its subsidiary), all of the outstanding shares of capital stock of IEX Corporation, our then wholly owned
subsidiary ("IEX"), resulting in total proceeds of approximately $201.5 million and a pre-tax gain of approximately $200.1 million ($177.5
million after-tax). Accordingly, our IEX business unit is classified as a discontinued operation and its results of operations, financial
position and cash flows are separately reported for all periods presented. Summarized financial information for IEX is as follows (in thousands):

|                                                      | December 31,
|----------------------------------------------------- | ------------
|                                                      | 2006        
|                                                      |             
|Revenues                                              | $           
|Income from discontinued operations before            |             
|provision of income taxes                             | $           
|Provision for income taxes                            |             
|Income from discontinued operations, net of           |             
|income taxes                                          |             
|Gain on sale of discontinued operations, net of taxes |             
|Income from discontinued operations, net of taxes     | $           

Liquidity and Capital Resources

We derive our liquidity and capital resources primarily from our cash flows from operations and from our working capital.
Our working capital increased to $435.4 million as of December 31, 2006 from $189.1 million as of December 31, 2005, primarily due to
an increase in cash flow from continuing operations and the proceeds from the sale of IEX. With a strong working capital position, we
believe that we have the flexibility to continue to invest in further development of our technology and, when necessary or appropriate,
make selective acquisitions to continue to strengthen our product portfolio.

The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, and
accounts receivable, reduced by trade accounts payable, accrued expenses, accrued payroll and related expenses and current portion
of deferred revenues. We continued to generate positive cash flows from operations in 2005 and 2006. Our cash, cash equivalents and short-term
investments were $424.5 million and $226.3 million at December 31, 2006 and 2005, respectively. In addition, as of December 31,
2006, we had a $30.0 million line of credit collateralized by a pledged investment account held with an intermediary financial
institution. As of December 31, 2006, there were no outstanding borrowings under this facility.

As of December 31, 2006, substantially all of our short-term investments had investment grade ratings and any such investments
that were in an unrealized loss position at December 31, 2006 were in such position solely due to interest rate changes, sector credit
rating changes or company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a
period of time that will be sufficient for anticipated recovery in market value, we currently expect to receive the full principal or recover
our cost basis on these securities. When evaluating our investments for possible impairment, we review factors such as the length of
time and extent to which fair value has been below our cost basis, the financial condition of the entity in which the investment is made,
and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value.
The declines in our securities are considered to be temporary in nature and, accordingly, we do not believe these securities are
impaired as of December 31, 2006.

We believe our current working capital and anticipated cash flows from continuing operations will be adequate to meet our cash
needs for our daily operations and capital expenditures for at least the next 12 months. Our liquidity could be negatively impacted by a
decrease in revenues resulting from a decline in demand for our products or a reduction of capital expenditures by our customers as a
result of a downturn in the global economy, among other factors. We did not repurchase any of our common stock during 2006, 2005 or
2004.

We currently have $125 million outstanding of 2.25% Senior Subordinated Convertible Notes due June 2008 (the "Notes") which
were issued under an Indenture dated as of June 17, 2003 (the "Indenture") between Deutsche Bank Trust Company Americas (the
"Trustee") and us. There are no financial covenants related to the Notes, no restrictions on the paying of dividends and no restrictions
concerning additional indebtedness.

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Contractual Obligations

As of December 31, 2006, our future fixed commitments for cash payments are as follows (in thousands):

|                                            |  |   |         |  |   |         |  |   | 2008 to |  |   | 2010 to |  |   | 2012 and
|------------------------------------------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | --------
|                                            |  |   | Total   |  |   | 2007    |  |   | 2009    |  |   | 2011    |  |   | Beyond  
|Long-term convertible debt                  |  | $ | 125,000 |  | $ | -       |  | $ | 125,000 |  | $ | -       |  | $ | -       
|Interest due on long-term convertible debt  |  |   | 4,219   |  |   | 2,812   |  |   | 1,407   |  |   | -       |  |   | -       
|Operating lease obligations                 |  |   | 48,996  |  |   | 8,469   |  |   | 15,007  |  |   | 14,473  |  |   | 11,047  
|Current liabilities on the balance sheet(1) |  |   | 126,381 |  |   | 126,381 |  |   | -       |  |   | -       |  |   | -       
|Purchase obligations(2)                     |  |   | 2,518   |  |   | 2,518   |  |   | -       |  |   | -       |  |   | -       
|Total                                       |  | $ | 307,114 |  | $ | 140,180 |  | $ | 141,414 |  | $ | 14,473  |  | $ | 11,047  

(1)	Current liabilities in the above table represents current liabilities as presented in the consolidated balance sheet, reduced by
the current portion of capital lease obligations and the current portion of deferred revenues as deferred revenues will not be settled
using cash payments, but rather with the provision of goods and services.

(2)	From time to time in the normal course of business we may enter into purchasing agreements with our suppliers that require
us to accept delivery of, and remit full payment for, finished products that we have ordered, finished products that we requested be held
as safety stock, and work in process started on our behalf in the event we cancel or terminate the purchasing agreement. It is not our
intent, nor is it reasonably likely, that we would cancel a purchase order that we have executed. Because these agreements do not
specify fixed or minimum quantities, do not specify minimum or variable price provisions, and do not specify the approximate timing of
the transaction, we have no basis to estimate any future liability under these agreements.

We lease a number of facilities throughout the United States and internationally under operating leases that range from one month
to ten years. We believe that our existing facilities will be adequate to meet our needs at least through 2007, and that we will be able to
obtain additional space when, where and as needed on acceptable terms.

Cash Flows

As discussed above, one of the primary sources of our liquidity is our ability to generate positive cash flows from
continuing operations. In 2006, we sold our IEX business unit which is classified as discontinued operations in our Consolidated
Financial Statements. Cash flows from discontinued operations are presented separately within each of the three cash flow categories.
The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities related to
continuing operations.

Cash Flows from Operating Activities

Net cash provided by operating activities of continuing operations was $28.1 million, $50.9 million and $7.4 million for 2006,
2005 and 2004, respectively. Cash provided by operating activities decreased on a year-over-year basis during 2006 primarily as the
result of changes in operating assets and liabilities, such as larger increases in accounts receivable in 2006 than in 2005 and smaller
increases in deferred revenues in 2006 than in 2005, offset by a decrease in deferred costs. Cash provided by operating activities
increased on a year-over-year basis during 2005 primarily as a result of increases in sales orders across our operating segments,
which increased both our total revenues from operations for the year, as well as our total deferred revenue balance as of December 31,
2005. Specifically, while many sales orders have not been recognized as revenue due primarily to partial shipments of the orders, we
have received a portion of the non-refundable payment related to these partial shipments, resulting in the significant year-over-year
increase in our cash flows from operations. Also contributing to the increase in cash flows from operations in 2005 is a reduction in our
DSO.

During 2006, 2005 and 2004, our cash flows from operations were primarily derived from (i) our earnings from continuing
operations prior to non-cash expenses such as depreciation, amortization, stock-based compensation, bad debt, write-downs of
inventory and non-cash impairment charges and (ii) changes in our working capital, which are primarily composed of net increases in
accounts receivable, increases in inventories and increases in deferred revenue and associated deferred costs (collectively
representing net cash outflows of $40.1 million, $23.4 million and $15.3 million in 2006, 2005 and 2004, respectively), partially offset by
changes in accounts payable, accrued expenses and accrued payroll and related expenses.

We currently anticipate that we will continue to operate a cash-positive business in 2007. Our ability to meet these
expectations depends on our ability to achieve positive earnings. Our ability to generate future cash flows from operations

52



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could be negatively impacted by a decrease in demand for our products, which are subject to technological changes and increasing competition, or a
reduction of capital expenditures by our customers as a result of a downturn in the global economy, among other factors.

Cash Flows from Investing Activities

Net cash used in investing activities of continuing operations was $236.9 million, $70.1 million and $44.4 million for 2006, 2005
and 2004, respectively. Our investment activities primarily relate to (i) transactions within our investments; (ii) strategic acquisitions; and
(iii) the purchase of property and equipment. For 2006, our cash used in investing activities of continuing operations included $202.2
million of net cash outflows associated with purchases of available-for sale securities, while in 2005 and 2004, our cash provided by
investing activities included $46.8 million and $91.5 million, respectively, of net cash inflows associated with sales of available-for-sale
securities from our short-term investment portfolio. Acquisition-related cash outflows were $82.9 million in 2005, relating to the cash
consideration component of our acquisitions of iptelorg and the Santera minority interest. In 2004, cash outflows relating to acquisitions
were $152.7 million, relating to the cash consideration component of our acquisitions of Taqua, VocalData and Steleus. Please refer to
Note 3 to our Consolidated Financial Statements for a further discussion of these acquisitions. Our investment in new property and
equipment amounted to $36.5 million, $29.9 million and $18.1 million during 2006, 2005 and 2004, respectively. Capital expenditures
increased during 2006 and 2005 primarily due to the continued growth of our global operations.

We intend to continue to closely monitor our capital expenditures, while making strategic investments to develop our existing
products and replace certain older computer and information technology infrastructure to meet the needs of our business and workforce.
We expect our total capital expenditures to be between $25.0 million and $35.0 million for 2007.

Cash Flows from Financing Activities

Net cash provided by financing activities was $19.1 million, $7.1 million and $27.0 million for 2006, 2005 and 2004,
respectively. For 2006, 2005 and 2004, our financing activities consist primarily of net proceeds of $17.5 million, $10.4 million and $35.9
million, respectively, from the issuance of our common stock pursuant to the exercise of employee stock options and our employee
stock purchase plan, partially offset by repayments of debt of $0.1 million, $3.2 million and $8.9 million during 2006, 2005 and 2004,
respectively. In 2006, net cash provided by financing activities also included excess tax benefits from stock-based compensation of
approximately $2.0 million and cash payments to settle stock options of approximately $0.3 million.

Litigation with Bouygues Telecom

As further described in Item 3 - "Legal Proceedings," Bouygues Telecom, S.A., a French
telecommunications operator, filed a lawsuit against us seeking damages for losses caused by a service interruption
Bouygues Telecom experienced. Bouygues has provided a claim summary suggesting that its damages may range from $127 million to
$179 million. On January 5, 2007, we presented Bouygues with an Offer of Judgment in response to a request from our insurance
carrier.  The offer of $6.2 million was based on our best estimate of the maximum amount of damages that could be recoverable by
Bouygues under the relevant contract.  Bouygues did not respond to the offer, and it expired ten days after it was
presented.  The amount of this settlement offer was recorded both as a liability and an offsetting receivable (from our insurance
carrier) in our 2006 financial statements. At this stage of the litigation, we cannot assess the likely outcome of this matter, however, an
unfavorable outcome could have a material adverse effect on our consolidated financial position, results of operations or cash
flows.

Financial and Market Risks

We operate internationally and thus are exposed to potential adverse changes in currency exchange rates. We use
derivative instruments (foreign exchange contracts) to reduce our exposure to foreign currency rate changes on receivables
denominated in a foreign currency. The objective of these contracts is to reduce or eliminate, and efficiently manage, the economic
impact of currency exchange rate movements on our operating results as effectively as possible. We do not enter into derivative
instrument transactions for trading or speculative purposes.

We monitor our exposure to foreign currency fluctuations on a monthly basis. We enter into multiple forward contracts throughout a
given month to match and mitigate our changing exposure to foreign currency fluctuations. Our exposure to foreign currency
fluctuations is principally due to receivables generated from sales denominated in foreign currencies. Our exposure fluctuates as we
generate new sales in foreign currencies and as existing receivables related to sales in foreign currencies are collected. Our foreign
currency forward contracts generally will have terms of one month or less and are typically structured to expire on the last fiscal day of
any given month. To the extent necessary to continue to mitigate our risk,
on the last fiscal day of any given month, we enter into new foreign currency forward contracts. As of December 31, 2006, we

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had four foreign currency contracts outstanding, as follows:

|                                                              |  |                  |  |   |            |  |   | Fair 
|------------------------------------------------------------- |  | ---------------- |  | - | ---------- |  | - | -----
|                                                              |  | Contract Amount  |  |   | Contract   |  |   | Value
|                                                              |  | (Local Currency) |  |   | Amount     |  |   | (US$)
|Australian dollars ("AUD") (contracts to pay AUD/receive US$) |  | (AUD) 640,000    |  | $ | 506,368    |  | $ | -    
|Euros ("EUR") (contracts to pay EUR/receive US$)              |  | (EUR) 25,000,000 |  | $ | 32,885,000 |  | $ | -    
|Brazilian reais ("BRL") (contracts to pay BRL/receive US$)    |  | (BRL) 19,200,000 |  | $ | 8,856,497  |  | $ | -    
|Canadian dollars ("CAD") (contracts to pay CAD/receive US$)   |  | (CAD) 1,500,000  |  | $ | 1,286,670  |  | $ | -    

We entered into these contracts during the last day of our fiscal year and as such, the fair value of these contracts individually and
in the aggregate was not significant as of December 31, 2006. For the years ending December 31, 2006, 2005 and 2004, our gain or
(loss) from foreign currency forward contracts was $(3,926,000), $2,489,000 and $(2,568,000), respectively, which was generally offset
by the remeasurement gain or loss on the underlying receivables. Please refer to Notes 1 and 8 to our Consolidated Financial
Statements for additional information relating to our derivatives and hedging activities.

We maintain an investment portfolio of various holdings, types, and maturities. Please refer to Note 6 to our Consolidated Financial
Statements for a description of these investments. These securities are generally classified as available-for-sale and consequently are
recorded in our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of
accumulated other comprehensive income, net of tax.

Fixed income securities are subject to interest rate risk. At any time, a significant rise or decrease in interest rates could have a
material adverse effect on the fair value of our investment portfolio as the fixed income securities we hold are subject to interest rate
risk. If market rates were to increase immediately and uniformly by 100 basis points from levels as of December 31, 2006, then the fair
value of our investments would decline by approximately $0.4 million. Our portfolio is diversified and consists primarily of investment
grade securities to minimize credit risk.

We have invested in privately-held companies, some of which are in startup or development stages. These investments are
inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages
and may never materialize. We could lose our entire investment in these companies. These investments are primarily carried at cost
and periodically evaluated for impairment. No impairment charges were recognized during the years ended December 31, 2006, 2005
or 2004.

There have been no significant borrowings under our variable rate credit facility. All of our outstanding long-term debt is fixed rate
and not subject to interest rate fluctuations. The fair value of our long-term debt will increase or decrease as interest rates decrease or
increase, respectively. Based on the quoted market price of our convertible subordinated notes, the fair value of the convertible
subordinated notes was approximately $126.4 million as of December 31, 2006.

With respect to trade receivables, we sell network signaling, switching and communications software solutions worldwide primarily
to telephone operating companies, equipment manufacturers and corporations that use our systems to design, install, maintain, test
and operate communications equipment and networks. Credit is extended based on an evaluation of each customer's financial
condition, and generally collateral is not required. Generally, payment terms stipulate payment within 90 days of shipment or
other milestone events and currently, we do not engage in leasing or other customer financing arrangements. Many of our international
sales are secured with export accounts receivable insurance or letters of credit. Although we have processes in place to monitor and
mitigate credit risk, there can be no assurance that such programs will be effective in eliminating such risk. Our exposure to credit risk
may increase as a result of weakened financial conditions in certain market segments. Credit losses for customers we deem to pose
substantial collection risks have been provided for in the financial statements. Historically, credit losses have been within
management's expectations. Future losses, if incurred, could harm our business and have a material adverse effect on our financial
position, results of operations or cash flows.

Off-Balance-Sheet Arrangements

We do not use off-balance-sheet arrangements with unconsolidated entities or related parties, nor do we use other forms
of off-balance-sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance-sheet risks from
unconsolidated entities. As of December 31, 2006, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii)
of SEC Regulation S-K.

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We have entered into operating leases for most U.S. and international sales and support offices and certain equipment in the
normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. As of December 31,
2006, we leased facilities and certain equipment under non-cancelable operating leases expiring between 2007
and 2016. Rent expense under operating leases for 2006, 2005 and 2004 was $8.7 million, $9.8 million and $9.4 million, respectively. Future minimum
lease payments under our operating leases as of December 31, 2006 are detailed previously in "Liquidity and Capital Resources" in the
section entitled "Contractual Obligations."

Seasonality

Our first quarter revenues and orders have historically been lower than the revenues and orders in the immediately
preceding fourth quarter because (i) many of our customers utilize a significant portion of their capital budgets at the end of their fiscal
year, (ii) the majority of our customers begin a new fiscal year on January 1, and (iii) capital expenditures tend to be lower in an
organization's first quarter than in its fourth quarter. We anticipate that this seasonality will continue. The seasonality between the fourth
quarter and first quarter may be impacted by a variety of factors, including changes in the global economy and other factors. Please
refer to the section entitled "Risk Factors" in Item 1A.

Application of Critical Accounting Policies and Use of Estimates

Use of Estimates

Our Consolidated Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States ("GAAP") and the application of GAAP requires management to make estimates that affect our
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In many
instances, we could have reasonably used different accounting estimates. In other instances, changes in the accounting estimates from
period to period are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by
management. To the extent that there are material differences between these estimates and actual results, our future financial
statement presentation of our financial condition or results of operations may be affected.

On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, provision for doubtful
accounts and sales returns, provision for inventory obsolescence, fair value of investments, fair value of acquired intangible assets and
goodwill, useful lives of intangible assets and property and equipment, income taxes, restructuring obligations, product warranty
obligations, and contingencies and litigation, among others. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. We refer to accounting estimates of
this type as "critical accounting estimates."

Critical Accounting Policies

In addition to making critical accounting estimates, we must ensure that our financial statements are properly stated in
accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does
not require management's judgment in its application, while in other cases, management's judgment is required in selecting among
available alternative accounting standards that allow different accounting treatment for similar transactions (e.g., stock-based
compensation, restructuring activities, depreciation methodology, etc.).

Our management has reviewed our critical accounting policies, our critical accounting estimates, and the related disclosures
with our Disclosure and Audit Committees. These policies and our procedures are described below. In addition, please refer to Note 1
to the accompanying Consolidated Financial Statements for a further description of our accounting policies. We believe that the
following are our most critical accounting policies, each of which is critical to the portrayal of our financial condition and results of
operations and requires our most difficult, subjective and complex judgments.

Revenue Recognition

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

Our telecommunications solutions are comprised of hardware and/or software components ranging from exclusively a software
solution to solutions that are hardware intensive. Our assessment of the appropriate revenue recognition guidance
involves significant judgment. For instance, the determination of whether the software component of our telecommunications

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solutions is more than
incidental to the related product in a sales arrangement can impact whether the entire sales arrangement is accounted for under
software revenue recognition guidance or more general revenue recognition guidance. This assessment has a significant impact on the
amount and timing of revenue recognition.

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

In applying existing revenue recognition guidance and especially the revenue recognition guidance of SOP 97-2, we exercise
judgment and use estimates in connection with the determination of the amount of product, warranty and professional services
revenues to be recognized in each accounting period. In addition to estimating the timing and amount of revenue to recognize, we must
evaluate whether the estimated costs required to provide any undelivered elements exceed the expected revenue allocated to those
elements. When total cost estimates exceed revenues, we accrue for the estimated losses immediately using cost estimates that are
based upon the estimated cost of the remaining equipment to be delivered and the consulting personnel delivering the services. As a
result of applying these judgments, in 2006 and 2005, we recognized approximately $3.4 million and $9.9 million, respectively, in
estimated losses on existing contracts with our customers.

The complexity of current revenue guidance, in particular SOP 97-2, and the related estimation process and factors relating to the
assumptions, risks and uncertainties inherent with the application of current revenue recognition guidance, affect the amounts of
revenue and related expenses reported in our Consolidated Financial Statements. The following is a summary of the key areas where
we exercise judgment and use estimates in connection with the determination of the amount of revenue to be recognized in each
accounting period:

Determining Separate Elements and Allocating Value to Those Elements

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

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

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

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

In addition to evaluating the fair value of each element of an arrangement, we consider whether the elements can be separated for
revenue recognition purposes under SOP 97-2. In making this determination, we consider the nature of services (i.e., consideration of
whether the services are essential to the functionality of the product), degree of risk, availability of services from other vendors, timing
of payments and impact of milestones or acceptance criteria on the collectibility of the product fee.

Product Revenue

For substantially all of our arrangements, we defer revenue for the fair value of the warranty offering and
professional services to be provided to the customer and recognize revenue for all products in an arrangement when persuasive evidence of
an arrangement exists and delivery of the last product has occurred, provided the fee is fixed or determinable and collection is

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deemed probable. We generally evaluate each of these criteria as follows:

- Persuasive evidence of an arrangement exists. We consider a non-cancelable agreement (such as an irrevocable
customer purchase order, contract, etc.) to be evidence of an arrangement.
- Delivery has occurred. Delivery is considered to occur when title to our products has passed to the customer, which
typically occurs at physical delivery of the products to a common carrier. For arrangements with systems integrators and OEM
customers, we recognize revenue when title to the last product in a multiple-element arrangement has passed. For arrangements with
resellers, we generally recognize revenue upon evidence of sell-through to the end customer.
- The fee is fixed and determinable. We assess whether fees are fixed and determinable at the time of sale. Our standard
payment terms may vary based on the country in which the arrangement is executed and the credit standing of the individual customer,
among other factors. We generally consider payments that are due within six months of shipment or acceptance to be fixed or
determinable based upon our successful collection history on such arrangements. We evaluate payment terms in excess of six months
but less than one year on a case by case basis as to whether the fee is fixed or determinable. In addition, we only consider the fee to
be fixed or determinable if the fee is not subject to refund or adjustment. If the arrangement fee is not fixed or determinable, we
recognize the revenue as amounts become due and payable.
- Collection is probable. We conduct a credit review for all significant transactions at the time of the arrangement to
determine the credit-worthiness of the customer. Collection is deemed probable if we expect that the customer will be able to pay
amounts under the arrangement as payments become due. If we determine collection is not probable, we defer the revenue and
recognize the revenue upon cash collection.

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

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

Warranty/Maintenance Revenue

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

Professional Services Revenue

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

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there exists a significant
uncertainty about the project completion or receipt of payment for the professional services, revenue is deferred until the uncertainty is
sufficiently resolved.

Provision for Doubtful Accounts

We initially record our provision for doubtful accounts based on our historical experience and then adjust
this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful
accounts. In estimating the allowance for doubtful accounts, management considers, among other factors, (i) the aging of the accounts
receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging
categories and the nature of the receivable (e.g., product, professional services, maintenance, etc.); (iv) our historical provision for
doubtful accounts, which has ranged up to 1% of total revenues per year during the last three years; (v) our historical write-offs and
recoveries; (vi) the credit-worthiness of each customer; (vii) the economic conditions within the telecommunications industry; and (viii)
general economic conditions. In cases where we are aware of circumstances that may impair a specific customer's ability to meet their
financial obligations to us, we record a specific allowance against amounts due from the customer, and thereby reduce the net
recognized receivable to the amount we reasonably believe will be collected.

Should any of these factors change, the estimates made by management will also change, which could impact the level of our
future provision for doubtful accounts. Specifically, if the financial condition of our customers were to deteriorate, affecting their ability to
make payments, an additional provision for doubtful accounts may be required.

Inventories

Our inventory balance was $49.5 million and $47.5 million as of December 31, 2006 and 2005, respectively. Inventory levels are
based on projections of future demand and market conditions. Any sudden decline in demand and/or rapid product improvements and
technological changes can result in excess and/or obsolete inventories.

On an ongoing basis inventories are reviewed and written down for estimated obsolescence or unmarketable inventories equal to
the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and
market conditions. Any adjustment to our inventory as a result of an estimated obsolescence or net realizable condition is reflected as a
component of our cost of sales. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and any
subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Our provision for inventory obsolescence was approximately $10.1 million, $12.1 million and $4.7 million for 2006, 2005 and 2004,
respectively. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of
inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to increase our
inventory allowances, and our gross margin could be adversely affected. If actual market conditions are less favorable than our
forecasts, additional inventory write downs may be required. Our estimates could be influenced by sudden decline in demand due to
economic downturn, rapid product improvements, technological changes and changes in customer requirements.

Investments

Marketable securities are classified as available-for-sale securities and are accounted for at their fair value, and unrealized
gains and losses on these securities are reported as a separate component of shareholders' equity net of tax. When the fair value of an
investment declines below its original cost, we consider all available evidence to evaluate whether the decline is other-than-temporary.
We employ a systematic methodology that considers available evidence in evaluating potential impairment of its investments on a
quarterly basis. This review may include an evaluation of historical and projected financial performance of the investee, expected cash
needs of the investee, recent funding events of the investee, general market conditions, industry and sector performance, and changes
in technology, among other factors. We also consider the duration and extent to which the fair value is less than cost, as well as our
intent and ability to hold the investment. Other-than-temporary impairments are recognized in earnings if (i) the market value of the
investment is below its current carrying value for an extended period, which we generally define as nine to twelve months; (ii) the issuer
has experienced significant financial declines; or (iii) the issuer has experienced difficulties in raising capital to continue operations,
among other factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a
new cost basis in the investment is established. To date, we have had no such other-than-temporary declines below cost basis.

Intangible Assets and Goodwill

We account for our purchases of acquired companies in accordance with SFAS No. 141 "Business
Combinations" ("SFAS 141") and account for the related acquired intangible assets in accordance with SFAS No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142"). In accordance with SFAS 141, we allocate the cost of the acquired companies to the identifiable
tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill.

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Certain intangible assets, such as "acquired technology," are amortized to expense over time, while IPR&D, if any, is recorded as an expense at the
acquisition date.

The majority of the entities acquired by us do not have significant tangible assets and, as a result, a significant
portion of the purchase price is typically allocated to intangible assets and goodwill. Our future operating performance will be impacted
by the future amortization of intangible assets, potential charges related to IPR&D, and potential impairment charges related to
goodwill or intangibles. As of December 31, 2006, we had an aggregate of approximately $65.2 million reflected on the accompanying
consolidated balance sheet related to goodwill and intangible assets. The allocation of the purchase price of the acquired companies to
intangible assets and goodwill requires management to make significant estimates and assumptions, including estimates of future cash
flows expected to be generated by the acquired assets and the appropriate discount rate for these cash flows. Specifically, the amounts
and useful lives assigned to identifiable intangible assets impact future amortization and the amounts assigned to IPR&D are
expensed immediately. If the assumptions and estimates used to allocate the purchase price are not correct, purchase price
adjustments or future asset impairment charges could be required.

As required by SFAS 142, in lieu of amortizing goodwill, we test goodwill for impairment periodically and record any necessary
impairment in accordance with SFAS 142. We are amortizing our intangible assets as follows: (i) acquired technology, customer
contracts and non-compete agreements are currently being amortized over their estimated useful lives using the straight-line method
and (ii) customer relationship intangible assets are currently being amortized over their estimated useful lives based on the greater of
the straight-line method or the estimated customer attrition rates.

Impairment of Long-Lived Assets

We test goodwill for impairment in accordance with SFAS 142, which requires that goodwill be tested for impairment at the
"reporting unit level" ("Reporting Unit") at least annually and more frequently upon the occurrence of certain events, as defined by SFAS
142. As of December 31, 2006, we have determined that we have four reporting units, consisting of (i) our NSG business unit, (ii) our
CSSG business unit (iii) Santera and VocalData, a component of our SSG reporting segment, and (iv) Taqua, also a component of our
SSG reporting segment. Goodwill is tested for impairment annually on October 1 in a two-step process. First, we determine if the
carrying amount of our Reporting Units exceeds their "fair value," If we determine that goodwill may be impaired, we compare the
"implied fair value" of the goodwill, as defined by SFAS 142, to its carrying amount to determine the impairment loss, if any.

We evaluate all of our long-lived assets (primarily property and equipment and intangible assets other than
goodwill) for impairment in accordance with the provisions of SFAS 144. SFAS 144 requires that long-lived assets and intangible assets
other than goodwill be evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable based on expected undiscounted cash flows attributable to that asset.

As discussed further in Note 10 to our Consolidated Financial Statements, in the third quarter of 2006, we determined that certain
intangible assets and the goodwill associated with our reporting unit consisting of our Santera and VocalData product lines were
impaired. Accordingly, we recognized an aggregate impairment charge of $100.6 million, consisting of a $75.0 million charge
associated with the goodwill and $25.6 million associated with the "acquired technology" intangible asset. In the fourth quarter of 2005
we determined that certain intangible assets and the goodwill associated with our Taqua reporting unit were impaired. Accordingly, we
recognized an aggregate impairment charge of $49.9 million, consisting of a $27.2 million charge associated with the goodwill and
$22.7 million associated with the "acquired technology" intangible asset.

As of December 31, 2006, the net carrying values of our goodwill and intangible assets (i.e., the primary asset categories in which
we have experienced impairment charges in the past) were $40.9 million and $24.4 million, respectively. While we do not currently
believe any of our long-lived assets are impaired, if a change in circumstances were to occur requiring an assessment of impairment,
then we would be required to evaluate whether the future cash flows related to the asset will be greater than its carrying value at the
time of the impairment test. While our cash flow assumptions are consistent with the plans and estimates we are using to manage our
operations, there is significant judgment in determining the cash flows attributable to our intangible assets over their respective
estimated useful lives. If such an evaluation resulted in an impairment of any of our long-lived assets, such impairment would be
recorded in the period we make the impairment determination.

Product Warranty Costs

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

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

Prior to 2005, we historically had few Class A designated warranty events and accordingly have generally expensed the cost of our
warranty obligations as incurred. In 2005, we had three Class A designated events or other events that obligated us to satisfy specific
warranty obligations. Accordingly, we established a warranty reserve within accrued liabilities in the accompanying consolidated
balance sheet for these events of approximately $9.3 million as of December 31, 2005. In 2006, we incurred additional provisions
related to Class A warranty events totaling approximately $4.1 million, consisting of i) revisions of estimates relating to previous Class A
events of approximately $1.1 million and ii) provisions for Class A warranty events that arose in 2006 of approximately $3.0 million. Our
warranty reserve is based on our estimates of the associated material costs, technical support labor costs, and associated overhead.
Our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting product
failures. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required. Further, if we continue to experience an increase in warranty claims compared with our historical
experience, or if the cost of servicing warranty claims is greater than the expectations on which the accrual has been based, our gross
margin could be adversely affected.

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

Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R") and Staff Accounting Bulletin No. 107, "Share-Based Payment," which require recognition of
compensation expense for all share-based payments made to employees based on estimated fair values. SFAS 123R requires that
companies estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The cost is to
be recognized over the period during which an employee is required to provide service in exchange for the award. The valuation
provisions of SFAS 123R apply to new grants and grants modified after the adoption date that were outstanding as of the effective date.
Compensation expense for grants outstanding as of the adoption date is recognized over the remaining service period based on the
grant date fair value estimated in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123R also requires the benefit of tax deductions in excess of
recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under
previous accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods
subsequent to adoption. Total cash flows remain unchanged from those reported under previous accounting rules.

SFAS 123R supersedes our previous accounting under SFAS 123 and Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25"), under which we used the intrinsic value method to account for our employee stock options and
employee stock purchase plan. Under the intrinsic value method, no stock-based compensation expense had generally been
recognized related to employee stock option grants, because the exercise price of the stock options granted to employees and directors
equaled the fair market value of the underlying stock at the date of grant.

We have historically used stock options as the key component of our employee stock-based compensation program. Prior to 2006,
virtually all of our employees were eligible to receive and were granted stock options. Our adoption of SFAS 123R and related
regulations made it significantly more expensive for us to continue to grant stock based compensation awards in accordance with our
prior strategy. As a result, we have revised our equity compensation policies to emphasize the use of restricted stock units and stock
appreciation rights as opposed to stock options, as well as limited awards of stock based

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compensation, such that grants are only made to employees at or above the manager level.

We adopted SFAS 123R using the modified prospective transition method. In accordance with the modified prospective method,
our Consolidated Financial Statements for periods prior to January 1, 2006 have not been restated to reflect, and do not include, the
impact of SFAS 123R. For awards that have graded-vesting features and service conditions only, we elected
the straight line single-option method of attributing the value of stock-based compensation expense to reporting periods. The adoption of SFAS 123R primarily
resulted in a change in the Company's method of measuring and recognizing stock-based compensation expense, and had a material
impact on our consolidated financial position. Stock-based compensation expense related to continuing operations recognized under
SFAS 123R for the year ended December 31, 2006 was approximately $34.7 million. For the years ended December 31, 2005 and
2004, stock-based compensation expense recognized under the intrinsic value method in accordance with APB 25 was $3.4 million and
$2.1 million, respectively. See Note 14 to our Consolidated Financial Statements for additional information regarding the stock-based
compensation expense.

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3
"Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards." We have elected to adopt the alternative
transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS
123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital
pool ("APIC pool") related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the
APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123R.

Contingent Liabilities

We have a number of unresolved regulatory, legal and tax matters, as discussed further in Note 9 and Note 13 to our
Consolidated Financial Statements.  We provide for contingent liabilities in accordance with SFAS No. 5 "Accounting for
Contingencies" ("SFAS 5"). In accordance with SFAS 5, a loss contingency is charged to income when (i) it is probable that an asset
has been impaired or a liability has been incurred at the date of the financial statements and (ii) the amount of the loss can be
reasonably estimated. Disclosure in the notes to the financial statements is required for loss contingencies that do not meet both those
conditions if there is a reasonable possibility that a loss may have been incurred. Gain contingencies are not recorded until realized. We
expense all legal costs incurred to resolve regulatory, legal and tax matters as incurred. In cases where our insurance carrier has
agreed to reimburse us for legal costs, including any accrued losses, we record a receivable in our consolidated financial statements for
any such amounts, which are included in prepaid expenses and other current assets.

Periodically, we review the status of each significant matter to assess the potential financial exposure. If a potential loss is
considered probable and the amount can be reasonably estimated as defined by SFAS 5, we reflect the estimated loss in our results of
operations. Significant judgment is required to determine the probability that a liability has been incurred or an asset impaired and
whether such loss is reasonably estimable. Because of uncertainties related to these matters, accruals are based on the best
information available at the time. Further, estimates of this nature are highly subjective, and the final outcome of these matters could
vary significantly from the amounts that have been included in the accompanying Consolidated Financial Statements. In determining
the probability of an unfavorable outcome of a particular contingent liability and whether such liability is reasonably estimable, we
consider the individual facts and circumstances related to the liability, opinions of legal and tax counsel, and recent legal and tax rulings
by the appropriate regulatory bodies, among other factors.  As additional information becomes available, we reassesses the
potential liability related to its pending claims and litigation and may revise its estimates accordingly. Such revisions in the estimates of
the potential liabilities could have a material impact on our results of operations and financial position.

Restructuring and Related Expenses

We account for restructuring and related expenses in accordance with SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146") and Staff Accounting Bulletin No. 100 "Restructuring and Impairment Charges." SFAS 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to
when management commits to an exit plan. SFAS 146 also requires that (i) liabilities associated with exit and disposal activities be
measured at fair value; (ii) one-time termination benefits be expensed at the date the entity notifies the employee, unless the employee
must provide future service, in which case the benefits are expensed ratably over the future service period; (iii) liabilities related to an
operating lease/contract be recorded at fair value and measured when the contract does not have any future economic benefit to the
entity (i.e., the entity ceases to utilize the rights conveyed by the contract); and (iv) all other costs related to an exit or disposal activity
be expensed as incurred. We account for severance costs in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits." The severance benefits provided as part of restructurings are part of an ongoing
benefit arrangement, and accordingly, we have accrued a liability for expected severance costs. Restructuring liabilities are included in
accrued expenses and accrued payroll and the related costs are reflected as operating expenses in the accompanying financial

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statements.

During 2006, 2005 and 2004, we incurred restructuring costs of $7.2 million, $7.7 million and $1.7 million, respectively, as
described further in Note 4 to the accompanying Consolidated Financial Statements (collectively, the "Restructurings"). Inherent in the
estimation of the costs related to the Restructurings are assessments related to the most likely expected outcome
of the significant
actions to accomplish the exit activities. In determining the charges related to the Restructurings, we had to make significant estimates
related to the expenses associated with the Restructurings. These estimates may vary significantly from actual costs depending, in part,
upon factors that may be beyond our control. We will continue to review the status of our Restructurings' obligations on a quarterly
basis and, if appropriate, record changes to these obligations in current operations based on management's most current
estimates.

Income Taxes

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This involves estimating our
current tax liabilities in each jurisdiction, including the impact, if any, of additional taxes resulting from tax examinations as well as
making judgments regarding the recoverability of deferred tax assets. To the extent recovery of deferred tax assets is not likely based
on our estimation of future taxable income in each jurisdiction, a valuation allowance is established. Tax liabilities can involve complex
issues and may require an extended period to resolve. We have considered future taxable income in assessing the need for an
additional valuation allowance on our remaining deferred tax assets. In the event we were to determine that we would not be able to
realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets would be charged to income in the period
such determination was made.

As a result of the acquisition of the remaining interest in Santera on October 3, 2005 (as discussed in Note 3 to the accompanying
Consolidated Financial Statements), the ownership threshold provided under income tax regulations for inclusion of Santera in our
consolidated federal income tax return has been met. We have removed the valuation allowance on Santera's net deferred tax assets
because we believe it is more likely than not that these assets will be realized in future consolidated federal income tax returns of
Tekelec. The elimination of this valuation allowance was recorded through purchase price accounting as an adjustment to goodwill.
Realization of the remaining net deferred tax assets is dependent on the amount of our income in carryback years and on our
generating sufficient taxable income in the future. Should it be determined that we would not be able to realize all or part of the net
deferred tax assets in the future, an adjustment to the deferred tax asset would reduce income in the period such determination was
made.

We assess the likelihood of the ultimate determination of various contingent tax liabilities that arise in different tax jurisdictions.
These tax matters can be complex in nature and uncertain as to the ultimate outcome. We establish reserves for tax contingencies
when we believe an unfavorable outcome is likely to occur and the liability can be reasonably estimated. Although we believe these
positions are fully supportable, we consider the likelihood of potential challenges and sustainability of such challenges upon
examination. Changes in our tax contingency reserves have occurred and are likely to continue to occur as our assessments change
based on current facts and circumstances such as further developments and progress of tax examinations in various jurisdictions.

As discussed in Note 9 to the accompanying Consolidated Financial Statements, our U.S. Federal income tax returns for the 2002
and 2004 tax years have been selected for audit by the IRS. While the final resolution of the IRS's examination is uncertain, we believe
that we have made adequate provisions in the accompanying Consolidated Financial Statements for any adjustments that the IRS may
propose with respect to our U.S. Federal income tax returns. The final determination of our tax obligations may exceed the amounts
provided for by us in the accompanying Consolidated Financial Statements. We will continually review our estimates related to our
income tax obligations, including potential assessments from the IRS of additional taxes, penalties and/or interest, and revise our
estimates, if deemed necessary. A revision in our estimates of our tax obligations will be reflected as an adjustment to our income tax
provision at the time of the change in our estimates. Such a revision could materially impact our effective tax rate, income tax provision
and net income.

Recent Accounting Pronouncements

Accounting Changes

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 "Accounting Changes and
Error Corrections" ("SFAS 154") which replaces Accounting Principles Board No. 20 "Accounting Changes" ("APB 20") and
Statement of Financial Accounting Standards No. 3 "Reporting Accounting Changes in Interim Financial Statements." SFAS 154
applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in
accounting principle. SFAS 154 requires retrospective application to prior periods' financial statements of a voluntary change in
accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be
recognized with a cumulative effect adjustment in net income of the period of the change. SFAS 154 is effective for accounting changes
made in annual periods beginning after December 15, 2005. The adoption of SFAS 154 did

62



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not have a material impact on our consolidated financial position, results of operations or cash flows.

Accounting for Uncertain Tax Positions

In July 2006, the FASB issued FASB Interpretation No. 48,"Accounting for Uncertainty in Income Taxes —
an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements. This Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Specifically, FIN 48
requires the recognition in financial statements of the impact of a tax position, if that position is more likely than not of being sustained
on audit, based on the technical merits of the position. Additionally, FIN 48 provides guidance on the derecognition of previously
recognized deferred tax items, classification, accounting for interest and penalties, and accounting in interim periods related to
uncertain tax positions, as well as, requires expanded disclosures. FIN 48 is effective for fiscal years beginning after
December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening
retained earnings. We are currently evaluating the impact on our financial statements of adopting FIN 48.

Fair Value Measurement

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 "Fair Value
Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact
on our financial statements of adopting SFAS 157.

Materiality

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108"). SAB 108 provides guidance
on the consideration of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.
The staff of the Securities and Exchange Commission (the "Staff") believes registrants must quantify the impact of correcting all
misstatements, including both carryover and reversing effects of prior year misstatements, on a company's current year Consolidated
Financial Statements. The Staff prescribes two approaches to assessing the materiality of misstatements: the "rollover" approach,
which quantifies misstatements based on the amount of error originating in the current year income statement and the "iron curtain
approach," which quantifies misstatements based on the effects of correcting the cumulative effect existing in the balance sheet at the
end of the current year. If under either approach, misstatements are deemed material, a company is required to adjust its financial
statements, including correcting prior year financial statements, even if such correction was, and continues to be, immaterial to the prior
year financial statements. Correcting prior year financial statements for immaterial errors would not require a company to amend
previously filed reports, and such corrections may be made the next time the company files its prior year statements. We do not have
any adjustments resulting from the application of SAB 108, which is effective for the first fiscal year ending after November 15,
2006.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

See the section entitled "Financial and Market Risks" included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 of Part I of this Annual Report.

Item 8. Financial Statements and Supplementary Data.

See our Consolidated Financial Statements included herein and listed in Item 15(a) of this Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Based on our management's evaluation (with the participation of our Chief Executive Officer and Chief Financial Officer),
as of the end of the period covered by this Annual Report, our Chief Executive Officer and Chief Financial Officer have

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concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) are effective to ensure that information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange
Commission rules and forms and is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles ("GAAP"). Internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may
deteriorate.

Management (with the participation of our Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management
concluded that our internal control over financial reporting was effective as of December 31, 2006.

Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been
audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report which is included
herein.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our fourth quarter of 2006 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls
and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud.
Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints and the benefits
of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances
of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any
system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions.

Item 9B. Other Information

Not applicable.

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PART III

Item 10.	 Directors, Executive Officers and Corporate Governance.

Certain information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for
our 2007 Annual Meeting of Shareholders to be held on May 18, 2007, entitled "Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance," to be filed with the SEC. Our Proxy Statement will be filed
within 120 days after the date of our fiscal year-end which was December 31, 2006.

Tekelec has adopted the Tekelec Code of Business Conduct and Ethics,
which every Tekelec employee is expected to observe. The Company has also adopted a Code of Ethics for Chief Executive Officer
and Senior Financial Officers which supplements the Code of Business Conduct and Ethics and sets forth certain fundamental
principals and key policies and procedures that govern the conduct of the Chief Executive Officer, Chief Financial Officer and certain
other designated senior financial officers.

The Tekelec Code of Business Conduct and Ethics is publicly available on Tekelec's website under "Governance" at the following
URL: http://www.tekelec.com/about/gov_code.asp. The Company's Code of Ethics for Chief Executive Officer and Senior Financial
Officers is included in this Annual Report on Form 10-K as Exhibit 14.1 hereto.

Item 11.	 Executive Compensation.

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our
2007 Annual Meeting of Shareholders to be held on May 18, 2007, entitled "Compensation Discussion and Analysis," "Executive
Compensation and Other Information," "Compensation of Directors," "Compensation Committee Interlocks and Insider Participation,"
and "Compensation Committee Report," to be filed with the SEC.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.

The information required by this item is incorporated herein by reference to the section of our definitive Proxy Statement
for our 2007 Annual Meeting of Shareholders to be held on May 18, 2007, entitled "Common Stock Ownership of Principal
Shareholders and Management," to be filed with the SEC.

The equity compensation plan information required to be provided in this Annual Report on Form 10-K is incorporated by
reference to the section of our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on May 18, 2007,
entitled "Executive Compensation and Other Information  — Equity Compensation Plan Information," to be filed with the
SEC.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated herein by reference to the section of our definitive Proxy Statement
for our 2007 Annual Meeting of Shareholders to be held on May 18, 2007, entitled "Certain Relationships and Related
Transactions," to be filed with the SEC.

Item 14. Principal Accountant Fees and Services

The information required by this Item is incorporated herein by reference to the section of our definitive Proxy Statement
for our 2007 Annual Meeting of Shareholders to be held on May 18, 2007, entitled "Principal Accountant Fees and Services," to
be filed with the SEC.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

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

(1) Consolidated Financial Statements



|                                                                                                                         |  |      |     | 
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                                                                         |  | Page |    
|                                                                                                                         |  |      |    
|Report of Independent Registered Public Accounting Firm                                                                  |  |      | F-1 | 
|Consolidated Statements of Operations for each of the three years in the period ended December 31, 2006                  |  |      | F-3 | 
|Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended
December 31, 2006 |  |      | F-4 | 
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                             |  |      | F-5 | 
|Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2006                  |  |      | F-6 | 
|Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31,
2006        |  |      | F-8 | 
|Notes to Consolidated Financial Statements                                                                               |  |      | F-9 | 

(2) Consolidated Financial Statement Schedules

None.

Schedules that are not listed herein have been omitted because they are not applicable or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.

(3) List of Exhibits



|Number |    | Exhibit
|------ | -- | -------
|       |    |        
|       | 2  | .1     
|      
|       | 2  | .2     
|      
|       | 2  | .3     
|      
|       | 3  | .1     
|      
|       | 3  | .2     
|      
|       | 4  | .1     
|      
|       | 4  | .2     
|      
|       | 10 | .1     
|      

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| | 10 | .2  |  | Form of Indemnification Agreement entered into between the Registrant and each of its directors and executive
officers(2)(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10 | .3  |  | Amended and Restated 1994 Stock Option Plan, including form of stock option agreement(8)(10), as amended by
Amendment No. 1 thereto dated May 8, 2003(6)(8)                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | 10 | .4  |  | Lease Agreement dated as of February 8, 1988 between the Registrant and State Street Bank and Trust
Company of California, N.A., not individually, but solely as an Ancillary Trustee for State Street Bank and Trust Company, a
Massachusetts banking corporation, not individually, but solely as Trustee for the AT&T Master Pension Trust, covering our
principal facilities in Calabasas, California(11), together with Fourth Amendment thereto effective as of May 24, 2005, between the
Registrant and Arden Realty Limited Partnership, as successor to original landlord(12)
|
| | 10 | .5  |  | Officer Severance Plan, including form of Employment Separation Agreement(13), as amended March 8,
1999(14) and February 4, 2000(8)(15)                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | 10 | .6  |  | Lease Agreement dated as of November 6, 1998 between the Registrant and Weeks Realty, L.P., covering
certain of the Registrant's facilities in Morrisville, North Carolina(14), as amended by First Amendment thereto dated May 27,
1999, Second Amendment thereto dated October 1, 1999, Third Amendment thereto dated November 30, 1999, and
Fourth Amendment thereto dated July 19, 2000(16)                                                                                                                                                                                       
|
| | 10 | .7  |  | Lease Agreement dated as of July 19, 2000 between the Registrant and Duke Construction Limited
Partnership covering certain of our facilities in Morrisville, North Carolina(16)                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | 10 | .8  |  | Amended and Restated Non-Employee Director Stock Option Plan, including form of stock option
agreement(8)(17)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | 10 | .9  |  | Amended and Restated 2003 Stock Option Plan(8)(17)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 10 | .10 |  | Credit Agreement dated December 15, 2004 between the Registrant and Wells Fargo Bank, National
Association(19), as amended by First Amendment thereto dated December 15, 2005(23), letter agreement dated March 16, 2006(23),
letter agreement dated May 25, 2006(23) and Second Amendment thereto dated December 15, 2006, together with Revolving Line of
Credit Note dated as of December 15, 2006 made by the Company in favor of the Bank(31)                                                                                                                                    
|
| | 10 | .11 |  | Employment Offer Letter Agreement dated April 7, 2005 between the Registrant and William Everett, together with
employment offer letter agreement effective as of October 14, 2004 between the Registrant and Mr. Everett(8)(20)                                                                                                                                                                                                                                                                                                                                                      
|
| | 10 | .12 |  | Amended and Restated 2005 Employee Stock Purchase Plan(8)(25)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | 10 | .13 |  | Summary of Compensation for the Registrant's Named Executive Officers(2)(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | 10 | .14 |  | Summary of Compensation for the Non-Employee Members of the Registrant's Board of Directors and its
Committees(2)(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | 10 | .15 |  | 2005 Executive Officer Bonus Plan(8)(21)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | 10 | .16 |  | Employment Separation Agreement effective as of October 26, 2005 between the Company and Frederick M.
Lax(8)(22)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | 10 | .17 |  | Employment Offer Letter Agreement effective January 18, 2006 between the Company and Franco
Plastina(8)(24)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | 10 | .18 |  | Stock Purchase Agreement dated as of April 27, 2006 between the Company and NICE-Systems Ltd. (schedules
are omitted from this agreement, and the Company agrees to furnish supplementary a copy of any such schedule to the Commission
upon request(25)                                                                                                                                                                                                                                                                                                                              
|

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| | 10 | .19 |  | Employment Separation Agreement dated as of June 22, 2006 between the Company and Lori
Craven(8)(26)                                                                                                
| | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10 | .20 |  | Amendment to Separation Agreement effective as of March 31, 2006 between the Company and Fred
Lax(8)(27)                                                                                            
|
| | 10 | .21 |  | Tekelec Amended and Restated 2004 Equity Incentive Plan for New Employees(8)(28)                                                                                                                    
|
| | 10 | .22 |  | Agreement effective October 26, 2006 between the Company and Ronald W. Buckly(8)(29)                                                                                                                
|
| | 10 | .23 |  | Tekelec 2006 Officer Bonus Plan(8)(30)                                                                                                                                                              
|
| | 10 | .24 |  | Agreement effective November 30, 2006 between the Company and Jay F. Whitehurst(8)(32)                                                                                                              
|
| | 14 | .1  |  | Code of Ethics for Chief Executive and Senior Financial Officers(18)                                                                                                                                
|
| | 21 | .1  |  | Subsidiaries of the Registrant(32)                                                                                                                                                                  
|
| | 23 | .1  |  | Consent of PricewaterhouseCoopers LLP(32)                                                                                                                                                           
|
| | 31 | .1  |  | Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(32)
|
| | 31 | .2  |  | Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(32)              
|
| | 32 | .1  |  | Certification of Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(32)                             
|
| | 32 | .2  |  | Certification of Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(32)                             



|     |                                                                                                                                     |                                                                                                                                                                   
|---- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | (1)                                                                                                                                 | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) filed
with the Commission on May 7, 2003.                             
|     |                                                                                                                                    
|     | (2)                                                                                                                                 | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended June 30, 2005.                               
|     |                                                                                                                                    
|     | (3)                                                                                                                                 | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended June 30, 1998.                               
|     |                                                                                                                                    
|     | (4)                                                                                                                                 | Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on November
28, 2006 (File No. 0-15135)                        
|     |                                                                                                                                    
|     | (5)                                                                                                                                 | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended September 30, 1997.                          
|     |                                                                                                                                    
|     | (6)                                                                                                                                 | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended June 30, 2003                                
|     |                                                                                                                                    
|     | (7)                                                                                                                                 | Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration Statement
No. 33-82124) filed with the Commission on July 28, 1994.
|     |                                                                                                                                    
|     | (8)                                                                                                                                 | Constitutes a management contract or compensatory plan, contract or arrangement required to be filed as an
exhibit to this Annual Report on Form 10-K.            
|     |                                                                                                                                    
|     | (9)                                                                                                                                 | 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.         
|     |                                                                                                                                    
|(10) | Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the
year ended December 31, 2002.  
|     |                                                                                                                                    
|(11) | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended June 30, 1988.
|     |                                                                                                                                    

68



---



|(12) | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) dated
May 31, 2005, as filed with the Commission on June 1, 2005.          
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                        
|(13) | Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the
year ended December 31, 1993.                                      
|     |                                                                                                                                                                        
|(14) | Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the
year ended December 31, 1998.                                      
|     |                                                                                                                                                                        
|(15) | Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the
year ended December 31, 1999.                                      
|     |                                                                                                                                                                        
|(16) | Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the
year ended December 31, 2000.                                      
|     |                                                                                                                                                                        
|(17) | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended June 30, 2004.                                    
|     |                                                                                                                                                                        
|(18) | Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the
year ended December 31, 2003.                                      
|     |                                                                                                                                                                        
|(19) | Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the
year ended December 31, 2004.                                      
|     |                                                                                                                                                                        
|(20) | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) dated
April 7, 2005, as filed with the Commission on April 13, 2005.       
|     |                                                                                                                                                                        
|(21) | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended September 30, 2005.                               
|     |                                                                                                                                                                        
|(22) | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) dated
October 26, 2005, as filed with the Commission on October 27, 2005.  
|     |                                                                                                                                                                        
|(23) | Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the
year ended December 31, 2005.                                      
|     |                                                                                                                                                                        
|(24) | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) dated
January 18, 2006, as filed with the Commission on January 24, 2006.  
|     |                                                                                                                                                                        
|(25) | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) dated
April 27, 2006, as filed with the Commission on May 3, 2006.         
|     |                                                                                                                                                                        
|(26) | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) dated
June 21, 2006, as filed with the Commission on June 26, 2006.        
|     |                                                                                                                                                                        
|(27) | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended March 31, 2006.                                   
|     |                                                                                                                                                                        
|(28) | Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration Statement
No. 333-108821) filed with the Commission on August 18, 2006. 
|     |                                                                                                                                                                        
|(29) | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) dated
October 26, 2006, as filed with the Commission on November 1, 2006.  
|     |                                                                                                                                                                        
|(30) | Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for
the quarter ended September 30, 2006.                               
|     |                                                                                                                                                                        
|(31) | Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-15135) dated
December 15, 2006, as filed with the Commission on December 21, 2006.
|     |                                                                                                                                                                        
|(32) | Filed herewith.                                                                                                                                                        
|     |                                                                                                                                                                        

69



---

(b) ExhibitsSee the list of Exhibits under Item 15(a)(3) of this Annual Report on Form 10-K.(c) Financial Statement SchedulesNone.70



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/ FRANCO PLASTINA
| |                                      
| |                                      
| | Franco Plastina                      
| | President and Chief Executive Officer

Dated: February 27, 2007

Pursuant to the requirements of the Securities Exchange 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/ MARK A. FLOYDMark A. Floyd            |  | Chairman of the Board and Director                                                                                 |  | February 27, 2007
|                                         
|/s/ FRANCO PLASTINAFranco Plastina        |  | President and Chief Executive
Officer and Director                                                                 |  | February 27, 2007
|                                         
|/s/ ____________________Robert V. Adams   |  | Director                                                                                                           |  |                  
|                                         
|/s/ DANIEL L. BRENNERDaniel L. Brenner    |  | Director                                                                                                           |  | February 27, 2007
|                                         
|/s/ MARTIN A. KAPLANMartin A. Kaplan      |  | Director                                                                                                           |  | February 27, 2007
|                                         
|/s/ JON F. RAGERJon F. Rager              |  | Director                                                                                                           |  | February 27, 2007
|                                         
|/s/ MICHAEL P. RESSNER
Michael P. Ressner |  | Director                                                                                                           |  | February 27, 2007
|                                         
|/s/ WILLIAM H. EVERETTWilliam H. Everett  |  | Senior Vice President and Chief Financial Officer                                                                  |  | February 27, 2007
|                                         
|/s/ GREGORY S. RUSHGregory S. Rush        |  | Vice President, Corporate Controller and Chief Accounting Officer
                  (Principal Accounting Officer) |  | February 27, 2007

71



---



Index to Consolidated Financial Statements



|                                                                                                                        |      |    
|----------------------------------------------------------------------------------------------------------------------- | ---- | ---
|                                                                                                                        | Page
|                                                                                                                        |     
|Report of Independent Registered Public Accounting Firm                                                                 |      | F-1
|Consolidated Statements of Operationsfor each of the three
years in the period ended December 31, 2006                  |      | F-3
|Consolidated Statements of Comprehensive Income (Loss)for each of the three years in the period ended December 31, 2006 |      | F-4
|Consolidated Balance Sheetsas of December 31, 2006 and
2005                                                             |      | F-5
|Consolidated Statements of Cash Flowsfor each of the three
years in the period ended December 31, 2006                  |      | F-6
|Consolidated Statements of Shareholders' Equityfor each of
the three years in the period ended December 31, 2006        |      | F-8
|Notes to Consolidated Financial Statements                                                                              |      | F-9

72



---

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Tekelec:
We have completed integrated audits of Tekelec's consolidated financial statements and of its internal control over financial
reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of
comprehensive income (loss), of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of
Tekelec and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). 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 of financial statements
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for
share-based compensation in 2006.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report on Internal Control over Financial
Reporting as of December 31, 2006 appearing in Item 9A, that the Company maintained effective internal control over financial
reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The
Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on
the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.

F-1



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina
   February 27, 2007

F-2



---



TEKELEC

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                           |  |   | For the Years Ended December 31,  
|-------------------------------------------------------------------------- |  | - | ----------------------------------
|                                                                           |  |   | 2006                              
|                                                                           |  |   | (Thousands, except per share data)
|Revenues                                                                   |  | $ | 553,647                           
|                                                                           |  |   |                                   
|Costs of sales:                                                            |  |   |                                   
|                                                                           |  |   |                                   
|Cost of goods sold                                                         |  |   | 256,789                           
|Amortization of purchased technology                                       |  |   | 4,219                             
|Impairment of purchased technology                                         |  |   | 25,615                            
|Total cost of sales                                                        |  |   | 286,623                           
|Gross profit                                                               |  |   | 267,024                           
|                                                                           |  |   |                                   
|Operating expenses:                                                        |  |   |                                   
|Research and development                                                   |  |   | 148,443                           
|Sales and marketing                                                        |  |   | 92,961                            
|General and administrative                                                 |  |   | 74,719                            
|Acquired in-process research and development                               |  |   | 2,100                             
|Restructuring and other                                                    |  |   | 7,173                             
|Amortization of intangible assets                                          |  |   | 1,938                             
|Impairment of goodwill                                                     |  |   | 75,000                            
|Total operating expenses                                                   |  |   | 402,334                           
|Loss from operations                                                       |  |   | (135,310)                         
|                                                                           |  |   |                                   
|Other income (expense), net:                                               |  |   |                                   
|Interest income                                                            |  |   | 10,936                            
|Interest expense                                                           |  |   | (3,813)                           
|Gain on sale of Catapult Stock                                             |  |   | -                                 
|Gain on sale of investment in privately held company                       |  |   | 1,794                             
|Gain on warrants in privately held company                                 |  |   | 1,275                             
|Loss on sale of investments                                                |  |   | -                                 
|Other, net                                                                 |  |   | 24                                
|Total other income (expense), net                                          |  |   | 10,216                            
|Income (loss) from continuing operations before provision for income taxes |  |   | (125,094)                         
|Provision for (benefit from) income taxes                                  |  |   | (21,941)                          
|Loss from continuing operations before minority interest                   |  |   | (103,153)                         
|Minority interest                                                          |  |   | -                                 
|Income (loss) from continuing operations                                   |  |   | (103,153)                         
|Income from discontinued operations, net of taxes                          |  |   | 189,209                           
|Net income (loss)                                                          |  | $ | 86,056                            
|                                                                           |  |   |                                   
|Earnings (loss) per share from continuing operations:                      |  |   |                                   
|Basic                                                                      |  | $ | (1.53)                            
|Diluted                                                                    |  |   | (1.53)                            
|                                                                           |  |   |                                   
|Earnings per share from discontinued operations:                           |  |   |                                   
|Basic                                                                      |  | $ | 2.81                              
|Diluted                                                                    |  |   | 2.81                              
|                                                                           |  |   |                                   
|Earnings (loss) per share:                                                 |  |   |                                   
|Basic                                                                      |  | $ | 1.28                              
|Diluted                                                                    |  |   | 1.28                              
|                                                                           |  |   |                                   
|Weighted average number of shares outstanding:                             |  |   |                                   
|Basic                                                                      |  |   | 67,340                            
|Diluted                                                                    |  |   | 67,340                            

See notes to consolidated financial statements.

F-3



---



TEKELEC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

|                                                                      |  |   | For the Years Ended December 31,
|--------------------------------------------------------------------- |  | - | --------------------------------
|                                                                      |  |   | 2006                            
|                                                                      |  |   | (Thousands)                     
|Net income (loss)                                                     |  | $ | 86,056                          
|Other comprehensive income (loss):                                    |  |   |                                 
|Foreign currency translation adjustments                              |  |   | 319                             
|Realized loss (gain) on available-for-sale securities, net of taxes,  |  |   |                                 
|previously recognized in other comprehensive income                   |  |   | -                               
|Unrealized gain (loss) on available-for-sale securities, net of taxes |  |   | 819                             
|Comprehensive income (loss)                                           |  | $ | 87,194                          

See notes to consolidated financial statements.

F-4



---



TEKELEC

CONSOLIDATED BALANCE SHEETS

|                                                                           |  |   | December 31,                  
|-------------------------------------------------------------------------- |  | - | ------------------------------
|                                                                           |  |   | 2006                          
|                                                                           |  |   | (Thousands, except share data)
|ASSETS                                                                    
|Current assets:                                                            |  |   |                               
|Cash and cash equivalents                                                  |  | $ | 45,451                        
|Short-term investments, at fair value                                      |  |   | 379,045                       
|Total cash, cash equivalents and short-term investments                    |  |   | 424,496                       
|Accounts receivable, net                                                   |  |   | 162,622                       
|Inventories                                                                |  |   | 49,451                        
|Income taxes receivable                                                    |  |   | 14,698                        
|Deferred income taxes                                                      |  |   | 32,206                        
|Deferred costs and prepaid commissions                                     |  |   | 65,187                        
|Prepaid expenses and other current assets                                  |  |   | 29,134                        
|Assets of discontinued operations                                          |  |   | -                             
|Total current assets                                                       |  |   | 777,794                       
|Property and equipment, net                                                |  |   | 53,273                        
|Investments in privately-held companies                                    |  |   | 7,322                         
|Deferred income taxes, net                                                 |  |   | 62,103                        
|Other assets                                                               |  |   | 3,521                         
|Goodwill                                                                   |  |   | 40,882                        
|Intangible assets, net                                                     |  |   | 24,362                        
|Total assets                                                               |  | $ | 969,257                       
|                                                                           |  |   |                               
|LIABILITIES AND SHAREHOLDERS' EQUITY                                      
|                                                                           |  |   |                               
|Current liabilities:                                                       |  |   |                               
|Trade accounts payable                                                     |  | $ | 31,779                        
|Accrued expenses                                                           |  |   | 62,306                        
|Accrued payroll and related expenses                                       |  |   | 32,296                        
|Short-term notes and current portion of notes payable                      |  |   | -                             
|Current portion of deferred revenues                                       |  |   | 216,023                       
|Liabilities of discontinued operations                                     |  |   | -                             
|Total current liabilities                                                  |  |   | 342,404                       
|                                                                           |  |   |                               
|Long-term convertible debt                                                 |  |   | 125,000                       
|Deferred income taxes                                                      |  |   | 1,481                         
|Long-term portion of deferred revenues                                     |  |   | 6,131                         
|Total liabilities                                                          |  |   | 475,016                       
|                                                                           |  |   |                               
|Commitments and Contingencies (Note 13)                                    |  |   |                               
|                                                                           |  |   |                               
|Shareholders' equity:                                                      |  |   |                               
|Common stock, without par value, 200,000,000 shares authorized; 68,728,986 |  |   |                               
|and 66,838,310 shares issued and outstanding, respectively                 |  |   | 322,620                       
|Deferred stock-based compensation                                          |  |   | -                             
|Retained earnings                                                          |  |   | 171,722                       
|Accumulated other comprehensive income (loss)                              |  |   | (101)                         
|Total shareholders' equity                                                 |  |   | 494,241                       
|Total liabilities and shareholders' equity                                 |  | $ | 969,257                       

See notes to consolidated financial statements.

F-5



---



TEKELEC

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                              |  |   | For the Years Ended December 31,
|----------------------------------------------------------------------------- |  | - | --------------------------------
|                                                                              |  |   | 2006                            
|                                                                              |  |   | (Thousands)                     
|Cash flows from operating activities:                                         |  |   |                                 
|Net income (loss)                                                             |  | $ | 86,056                          
|Income from discontinued operations                                           |  |   | (189,209)                       
|Adjustments to reconcile net income (loss) to net cash provided by            |  |   |                                 
|operating activities:                                                         |  |   |                                 
|Loss (gain) on investments                                                    |  |   | (3,069)                         
|Minority interest                                                             |  |   | -                               
|Impairment of purchased technology                                            |  |   | 25,615                          
|Impairment of goodwill                                                        |  |   | 75,000                          
|Provision for doubtful accounts and returns                                   |  |   | 3,582                           
|Inventory write downs                                                         |  |   | 10,054                          
|Write-off of leasehold improvements and other assets                          |  |   | -                               
|Depreciation                                                                  |  |   | 23,703                          
|Amortization of intangibles                                                   |  |   | 7,237                           
|Amortization, other                                                           |  |   | 3,026                           
|Amortization of deferred financing costs                                      |  |   | 763                             
|Acquired in-process research and development                                  |  |   | 2,100                           
|Convertible debt and note payable accretion                                   |  |   | -                               
|Deferred income taxes                                                         |  |   | 1,088                           
|Stock-based compensation, net of forfeitures                                  |  |   | 35,706                          
|Tax benefit related to stock options                                          |  |   | -                               
|Excess tax benefits from stock-based compensation                             |  |   | (1,991)                         
|Changes in operating assets and liabilities (net of business                  |  |   |                                 
|disposal and acquisitions):                                                   |  |   |                                 
|Accounts receivable                                                           |  |   | (49,583)                        
|Inventories                                                                   |  |   | (11,960)                        
|Deferred costs                                                                |  |   | 13,003                          
|Prepaid expenses and other current assets                                     |  |   | (7,309)                         
|Trade accounts payable                                                        |  |   | (820)                           
|Accrued expenses                                                              |  |   | 5,861                           
|Accrued payroll and related expenses                                          |  |   | 3,931                           
|Deferred revenues                                                             |  |   | 8,402                           
|Income taxes payable / receivable                                             |  |   | (13,091)                        
|Net cash provided by operating activities - continuing operations             |  |   | 28,095                          
|Net cash provided by (used in) operating activities - discontinued operations |  |   | (16,763)                        
|Net cash provided by operating activities                                     |  |   | 11,332                          
|                                                                              |  |   |                                 
|Cash flows from investing activities:                                         |  |   |                                 
|Proceeds from sales and maturities of investments                             |  |   | 861,490                         
|Purchases of investments                                                      |  |   | (1,063,652)                     
|Purchases of property and equipment                                           |  |   | (36,471)                        
|Cash paid for Taqua, net of cash acquired                                     |  |   | -                               
|Cash paid for VocalData, net of cash acquired                                 |  |   | -                               
|Cash paid for Steleus, net of cash acquired                                   |  |   | -                               
|Cash paid for iptelorg, net of cash acquired                                  |  |   | -                               
|Cash paid for minority interest in Santera                                    |  |   | -                               
|Proceeds from sale of Catapult stock                                          |  |   | -                               
|Proceeds from sale of warrants in privately held companies                    |  |   | -                               
|Other non-operating assets                                                    |  |   | 1,770                           
|Net cash used in investing activities - continuing operations                 |  |   | (236,863)                       
|Net cash provided by (used in) investing activities - discontinued operations |  |   | 199,902                         
|Net cash used in investing activities                                         |  |   | (36,961)                        

F-6



---



TEKELEC

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

|                                                                      |  |   | For the Years Ended December 31,
|--------------------------------------------------------------------- |  | - | --------------------------------
|                                                                      |  |   | 2006                            
|                                                                      |  |   | (Thousands)                     
|Cash flows from financing activities:                                 |  |   |                                 
|Payments on notes payable                                             |  |   | (96)                            
|Proceeds from issuance of common stock                                |  |   | 17,481                          
|Excess tax benefits from stock-based compensation                     |  |   | 1,991                           
|Cash paid to settle stock options                                     |  |   | (255)                           
|Net cash provided by financing activities                             |  |   | 19,121                          
|                                                                      |  |   |                                 
|Effect of exchange rate changes on cash                               |  |   | (110)                           
|Net increase (decrease) in cash and cash equivalents                  |  |   | (6,618)                         
|Cash and cash equivalents at beginning of the year                    |  |   | 52,069                          
|Cash and cash equivalents at end of the year                          |  |   | 45,451                          
|Cash and cash equivalents of discontinued operations at end of period |  |   | -                               
|Cash and cash equivalents of continuing operations at end of period   |  | $ | 45,451                          
|                                                                      |  |   |                                 
|Supplemental disclosure of cash flow information:                     |  |   |                                 
|Cash paid during the year for:                                        |  |   |                                 
|Interest                                                              |  | $ | 2,813                           
|Income taxes                                                          |  |   | 9,532                           

See notes to consolidated financial statements.

F-7



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TEKELEC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                                                 |  | Common Stock |  |   | Deferred |  |   |              |  |   | Accumulated
Other |  |   | Total        
|------------------------------------------------ |  | ------------ |  | - | -------- |  | - | ------------ |  | - | ----------------- |  | - | -------------
|                                                 |  | Number       |  |   |          |  |   | Stock-Based  |  |   | Retained          |  |   | Comprehensive
|                                                 |  | of shares    |  |   | Amount   |  |   | Compensation |  |   | Earnings          |  |   | Income (Loss)
|                                                 |  | (Thousands) 
|Balance, December 31, 2003                       |  | 61,650       |  | $ | 189,908  |  | $ | -            |  | $ | 101,228           |  | $ | 643          
|Exercise of stock options and warrants and       |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|issuance of shares under employee stock          |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|purchase plan                                    |  | 3,131        |  |   | 35,851   |  |   | -            |  |   | -                 |  |   | -            
|Deferred stock-based compensation on stock       |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|options assumed in acquisitions and issuance     |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|of restricted stock                              |  | -            |  |   | 6,244    |  |   | (6,244)      |  |   | -                 |  |   | -            
|Amortization of stock-based compensation,        |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|net                                              |  | -            |  |   | 286      |  |   | 1,764        |  |   | -                 |  |   | -            
|Stock option tax benefits                        |  | -            |  |   | 9,750    |  |   | -            |  |   | -                 |  |   | -            
|Vested stock options assumed in the Taqua        |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|acquisition                                      |  | -            |  |   | 3,524    |  |   | -            |  |   | -                 |  |   | -            
|Stock options granted to Santera advisory        |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|board                                            |  | 7            |  |   | 93       |  |   | -            |  |   | -                 |  |   | -            
|Shares issued related to VocalData               |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|acquisition                                      |  | 780          |  |   | 13,000   |  |   | -            |  |   | -                 |  |   | -            
|Net unrealized loss on available-for-sale        |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|securities, net of tax benefit                   |  | -            |  |   | -        |  |   | -            |  |   | -                 |  |   | (472)        
|Translation adjustment                           |  | -            |  |   | -        |  |   | -            |  |   | -                 |  |   | (1)          
|Net income                                       |  | -            |  |   | -        |  |   | -            |  |   | 18,179            |  |   | -            
|Balance, December 31, 2004                       |  | 65,568       |  |   | 258,656  |  |   | (4,480)      |  |   | 119,407           |  |   | 170          
|Exercise of stock options and issuance of        |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|shares under employee stock purchase plan        |  | 961          |  |   | 10,382   |  |   | -            |  |   | -                 |  |   | -            
|Issuance of stock-based compensation, net        |  | 237          |  |   | 5,880    |  |   | (5,880)      |  |   | -                 |  |   | -            
|Issuance of common stock upon vesting of         |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|restricted stock units                           |  | 106          |  |   | -        |  |   | -            |  |   | -                 |  |   | -            
|Common stock withheld upon vesting of            |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|restricted stock units for payroll taxes         |  | (34)         |  |   | (585)    |  |   | -            |  |   | -                 |  |   | -            
|Amortization of stock-based compensation,        |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|net                                              |  | -            |  |   | -        |  |   | 3,494        |  |   | -                 |  |   | -            
|Stock option tax benefits                        |  | -            |  |   | 1,383    |  |   | -            |  |   | -                 |  |   | -            
|Forfeiture of unvested stock-based               |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|compensation                                     |  | -            |  |   | (1,186)  |  |   | 1,186        |  |   | -                 |  |   | -            
|Forfeiture of previously expensed stock-         |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|based compensation                               |  | -            |  |   | (117)    |  |   | -            |  |   | -                 |  |   | -            
|Net unrealized loss on available-for-sale        |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|securities, net of tax benefit                   |  | -            |  |   | -        |  |   | -            |  |   | -                 |  |   | (1,163)      
|Translation adjustment                           |  | -            |  |   | -        |  |   | -            |  |   | -                 |  |   | (246)        
|Net loss                                         |  | -            |  |   | -        |  |   | -            |  |   | (33,741)          |  |   | -            
|Balance, December 31, 2005                       |  | 66,838       |  |   | 274,413  |  |   | (5,680)      |  |   | 85,666            |  |   | (1,239)      
|Adjustment to deferred compensation              |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|upon adoptions of SFAS 123R                      |  | -            |  |   | (5,680)  |  |   | 5,680        |  |   | -                 |  |   | -            
|Exercise of stock options and issuance of shares |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|under employee stock purchase plan               |  | 1,877        |  |   | 17,481   |  |   | -            |  |   | -                 |  |   | -            
|Issuance of common stock upon vesting of         |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|restricted stock units                           |  | 56           |  |   | -        |  |   | -            |  |   | -                 |  |   | -            
|Common stock withheld upon vesting of restricted |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|stock units for payroll taxes                    |  | (12)         |  |   | (144)    |  |   | -            |  |   | -                 |  |   | -            
|Stock-based compensation expense, net            |  | -            |  |   | 35,706   |  |   | -            |  |   | -                 |  |   | -            
|Cash paid to settle options                      |  | -            |  |   | (255)    |  |   | -            |  |   | -                 |  |   | -            
|Stock option tax benefits                        |  | -            |  |   | 1,596    |  |   | -            |  |   | -                 |  |   | -            
|Retirement of VocalData Escrow Shares            |  | (30)         |  |   | (497)    |  |   | -            |  |   | -                 |  |   | -            
|Net unrealized gain on available-for-sale        |  |              |  |   |          |  |   |              |  |   |                   |  |   |              
|securities, net of tax benefit                   |  | -            |  |   | -        |  |   | -            |  |   | -                 |  |   | 819          
|Translation adjustment                           |  | -            |  |   | -        |  |   | -            |  |   | -                 |  |   | 319          
|Net income                                       |  | -            |  |   | -        |  |   | -            |  |   | 86,056            |  |   | -            
|Balance, December 31, 2006                       |  | 68,729       |  | $ | 322,620  |  | $ | -            |  | $ | 171,722           |  | $ | (101)        

See notes to consolidated financial statements.

F-8



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TEKELEC
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Business, Basis of Presentation and Summary of Significant Accounting
Policies

Business

We are a developer of switching and signaling telecommunications products and services, network performance
management technology, business intelligence and value-added applications. Our products and services are widely deployed in
traditional and next-generation wireline and wireless networks worldwide. We are principally engaged in the design, development,
production, marketing, sales and support of our telecommunications products and services. Our revenues are primarily derived from the
sale of telecommunications equipment and software, the related professional services, such as installation and training services, and
the related customer support, including customer extended warranty service contracts.

We are organized into three major operating segments: the Network Signaling Group ("NSG"), the Switching Solutions Group
("SSG") and the Communications Software Solutions Group ("CSSG"). Our customers include telecommunications carriers and network
service providers.

Principles of Consolidation

The consolidated financial statements include the accounts and operating results of Tekelec and our wholly owned
subsidiaries. As discussed in Note 3, as a result of our acquisition of the shares of Santera capital stock owned by Santera's minority
shareholders on October 3, 2005, Santera became a wholly owned subsidiary of Tekelec on that date. From the original acquisition of
our majority interest in Santera on June 10, 2003 through October 3, 2005, the consolidated financial statements included the accounts
and operating results of Santera, less that portion of income or loss allocated to the minority interest. All significant intercompany
accounts and transactions have been eliminated.

Use of Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires that we make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to revenue recognition, provision for doubtful accounts and sales
returns, provision for inventory obsolescence, fair value of investments, fair value of acquired intangible assets and goodwill, useful
lives of intangible assets and property and equipment, income taxes, restructuring obligations, product warranty obligations, employee
stock options, and contingencies and litigation, among others. We generally base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ
significantly from the estimates made by us with respect to these and other items.

Foreign Currency Translation

In accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation("SFAS 52"), one of our international operations uses the local currency as their functional currency while our remaining
international operations use the U.S. dollar as their functional currency. For our international operations in which we consider the
functional currency to be the local currency, the foreign currency is translated into our reporting currency, the U.S. dollar, using
exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for the results
of operations. Adjustments resulting from the translation of this foreign subsidiary financial statements are reported in accumulated
other comprehensive income (loss). The foreign currency translation adjustment is not adjusted for income taxes since it relates to our
indefinite term investment in non-U.S. subsidiaries. Gains or losses on foreign currency transactions are recognized in current
operations.

Our international subsidiaries that have the U.S. dollar as their functional currency translate monetary assets and liabilities
using current rates of exchange at the balance sheet date and translate non-monetary assets and liabilities using historical rates of
exchange. Gains and losses from remeasurement for such subsidiaries are included in other income, net and have historically not been
significant.

Fair Value of Financial Instruments

The fair values of our cash, cash equivalents, short-term investments, accounts receivable and accounts payable
approximate their respective carrying amounts. While we have determined that it is impractical to ascertain the fair value of our
investments in privately-held companies, we believe that the fair value of these investments is equal to or exceeds the carrying value as
of December 31, 2006. Quoted market prices for our investments in privately-held companies are not available.

Based on the quoted market price of our convertible subordinated notes, the fair value of the convertible subordinated notes was
approximately $126.4 million as of December 31, 2006. The fair value of our derivative financial instruments, principally foreign
currency contracts utilized to offset foreign currency transaction gains and losses, was not significant as of December

F-9



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31, 2006, as we entered into these contracts during the last day of our fiscal year.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be
cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. We hold cash and cash equivalents at
several major financial institutions, which often exceed FDIC insured limits. Historically, we have not experienced any losses due to
such concentration of credit risk.

Accounts Receivable

We typically invoice our customers at shipment for the sales order (or contract) value of the related products delivered and
for services when rendered. Accounts receivable are recorded at the invoiced amount, net of any amounts included in deferred revenue
that are not yet due based on the payment terms, and do not bear interest. We do not have any off-balance sheet credit exposure
related to our customers.

Investments

Marketable securities are classified as available-for-sale securities and are accounted for at their fair value, and unrealized
gains and losses on these securities are reported as a separate component of shareholders' equity, net of tax. When the fair value of
an investment declines below its original cost, we consider all available evidence to evaluate whether the decline is other-than-temporary.
Among other things, we consider the duration and extent of the decline and economic factors influencing the markets. To
date, we have had no such other-than-temporary declines below cost basis. We utilize specific identification in computing realized gains
and losses on the sale of investments. Investments in marketable securities with maturities beyond one year may be classified as short
term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for
current operations.

We also invest in equity instruments of privately-held companies for business and strategic purposes. These investments are
classified as long-term assets and are accounted for under the cost method since we do not have the ability to exercise significant
influence over their operations. We monitor these investments for impairment and make appropriate reductions in carrying value if we
determine that an impairment charge is required based primarily on the financial condition and near-term prospects of these
companies. There have been no identified events or changes in circumstances noted that may have a significant adverse effect on the
fair value of our equity instruments of privately-held companies. There have been no impairments of investments in privately-held
companies in 2006, 2005 or 2004. Realized gains and losses on our investments are reported in other income and expense.

Concentrations of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of
short-term investments, trade accounts receivable and financial instruments used in foreign currency hedging activities. We primarily
invest our excess cash in money market instruments, government securities, corporate bonds and asset backed securities. We are
exposed to credit risks related to our short-term investments in the event of default or decrease in credit-worthiness of one of the
issuers of the investments. We perform ongoing credit evaluations of our customers and generally do not require collateral on accounts
receivable, as the majority of our customers are large, well-established companies. We maintain reserves for potential credit losses, but
historically have not experienced any significant losses related to any particular geographic area since our business is not concentrated
within any particular geographic region.

During 2006, 2005, and 2004, sales to Cingular, including AT&T, accounted for 10%, 18% and 13%,
respectively, of our revenue and included sales from our Network Signaling Group and Communications Software Solutions Group.
During 2005, sales to Alcatel accounted for 19% of our revenues and included sales from our Switching Solutions Group. No other
customer accounted for more than 10% of our revenue for any period presented. Because our customers are primarily in the
telecommunications industry, our accounts receivable are concentrated within one industry and therefore are exposed to concentrations
of credit risk within that industry.

We rely on sole providers for certain components of our products and rely on a limited number of contract
manufacturers and suppliers to provide manufacturing services for our products. The inability of a contract manufacturer or supplier to
fulfill our supply requirements could materially impact future operating results.

F-10



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We have entered into agreements relating to our foreign currency contracts with large, multinational financial
institutions. The amounts subject to credit risk arising from the possible inability of any such parties to meet the terms of their contracts
are generally limited to the amounts, if any, by which such party's obligations exceed our obligations to that party.

Inventories

Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual
cost, on a first-in, first-out basis. We provide inventory allowances primarily based on excess and obsolete inventories determined
primarily by future demand forecasts. The allowance is measured as the difference between the cost of the inventory and market value
based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the
point of the loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and
circumstances do not result in the restoration or increase in that newly established cost basis.

Deferred Costs and Prepaid Commissions

For all customer sales arrangements in which we defer the recognition of revenue, we also defer the associated costs,
such as the cost of the hardware, installation costs, and other direct costs associated with the revenue. As a component of these costs
we defer any sales commission payments to our direct sales force. The commission payments, which are paid 50% upon order and
50% upon revenue recognition, are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are
recoverable through the future revenue streams under our sales arrangements. We believe this is the preferable method of accounting
as the commission charges are so closely related to the revenue generated that they should be recorded as an asset and charged to
expense over the same period that the revenue is recognized. Amortization of deferred commissions is included in sales and marketing
expenses in the accompanying consolidated statements of operations. Costs are only deferred up to the fair value of the
products or services being sold and are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization
are calculated using the straight-line method over the shorter of the estimated useful lives of the respective assets or any applicable
lease term. The useful lives of the assets are generally as follows:



|Manufacturing and development equipment |  | 3 to 5 years                                                         
|--------------------------------------- |  | ---------------------------------------------------------------------
|Furniture and office equipment          |  | 3 to 5 years                                                         
|Demonstration equipment                 |  | 3 years                                                              
|Leasehold improvements                  |  | Shorter of the estimated useful life or lease term, generally 5 years

Expenditures for maintenance and repairs are charged to expense as incurred. Cost and
accumulated depreciation of assets sold or retired are removed from the respective property accounts, and the gain or loss is reflected
in the consolidated statements of operations.

Software Developed for Internal Use

We capitalize costs of software, consulting services, hardware and other related costs incurred to purchase or develop
internal-use software. We expense costs incurred during preliminary project assessment, research and development, re-engineering,
training and application maintenance.

Software Development Costs

Software development costs associated with new software products and enhancements to existing software products are
expensed as incurred until technological feasibility in the form of a working model has been established. To date, the time period
between the establishment of technological feasibility and completion of software development has been short, and no significant
development costs have been incurred during that period. Accordingly, the Company has not capitalized any software development
costs to date.

Intangible Assets and Goodwill

We account for our business combinations in accordance with SFAS No. 141 "Business Combinations" ("SFAS 141") and
the related acquired intangible assets and goodwill in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 specifies the accounting for business combinations and the criteria for recognizing and reporting intangible assets
apart from goodwill.

F-11



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We record the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of
acquisition, with any excess purchase price recorded as goodwill. Valuation of intangible assets and in-process research and
development entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to
complete development projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating
probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer
contracts, and approximating the useful lives of the intangible assets acquired.

SFAS 142 requires that intangible assets with an indefinite life should not be amortized until their life is determined to be finite, and
all other intangible assets must be amortized over their useful lives. We are currently amortizing our acquired intangible assets with
definite lives over periods ranging from one to ten years. SFAS 142 also requires that goodwill not be amortized but instead be tested
for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain
events (see "Impairment of Long-Lived Assets" below). Please refer to Note 10 for a further discussion of our intangible assets and
goodwill.

Impairment of Long-Lived Assets

We test goodwill for impairment in accordance with SFAS 142. SFAS 142 requires that goodwill be tested for impairment
at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by SFAS 142. We
have determined that we have four reporting units, consisting of: (i) our NSG business unit; (ii) our CSSG business unit; (iii) a reporting
unit consisting of our Santera and VocalData product lines; and (iv) our Taqua reporting unit. Together, the reporting unit consisting of
our Santera and VocalData product lines and our Taqua reporting unit comprise our SSG business unit. Goodwill is tested for
impairment annually on October 1st using a two-step process. First, we determine if the carrying amount of any of our reporting units
exceeds its fair value (determined using the discounted cash flows or market multiples based on revenues), which would indicate a
potential impairment of goodwill associated with that reporting unit. If we determine that a potential impairment of goodwill exists, we
then compare the implied fair value of the goodwill associated with the respective reporting unit, to its carrying amount to determine if
there is an impairment loss.

In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), we evaluate
long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. An impairment is considered to exist if the total estimated future cash flows
on an undiscounted basis are less than the carrying amount of the assets. If an impairment exists, the impairment loss is measured and
recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest levels for
which there are identifiable cash flows that are largely independent of cash flows from other asset groups. Our estimate of future cash
flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other
factors. The actual cash flows realized from these assets may vary significantly from our estimates due to increased competition,
changes in technology, fluctuations in demand, consolidation of our customers and reductions in average selling prices. Assumptions
underlying future cash flow estimates are therefore subject to significant risks and uncertainties.

During the third quarter of 2006, we recognized non-cash impairment charges totaling $100.6 million relating to the goodwill and
purchased technology within the reporting unit consisting of our Santera and VocalData product lines. During the fourth quarter of 2005,
we recognized non-cash impairment charges totaling $49.9 million relating to the goodwill and purchased technology within our Taqua
reporting unit. Please refer to Note 10 for a further discussion of these impairment charges.

Contingent Liabilities

We have a number of unresolved regulatory, legal and tax matters, as discussed further in Note 9 and Note 13.  We
provide for contingent liabilities in accordance with SFAS No. 5 "Accounting for Contingencies" ("SFAS 5"). In accordance with SFAS 5,
a loss contingency is charged to income when (i) it is probable that an asset has been impaired or a liability has been incurred at the
date of the financial statements and (ii) the amount of the loss can be reasonably estimated. Disclosure in the notes to the financial
statements is required for loss contingencies that do not meet both those conditions if there is a reasonable possibility that a loss may
have been incurred. Gain contingencies are not recorded until realized. We expense all legal costs incurred to resolve regulatory, legal
and tax matters as incurred. In cases where our insurance carrier has agreed to reimburse us for legal costs, including any accrued
losses, we record a receivable in our consolidated financial statements for any such amounts, which are included in prepaid expenses
and other current assets.

Periodically, we review the status of each significant matter to assess the potential financial exposure. If a potential loss is
considered probable and the amount can be reasonably estimated as defined by SFAS 5, we reflect the estimated loss in our results of
operations. Significant judgment is required to determine the probability that a liability has been incurred or an asset impaired and
whether such loss is reasonably estimable. Further, estimates of this nature are highly subjective, and the final outcome of these
matters could vary significantly from the amounts that have been included in the accompanying consolidated financial statements. As

F-12



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additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise
estimates accordingly. Such revisions in the estimates of the potential liabilities could have a material impact on our results of
operations and financial position.

Product Warranty Costs

Our sales arrangements with our customers typically provide for 12 to 15 months of warranty coverage (the "Standard
Warranty") ending the sooner of one year from installation or 14 to 15 months after shipment. Our customers can extend their warranty
coverage outside the term of the Standard Warranty through our Customer Extended Warranty Service ("CEWS") offerings. As
discussed further below under revenue recognition, we account for our Standard Warranty and CEWS offerings as separate elements
of an arrangement, with the fair value of these elements recognized as revenue ratably over the service period. Accordingly, we
expense all costs associated with these elements as incurred.

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

Prior to 2005, we historically had few Class A designated warranty events and accordingly have generally expensed the cost of our
warranty obligations as incurred. In 2005, we had three Class A designated events or other events that obligated us to satisfy specific
warranty obligations. Accordingly, we established a warranty reserve within accrued liabilities in the accompanying consolidated
balance sheet for these events of approximately $9.3 million as of December 31, 2005. In 2006, we incurred additional provisions
related to Class A warranty events totaling approximately $4.1 million, consisting of i) revisions of estimates relating to previous Class A
events of approximately $1.1 million and ii) provisions for Class A warranty events that arose in 2006 of approximately $3.0 million. Our
warranty reserve is based on our estimates of the associated material costs, technical support labor costs, and associated overhead.
Our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting product
failures. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required. Further, if we continue to experience an increase in warranty claims compared with our historical
experience, or if the cost of servicing warranty claims is greater than the expectations on which the accrual has been based, our gross
margin could be adversely affected.

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

An analysis of changes in the liability for product warranty costs is as follows (in thousands):

|                               |  |   | For the Years Ended December 31,
|------------------------------ |  | - | --------------------------------
|                               |  |   | 2006                            
|Balance at beginning of period |  | $ | 9,269                           
|Current year provision         |  |   | 4,059                           
|Expenditures                   |  |   | (8,159)                         
|Balance at end of period       |  | $ | 5,169                           

Derivative Instruments and Hedging Activities

We operate internationally and thus are exposed to potential adverse changes in currency exchange rates. We use
derivative instruments (foreign exchange contracts) to reduce our exposure to foreign currency rate changes on receivables
denominated in a foreign currency. The objective of these contracts is to reduce or eliminate, and efficiently manage, the economic
impact of currency exchange rate movements on our operating results as effectively as possible. These contracts require us to
exchange currencies at rates agreed upon at the contract's inception. These contracts reduce the exposure to fluctuations in exchange rate movements because the

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gains and losses associated with foreign currency balances and transactions are generally offset with the
gains and losses of the foreign exchange contracts.

Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in
the fair value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation. We do
not designate our derivative instruments as accounting hedges as defined by SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") and, accordingly, we adjust these instruments to fair value through operations (i.e., included in
"other income"). We do not hold or issue financial instruments for speculative or trading purposes. Please refer to Note 8 for a further
discussion of our derivative instruments and hedging activities.

Because the majority of our revenue arrangements are in U.S. dollars or are otherwise hedged, our exposure to foreign currency
fluctuations is limited.

Revenue Recognition

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

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

When total cost estimates exceed revenues, we accrue for the estimated losses immediately using the estimated cost of the
remaining equipment to be delivered and an average fully burdened daily rate applicable to the consulting personnel delivering the
services. As a result of applying these judgments, in 2006 and 2005, we recognized approximately $3.4 million and $9.9 million,
respectively, in estimated losses on existing contracts with our customers.

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

Determining Separate Elements and Allocating Value to Those Elements

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

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

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

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

In addition to evaluating the fair value of each element of an arrangement, we consider whether the elements can be separated for
revenue recognition purposes under SOP 97-2. In making this determination, we consider the nature of services (i.e., consideration of

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whether the services are essential to the functionality of the product), degree of risk, availability of services from other vendors, timing
of payments and impact of milestones or acceptance criteria on the collectibility of the product fee.

Product Revenue

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

- Persuasive evidence of an arrangement exists. We consider a non-cancelable agreement (such as an irrevocable
customer purchase order, contract, etc.) to be evidence of an arrangement.
- Delivery has occurred. Delivery is considered to occur when title to our products has passed to the customer, which
typically occurs at physical delivery of the products to a common carrier. For arrangements with systems integrators and OEM
customers, we recognize revenue when title to the last product in a multiple-element arrangement has passed. For arrangements with
resellers, we generally recognize revenue upon evidence of sell-through to the end customer.
- The fee is fixed and determinable. We assess whether fees are fixed and determinable at the time of sale. Our standard
payment terms may vary based on the country in which the arrangement is executed and the credit standing of the individual customer,
among other factors. We generally consider payments that are due within six months of shipment or acceptance to be fixed or
determinable based upon our successful collection history on such arrangements. We evaluate payment terms in excess of six months
but less than one year on a case by case basis as to whether the fee is fixed or determinable. In addition, we only consider the fee to
be fixed or determinable if the fee is not subject to refund or adjustment. If the arrangement fee is not fixed or determinable, we
recognize the revenue as amounts become due and payable.
- Collection is probable. We conduct a credit review for all significant transactions at the time of the arrangement to
determine the credit-worthiness of the customer. Collection is deemed probable if we expect that the customer will be able to pay
amounts under the arrangement as payments become due. If we determine collection is not probable, we defer the revenue and
recognize the revenue upon cash collection.

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

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

Warranty/Maintenance Revenue

Our arrangements typically provide for one year of warranty coverage (the "Standard Warranty") ending
the sooner of one year after installation or 14 to 15 months after shipment. We typically provide our Standard Warranty coverage at no
additional charge to our customer. We allocate a portion of the arrangement fee to the Standard Warranty based on the VSOE of its fair
value. The related revenue is deferred and recognized ratably over the term of the Standard Warranty based on the number of days of
warranty coverage during each period. Our customers can extend their warranty coverage outside the term of the Standard Warranty
through our Customer Extended Warranty Service ("CEWS") offerings. Renewal rates for CEWS are typically established based upon a
specified percentage of net product fees as set forth in the arrangement.

Professional Services Revenue

Professional services revenue primarily consists of implementation services related to the installation of our products and training

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

Cost of Sales

Cost of sales consists primarily of materials, labor and overhead costs incurred internally and paid to contract
manufacturers to produce our products, personnel and other implementation costs incurred to install our products and train customer
personnel and customer service and third party original equipment manufacturer costs to provide continuing support to our customers.
Also included in cost of sales is the amortization of purchased technology intangible assets.

Shipping and Handling Costs

Shipping and handling costs are included as a component of costs of sales in the accompanying consolidated statements of operations
because we include in revenues the related costs that we bill our customers.

Advertising

We expense the costs of producing advertisements at the time production occurs and expense the cost of communicating
the advertising in the period in which the advertising is used.

Provision for Doubtful Accounts

We initially record our provision for doubtful accounts based on our historical experience and then
adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for
doubtful accounts.

Lease Obligations

We recognize lease obligations with fixed escalations of rental payments on a straight-line basis in accordance with
Financial Accounting Standards Board Technical Bulletin 85-3 "Accounting for Operating Leases with Scheduled Rent Increases"
("FTB 85-3"). Accordingly, the total amount of base rentals over the term of the Company's leases is charged to expense on a straight-line
method, with the amount of rental expense in excess of lease payments recorded as a deferred rent liability.

Income Taxes

We use the asset and liability method of accounting for income taxes provided under SFAS No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss
carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax
asset cannot be recognized under the preceding criteria, allowances are established. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Presentation of Taxes Collected from Customers and Remitted to Governmental Authorities

We present taxes (e.g., sales tax) collected from customers and remitted to governmental authorities on a net basis (i.e.,
excluded from revenues).

Stock-Based Compensation

On January 1, 2006 we adopted Statement of Financial Accounting Standards No 123 (revised 2004), "Share-Based
Payment," ("SFAS 123R") and Staff Accounting Bulletin No. 107, "Share-Based Payment," which require recognition of compensation
expense for all share-based payments made to employees based on estimated fair values. SFAS 123R requires that companies
estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The cost is to be
recognized over the period during which an employee is required to provide service in exchange for the award. The valuation provisions
of SFAS 123R apply to new grants and grants modified after the adoption date that were outstanding as of the effective date.
Compensation expense

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for grants outstanding as of the adoption date is recognized over the remaining service period based on the
grant date fair value estimated in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123R also requires the benefit of tax deductions in excess of
recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under
previous accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods
subsequent to adoption. Total cash flows remain unchanged from those reported under previous accounting rules.

SFAS 123R supersedes our previous accounting under SFAS 123 and Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25"), under which we used the intrinsic value method to account for our employee stock options and
employee stock purchase plan. Under the intrinsic value method, no stock-based compensation expense had generally been
recognized related to employee stock option grants, because the exercise price of the stock options granted to employees and directors
equaled the fair market value of the underlying stock at the date of grant.

We adopted SFAS 123R using the modified prospective transition method. In accordance with the modified prospective method,
our Consolidated Financial Statements for periods prior to January 1, 2006 have not been restated to reflect, and do not include, the
impact of SFAS 123R. For awards that have graded-vesting features and service conditions only, we elected the straight line
single-option method of attributing the value of stock-based compensation expense to reporting periods. The adoption of SFAS 123R primarily
resulted in a change in the Company's method of measuring and recognizing stock-based compensation expense, and had a material
impact on our consolidated financial position. Stock-based compensation expense related to continuing operations recognized under
SFAS 123R for the year ended December 31, 2006 was approximately $34.7 million. For the years ended December 31, 2005 and
2004, stock-based compensation expense recognized under the intrinsic value method in accordance with APB 25 was $3.4 million and
$2.1 million, respectively. See Note 14 to the Consolidated Financial Statements for additional information regarding the stock-based
compensation expense.

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3
"Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards." We have elected to adopt the alternative
transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS
123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital
pool ("APIC pool") related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the
APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123R.

Earnings Per Share

We determine earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings
per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the
applicable period. Diluted earnings per share is determined in the same manner as basic earnings per share except that the number of
shares is increased to assume exercise of potentially dilutive stock options, unvested restricted stock and contingently issuable shares
using the treasury stock method, unless the effect of such increase would be anti-dilutive. Under the treasury stock method, the amount
the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet
recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are
assumed to be used to repurchase shares. For the years ended December 31, 2006 and 2005, the diluted earnings per share amounts
equal the basic earnings per share amounts because we had losses from continuing operations in both 2006 and 2005 and as such,
the impact of the assumed exercise of stock options, unvested restricted stock and contingently issuable shares would have been
anti-dilutive.

Restructuring and Related Expenses

We account for restructuring and related expenses in accordance with SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, as opposed to when management commits to an exit plan. SFAS 146 also requires that (i)
liabilities associated with exit and disposal activities be measured at fair value; (ii) one-time termination benefits be expensed at the
date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably
over the future service period; (iii) liabilities related to an operating lease/contract be recorded at fair value and measured when the
contract does not have any future economic benefit to the entity (i.e., the entity ceases to utilize the rights conveyed by the contract);
and (iv) all other costs related to an exit or disposal activity be expensed as incurred. We account for severance costs in accordance
with SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The severance benefits provided as part of restructurings
are part of an ongoing benefit arrangement, and accordingly, we have accrued a liability for expected severance costs. Restructuring
liabilities are included in accrued expenses and the related costs are reflected as operating expenses in the accompanying financial
statements.

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Research and Development Costs

Research and development costs, which include costs in connection with new product development, improvement of
existing products, process improvement, and product use technologies, are charged to operations in the period in which they are
incurred. In connection with a business combination, the purchase price allocated to research and development projects that have not
yet reached technological feasibility and for which no alternative future use exists is charged to operations in the period of
acquisition.

Segment Information

We disclose information concerning our operating segments in accordance with SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires segmentation based on our internal
organization and reporting of revenue and operating income based upon internal accounting methods commonly referred to as the
"management approach." Our financial reporting systems present various data for management to run the business, including internal
profit and loss statements prepared on a basis not consistent with U.S. GAAP. The segments are designed to allocate resources
internally and provide a framework to determine management responsibility. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our
Chief Executive Officer. We currently have three reportable segments: Network Signaling Group; Switching Solutions Group and
Communications Software Solutions Group. During 2004, certain network signaling products, including our Sentinel product line, were
combined with Steleus products and resources to become our Communications Software Solutions Group.

Recent Accounting Pronouncements

Accounting Changes

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 "Accounting Changes and
Error Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinion No. 20 "Accounting Changes" ("APB 20")
and Statement of Financial Accounting Standards No. 3 "Reporting Accounting Changes in Interim Financial Statements." SFAS
154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change
in accounting principle. SFAS 154 requires retrospective application to the financial statements of prior periods of a voluntary change in
accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be
recognized with a cumulative effect adjustment in net income of the period of the change. SFAS 154 is effective for accounting changes
made in annual periods beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on our
consolidated financial position, results of operations or cash flows.

Accounting for Uncertain Tax Positions

In July 2006, the FASB issued FASB Interpretation No. 48,"Accounting for Uncertainty in Income Taxes —
an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements. This Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Specifically, FIN 48
requires the recognition in financial statements of the impact of a tax position, if that position is more likely than not of being sustained
on audit, based on the technical merits of the position. Additionally, FIN 48 provides guidance on the derecognition of previously
recognized deferred tax items, classification, accounting for interest and penalties, and accounting in interim periods related to
uncertain tax positions, as well as, requires expanded disclosures. FIN 48 is effective for fiscal years beginning after
December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening
retained earnings. We are currently evaluating the impact on our financial statements of adopting FIN 48.

Fair Value Measurement

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 "Fair Value
Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact
on our financial statements of adopting SFAS 157.

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Materiality

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108"). SAB 108 provides guidance
on the consideration of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The
staff of the Securities and Exchange Commission (the "Staff") believes registrants must quantify the impact of correcting all
misstatements, including both carryover and reversing effects of prior year misstatements, on a company's current year consolidated
financial statements. The Staff prescribes two approaches to assessing the materiality of misstatements: the "rollover" approach, which
quantifies misstatements based on the amount of error originating in the current year income statement and the "iron curtain approach,"
which quantifies misstatements based on the effects of correcting the cumulative effect existing in the balance sheet at the end of the
current year. If, under either approach, misstatements are deemed material, a company is required to adjust its financial statements,
including correcting prior year financial statements, even if such correction was, and continues to be, immaterial to the prior year
financial statements. Correcting prior year financial statements for immaterial errors would not require a company to amend previously
filed reports, and such corrections may be made the next time the company files its prior year statements. We do not currently
anticipate any adjustments resulting from the application of SAB 108, which is effective for the first fiscal year ending after November
15, 2006.

Note 2  —  Disposition of IEX

On April 27, 2006, we entered into a Stock Purchase Agreement pursuant to which we agreed to sell to NICE-Systems Ltd. (or
its subsidiary), all of the outstanding shares of capital stock of IEX Corporation (the "IEX Shares"), our then wholly owned subsidiary
("IEX"). The sale price for the IEX Shares was approximately $200.0 million in cash, and was subject to a post-closing adjustment
based on the working capital of IEX as of the closing date. The closing of the sale of the IEX Shares occurred on July 6, 2006, resulting
in total proceeds of approximately $201.5 million and a pre-tax gain of approximately $200.1 million ($177.5 million after tax) in the year
ended December 31, 2006.

IEX is classified as discontinued operations in our consolidated financial statements and its results of operations, financial position
and cash flows are separately reported for all periods presented. Prior to our decision to sell IEX, the results of IEX's operations were
reported as the IEX Contact Center Group operating segment. Summarized financial information for IEX is as follows (dollars in
thousands):

|                                                      | December 31,
|----------------------------------------------------- | ------------
|                                                      | 2006        
|                                                      |             
|Revenues                                              | $           
|Income from discontinued operations before            |             
|provision of income taxes                             | $           
|Provision for income taxes                            |             
|Income from discontinued operations, net of           |             
|income taxes                                          |             
|Gain on sale of discontinued operations, net of taxes |             
|Income from discontinued operations, net of taxes     | $           

|                                          |  |   |                  
|----------------------------------------- |  | - | -----------------
|                                          |  |   | December 31, 2005
|                                          |  |   |                  
|Accounts receivable, net                  |  | $ | 6,994            
|Inventories                               |  |   | 835              
|Deferred income taxes                     |  |   | 359              
|Prepaid expenses and other current assets |  |   | 441              
|Property and equipment, net               |  |   | 320              
|Goodwill                                  |  |   | 9,698            
|Assets of discontinued operations         |  | $ | 18,647           
|                                          |  |   |                  
|Trade accounts payable                    |  | $ | 880              
|Accrued expenses                          |  |   | 2,689            
|Accrued payroll and related expenses      |  |   | 1,235            
|Deferred revenues                         |  |   | 18,475           
|Liabilities of discontinued operations    |  | $ | 23,279           

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As more fully described in Note 13, in April 2006, IEX settled litigation with Blue Pumpkin Software, Inc. ("Blue Pumpkin"). Pursuant
to the settlement agreement, each party granted to the other a release and cross-license of the patents asserted in the lawsuits. Blue
Pumpkin made a balancing license payment to IEX in the amount of $8.25 million on April 7, 2006, and Blue Pumpkin is
obligated to make six additional annual payments of $500,000 each to Tekelec beginning April 1, 2007 and ending April 1,
2012. Included in IEX's operations for the year ended December 31, 2006 is revenue and income of $8.25 million from this settlement.
The remaining six annual installments of $500,000 each have been assigned by IEX to Tekelec and will be recorded as income in
future periods when realized.

Note 3  —  Acquisitions

During 2006, 2005 and 2004, we completed several acquisitions in order to expand our product lines and offer our customers
an expanded next-generation switching portfolio of products and expanded product offering of intelligent network services. With each
acquisition, we determined the fair value of the assets acquired. Fair value is defined as the amount for which an asset or liability could
be exchanged in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion.
The fair value was determined for each entity at the time of the business combination, exclusive of any buyer specific post-combination
synergies.

Using generally accepted valuation practice principles, we valued the assets of each entity by applying three valuation
methodologies, which themselves are inter-related: the Cost Approach; the Market Approach; and the Income Approach. These
approaches are based upon market exchanges for comparable business interests or assets, the capitalization of income, and the cost
to reproduce assets. Each asset was valued by applying these approaches as deemed most appropriate given the nature of each asset
and the specific facts and circumstances as represented by management. The methodologies were applied under the premise of value
to a prudent investor contemplating retention and use of the assets on an ongoing basis.

As the basis of identifying the in-process research and development ("IPRD"), the development projects of each acquired entity
were evaluated in the context of Interpretation 4 of FASB Statement No. 2. In accordance with these provisions, the development
projects were examined to determine if there were any alternative future uses. Such evaluation consisted of a review of the efforts,
including the overall objectives of the project, progress toward the objectives, and the uniqueness of the developments of these
objectives. Further, each IPRD project was reviewed to determine if technological feasibility had been achieved.

Acquisition of Certain Signaling Technology

In December 2006, we entered into a worldwide license to certain technologies and intellectual property rights owned by a
third-party provider.  We believe this technology will form the core software platform for our service mediation product
family.  We believe this technology provides key capabilities, which will provide our customers with a smooth evolution from SS7
to SIP-based signaling and next-generation high performance network applications once we complete development of the product
offerings based on this technology.  The license fee for this technology was $2.1 million.  Because the technology obtained
in this license had no alternative use, we have reflected a charge of $2.1 million in purchased in-process product development expense
during 2006.  We expect to complete the development of this technology and resulting service mediation product family during
the second half of 2007 and estimate that we will incur an additional $2.0 million in development expense associated with completing
the development of this product family.

Santera Systems Inc.

In June 2003, we acquired a 51.6% controlling voting ownership interest (57.5% on an as converted basis) in
Santera Systems Inc. ("Santera") in exchange for a cash contribution of $28.0 million and the contribution of the business
operations and certain assets and liabilities of our Packet Telephony Business Unit. Santera develops, markets and sells products and
services for carrier-class, next-generation switches. Under the terms of the initial purchase agreement, in 2004, we made additional
cash investments of $12.0 million in Santera, comprised of $6.0 million in March 2004 and $6.0 million in May 2004,
in exchange for 12,000 additional shares of Santera Series B Preferred Stock. As a result of this cash investment, our ownership
percentage increased to 55.7% (62.5% on an as converted basis). In accordance with generally accepted accounting principles, prior to
our acquisition of the remaining minority interest in Santera in October 2005 discussed below, the capital structure of Santera has been
eliminated in consolidation and the minority stockholders' interest in Santera is reflected in our consolidated balance sheet as minority
interest, which was originally reflected at the fair value of the Santera assets acquired on the date of acquisition. In addition to the
$12 million additional investment noted above, we have funded substantially all of Santera's operating losses and working capital
requirements since the June 2003 acquisition.

As discussed below, we acquired the remaining shares of Santera held by the minority shareholders in October 2005. Prior to that
date, the net income and losses of Santera were allocated between Tekelec and the minority stockholders based on their relative
interests in the equity of Santera and the related liquidation preferences. This approach required net losses to be allocated first to the

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Series A Preferred Stock until fully absorbed and then to
the Series B Preferred Stock. Subsequent net income was
allocated first to the Series B Preferred Stock to the extent of previously recognized net losses allocated to Series B
Preferred Stock. Additional net income was then allocated to the Series A Preferred Stock to the extent of previously recognized
losses allocated to Series A Preferred Stock and then to common stock in proportion to their relative ownership interests in the
equity of Santera. The loss allocated to minority interest of Santera for the years ended December 31, 2005 and 2004 was computed as
follows (dollars in thousands):

|                                                                    |  |  |  |  |   | 2005(1) |   |   | 2004   |  
|------------------------------------------------------------------- |  |  |  |  | - | ------- | - | - | ------ | -
|Santera net losses                                                  |  |  |  |  | $ | 16,529  |   | $ | 35,105 |  
|Percentage of losses attributable to the minority interest based on |  |  |  |  |   |         |   |   |        |  
|capital structure and liquidation preferences                       |  |  |  |  |   | 62      | % |   | 62     | %
|Minority interest losses                                            |  |  |  |  | $ | 10,248  |   | $ | 21,765 |  

(1)    The losses of Santera for 2005 only include losses that were incurred prior to October 3, 2005, the date of our acquisition of the
shares of Santera held by the minority shareholders, as discussed below.

On October 3, 2005, we completed the purchase of all of the shares of capital stock owned by Santera's minority
stockholders for an aggregate total purchase price of $75.8 million, including approximately $0.2 million of acquisition
related costs (the "Purchase Price"). The transaction has been accounted for as a step acquisition of minority interest.

The following represents the allocation of the Purchase Price paid for the minority interest in Santera based on the estimated fair
values of the acquired assets and assumed liabilities of Santera. The consolidated financial statements reflect a total Purchase Price of
$75.8 million, consisting of the following: (i) the payment of the cash consideration of approximately $75.6 million,
and (ii) transaction costs of approximately $0.2 million consisting primarily of professional fees incurred relating to attorneys,
accountants and valuation advisors. Under the purchase method of accounting for a step acquisition of remaining minority interest, the
Purchase Price is first applied to eliminate the minority interest in Santera of approximately $7.4 million from our condensed
consolidated balance sheet, with the remaining Purchase Price of approximately $68.4 million allocated on a pro rata basis to the
identifiable assets and liabilities of Santera taking into account their respective fair values at the date of the acquisition and the interest
percentage being acquired. After giving effect to the elimination of the minority interest, the remaining Purchase Price allocation is as
follows (in thousands):

|Tangible assets:                    |  |  |  |  |  |  |  |   |       
|----------------------------------- |  |  |  |  |  |  |  | - | ------
|Deferred tax asset, net             |  |  |  |  |  |  |  | $ | 42,576
|Total tangible assets               |  |  |  |  |  |  |  |   | 42,576
|                                    |  |  |  |  |  |  |  |   |       
|Intangible assets:                  |  |  |  |  |  |  |  |   |       
|Acquired technology                 |  |  |  |  |  |  |  |   | 2,840 
|In-process research and development |  |  |  |  |  |  |  |   | 2,363 
|Customer relationships              |  |  |  |  |  |  |  |   | 1,128 
|Contracted backlog                  |  |  |  |  |  |  |  |   | 1,613 
|Goodwill                            |  |  |  |  |  |  |  |   | 19,803
|Total intangible assets             |  |  |  |  |  |  |  |   | 27,747
|                                    |  |  |  |  |  |  |  |   |       
|Liabilities assumed:                |  |  |  |  |  |  |  |   |       
|Deferred tax liability              |  |  |  |  |  |  |  |   | 1,953 
|Total liabilities assumed           |  |  |  |  |  |  |  |   | 1,953 
|Net assets acquired                 |  |  |  |  |  |  |  | $ | 68,370

The acquisition of the remaining interest in Santera on October 3, 2005 resulted in the recognition of deferred tax
assets of approximately $42.6 million primarily related to acquired temporary differences and net operating loss carryforwards
and deferred tax liabilities of approximately $2.0 million related to acquired intangible assets. As a result of the acquisition, the
ownership threshold provided under income tax regulations for inclusion of Santera in our consolidated federal income tax return has
been met. We have removed the valuation allowance on Santera's net deferred tax assets because we believe it is more likely than not
that these assets will be realized in our future consolidated federal income tax returns.

The valuation of intangible assets in the above table was determined using the "income" valuation approach and discount rates
ranging from 24% to 39%. The excess of the purchase price over the fair value of the identifiable tangible and intangible net assets
acquired of $19.8 million was assigned to goodwill. Goodwill represents the excess of the purchase price over the fair value of the
tangible and intangible assets acquired. In accordance with SFAS No. 142, goodwill will not be amortized but will be tested for

F-21



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impairment at least annually. This amount is not deductible for tax purposes.

Based on the purchase price allocation, $2.4 million of the purchase price represented acquired IPR&D that had not yet
reached technological feasibility and had no alternative future use. The IPR&D amount was recorded as an expense in the fourth
quarter of 2005. At the time of this acquisition, Santera had three significant IPR&D projects related to Versions 5.0, 6.0 and 7.0 of
its base product, the T9000 (formerly SanteraOne). We estimated that the IPR&D relating to Versions 5.0, 6.0 and 7.0 was 70%,
60% and 50% complete, respectively, and that we expected to incur up to an additional $5.8 million, $27.7 million and $4.1 million in the
remainder of 2005 and in 2006 and 2007, respectively, to complete these development projects.

The identifiable assets created as a result of the acquisition will be amortized over their respective estimated useful lives as follows
(in thousands):

|                       |  |  |  |  |   |        |  |  | Estimated
|---------------------- |  |  |  |  | - | ------ |  |  | ---------
|                       |  |  |  |  |   | Asset  |  |  | Life     
|                       |  |  |  |  |   | Amount |  |  | in Years 
|Acquired technology    |  |  |  |  | $ | 2,840  |  |  | 10       
|Customer relationships |  |  |  |  |   | 1,128  |  |  | 6        
|Contracted backlog     |  |  |  |  |   | 1,613  |  |  | 1.5      
|                       |  |  |  |  | $ | 5,581  |  |  |          

During the third quarter of 2006, we recognized non-cash impairment charges relating to the goodwill and purchased technology we
recorded as part of our acquisition of Santera. Please refer to Note 10 for a discussion of these impairment charges.

The following table presents unaudited summarized combined results of our operations and Santera's, on a pro forma basis, as
though we had acquired the remaining minority interest as of January 1, 2004. As noted above, the minority stockholders of Santera
owned 37.5% but absorbed 62% of the losses. The operating results of Santera have been fully included in our consolidated financial
statements from the date of our acquisition of all of the shares of capital stock from Santera's minority stockholders. The following
unaudited proforma amounts are in thousands, except per share amounts (in thousands):

|                                    |  |  |  |  |   | December 31,
|----------------------------------- |  |  |  |  | - | ------------
|                                    |  |  |  |  |   | 2005        
|Total revenues                      |  |  |  |  | $ | 486,505     
|Net income (loss)                   |  |  |  |  | $ | (31,653)    
|Diluted net income (loss) per share |  |  |  |  | $ | (0.48)      

The above unaudited pro forma summarized results of operations are intended for informational purposes only and, in the opinion
of management, are not indicative of our future results of operations.

iptelorg GmbH

On July 13, 2005, we completed the acquisition of iptelorg GmbH ("iptelorg"), a developer of Session Initiation Protocol
(SIP) routing software. We purchased all of iptelorg's outstanding stock for approximately $7.1 million in cash, approximately $0.2
million of transaction costs and approximately $4.1 million in shares of restricted common stock, all or a portion of which are subject to
repurchase for a nominal amount if certain of the former iptelorg shareholders terminate their employment with us within four years from
the acquisition date.

F-22



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We have allocated $4.1 million of the purchase price to deferred compensation associated with the restricted stock, which is being
amortized to expense over the four-year vesting period during which the restricted stock is subject to repurchase. We allocated the
remaining purchase price of approximately $7.3 million to the tangible net assets and liabilities and intangible assets acquired, based
on their estimated fair values as follows (in thousands):

|Tangible assets:                             |  |  |  |  |  |  |  |   |      
|-------------------------------------------- |  |  |  |  |  |  |  | - | -----
|Cash and cash equivalents                    |  |  |  |  |  |  |  | $ | 183  
|Accounts receivable and other current assets |  |  |  |  |  |  |  |   | 486  
|Property and equipment                       |  |  |  |  |  |  |  |   | 101  
|Total tangible assets                        |  |  |  |  |  |  |  |   | 770  
|Intangible assets:                           |  |  |  |  |  |  |  |   |      
|Acquired technology                          |  |  |  |  |  |  |  |   | 4,190
|Customer relationships                       |  |  |  |  |  |  |  |   | 60   
|Non-compete agreements                       |  |  |  |  |  |  |  |   | 240  
|In-process research and development          |  |  |  |  |  |  |  |   | 1,210
|Goodwill                                     |  |  |  |  |  |  |  |   | 3,361
|Total intangible assets                      |  |  |  |  |  |  |  |   | 9,061
|Liabilities assumed:                         |  |  |  |  |  |  |  |   |      
|Accounts payable and accrued liabilities     |  |  |  |  |  |  |  |   | 747  
|Deferred tax liability                       |  |  |  |  |  |  |  |   | 1,796
|Total liabilities assumed                    |  |  |  |  |  |  |  |   | 2,543
|Net assets acquired                          |  |  |  |  |  |  |  | $ | 7,288

The customer relationship intangible assets are being amortized over a period of one year based on the estimated customer
attrition rates. The non-compete agreements and acquired technology intangible assets are being amortized over their estimated lives
of three and ten years, respectively, using the straight-line method. In performing the purchase price allocation, we considered, among
other factors, our intention for future use of the acquired assets, analyses of historical financial performance and estimates of the future
performance of the acquired business.

We estimated the fair value of IPR&D to be approximately $1.2 million, which we have reflected in "acquired in-process
research and development" expense in the consolidated statement of operations. This represents certain technologies under
development, primarily related to iptelorg's SIP routing software and IP Multimedia Subsystem ("IMS"). We estimated that the
technologies under development were approximately 30% to 80% complete at the date of acquisition and we expected to incur up to an
additional $755,000 to complete this development. This development was completed in 2006.

We determined the fair values of each of the identifiable intangible assets and the in-process research and development using the
"income" valuation approach and discount rates ranging from 30% to 35%. The discount rates selected were based in part on our
weighted average cost of capital and determined after consideration of our rate of return on debt capital and equity, the weighted
average return on invested capital and the risk associated with achieving forecasted cash flows. Further, we also considered risks
associated with achieving anticipated levels of market acceptance and penetration, successful completion of various research and
development efforts, market growth rates and risks related to the impact of potential changes in future target markets.

The excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired of $3.4 million
was assigned to goodwill. In accordance with SFAS 142, goodwill will not be amortized but will be tested for impairment at least
annually. This amount is not deductible for tax purposes. The assets, liabilities and operating results of iptelorg have been included in
our consolidated financial statements from the date of acquisition within the operations of our Network Signaling Group. Pro forma
information giving effect to this acquisition has not been presented because the pro forma information would not differ materially from
our historical results.

Steleus Group Inc.

On October 14, 2004, we completed the acquisition of Steleus Group Inc. ("Steleus"), a real-time performance
management company that supplies network-related intelligence products and services to telecom operators. We paid an aggregate
cash amount of approximately $53.6 million for 100% of Steleus' outstanding stock. In addition, we incurred approximately
$5.0 million in direct acquisition-related costs. The acquisition was accomplished by means of a reverse triangular merger of a
new wholly owned subsidiary of Tekelec into Steleus.

F-23



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The acquisition was accounted for using the purchase method of accounting with the Steleus
assets acquired and the liabilities assumed reflected at their estimated fair values. Steleus and our existing business intelligence
applications, such as billing verification and other network element-independent applications, formed our Communications Software
Solutions Group ("CSSG"), which began to be reported as an operating segment in 2004.

The acquisition of Steleus resulted in the recognition of deferred tax assets of approximately $15.6 million primarily related to
acquired temporary differences and net operating loss carryforwards and deferred tax liabilities of approximately $8.6 million
related to acquired intangible assets. Steleus' operating results have been included in our consolidated results since the date of
acquisition.

The transaction resulted in a step-up of approximately $48.7 million of Steleus' assets and liabilities to fair value as follows
(in thousands):

|Total cash paid or held in escrow                                   |  |  |  |  |  |  |  | $ | 53,600  
|------------------------------------------------------------------- |  |  |  |  |  |  |  | - | --------
|Direct transaction costs                                            |  |  |  |  |  |  |  |   | 5,003   
|Total fair value of consideration paid and direct transaction costs |  |  |  |  |  |  |  |   | 58,603  
|Less: Steleus' tangible net assets acquired                         |  |  |  |  |  |  |  |   | (2,894) 
|Add: Estimated deferred tax liability                               |  |  |  |  |  |  |  |   | 8,599   
|Less: Estimated deferred tax assets                                 |  |  |  |  |  |  |  |   | (15,641)
|Total fair value step-up in Steleus                                 |  |  |  |  |  |  |  | $ | 48,667  

Through this acquisition, we gained an expanded portfolio of value-added applications with real-time monitoring and management
capabilities for legacy and next-generation networks. We believe the combination of our signaling products and expertise, combined
with the acquired Steleus assets, provide a unique value-proposition to our customers. These factors contributed to a purchase price in
excess of fair market value of Steleus' net tangible and intangible assets acquired, and as a result, we recorded goodwill in connection
with the transaction.

The total purchase price step-up was allocated among the Steleus assets acquired and liabilities assumed based on their estimated
fair values as follows (in thousands):

|In-process research and development |  |  |  |  |  |  |  | $ | 3,800 
|----------------------------------- |  |  |  |  |  |  |  | - | ------
|Goodwill                            |  |  |  |  |  |  |  |   | 20,297
|Identifiable intangible assets      |  |  |  |  |  |  |  |   | 24,570
|Total purchase price allocation     |  |  |  |  |  |  |  | $ | 48,667

Based on the purchase price allocation, $3.8 million of the purchase price represented acquired IPR&D that had not yet
reached technological feasibility and had no alternative future use. At the date of our acquisition of Steleus, we estimated that the
Steleus IPR&D projects were 75% complete, and we expected to incur up to an additional $2.8 million and $3.0 million in the
remainder of 2004 and 2005, respectively, to complete these development projects. All of the IPR&D projects were expected to
generate revenues beginning in 2005. We estimated the fair value of the IPR&D using the "income" valuation approach and a
discount rate of 37%. This discount rate was selected based in part on our weighted average cost of capital and the risk associated with
achieving forecasted cash flows. The IPR&D amount was recorded as an expense in the fourth quarter of 2004. The identifiable
assets created as a result of the acquisition will be amortized over their respective estimated useful lives as follows (in thousands):

|                                |  |  |  |  |   |        |  |  | Estimated
|------------------------------- |  |  |  |  | - | ------ |  |  | ---------
|                                |  |  |  |  |   | Asset  |  |  | Life     
|                                |  |  |  |  |   | Amount |  |  | in Years 
|Acquired technology             |  |  |  |  | $ | 19,300 |  |  | 10       
|Acquired backlog                |  |  |  |  |   | 800    |  |  | 1.2      
|Trade names and marks           |  |  |  |  |   | 150    |  |  | 1.2      
|Existing customer relationships |  |  |  |  |   | 1,030  |  |  | 10       
|Service contracts               |  |  |  |  |   | 2,890  |  |  | 2        
|Non-compete agreements          |  |  |  |  |   | 400    |  |  | 2        
|                                |  |  |  |  | $ | 24,570 |  |  |          

F-24



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VocalData, Inc.

On September 20, 2004, we completed the acquisition of all of the outstanding shares of capital stock of privately
held VocalData, Inc. ("VocalData"). VocalData is a provider of hosted Internet protocol (IP) telephony applications that enable the
delivery of advanced telecom services and applications to business and residential customers. The acquisition was accomplished by
means of a reverse triangular merger of a new wholly owned subsidiary of Tekelec into VocalData.

We paid to the preferred stockholders of VocalData, in exchange for their interests in VocalData, consideration in the total amount
of approximately $27.5 million, consisting of (i) an aggregate cash amount of $14.5 million, and
(ii) 779,989 shares of our
Common Stock. The value of the 779,989 shares was equal to approximately
$13.0 million based on the closing sales price of our Common Stock on the Nasdaq National Market at the closing date of
September 20, 2004.

The acquisition has been accounted for under the purchase method of accounting, with the VocalData assets and liabilities
acquired reflected at their estimated fair values. The acquisition of VocalData resulted in the recognition of deferred tax assets of
approximately $12.3 million primarily related to acquired temporary differences and net operating loss carryforwards and deferred
tax liabilities of approximately $2.3 million related to acquired intangible assets. VocalData's operating results have been included
in our consolidated results since the date of acquisition.

The transaction resulted in a step-up of approximately $15.2 million of VocalData's assets and liabilities to fair value as
follows (in thousands):

|Total cash paid                                                     |  |  |  |  |  |  |  | $ | 14,500  
|------------------------------------------------------------------- |  |  |  |  |  |  |  | - | --------
|Fair value of stock issued                                          |  |  |  |  |  |  |  |   | 13,000  
|Direct transaction costs                                            |  |  |  |  |  |  |  |   | 354     
|Total fair value of consideration paid and direct transaction costs |  |  |  |  |  |  |  |   | 27,854  
|Less: VocalData's tangible net assets acquired                      |  |  |  |  |  |  |  |   | (2,636) 
|Add: Estimated deferred tax liability                               |  |  |  |  |  |  |  |   | 2,278   
|Less: Estimated deferred tax assets                                 |  |  |  |  |  |  |  |   | (12,253)
|Total fair value step-up in VocalData                               |  |  |  |  |  |  |  | $ | 15,243  

Through this acquisition, we gained a meaningful presence in the next-generation switching space, specifically for IP Centrex
applications. These factors contributed to a purchase price in excess of fair market value of VocalData's net tangible and intangible
assets acquired, and as a result, we have recorded goodwill in connection with the transaction.

The total purchase price step-up was allocated among the VocalData assets acquired and liabilities assumed based on their
estimated fair values as follows (in thousands):

|In-process research and development |  |  |  |  |  |  |  | $ | 2,400 
|----------------------------------- |  |  |  |  |  |  |  | - | ------
|Goodwill                            |  |  |  |  |  |  |  |   | 6,333 
|Identifiable intangible assets      |  |  |  |  |  |  |  |   | 6,510 
|Total purchase price allocation     |  |  |  |  |  |  |  | $ | 15,243

F-25



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Based on the purchase price allocation, $2.4 million of the purchase price represented acquired IPR&D that had not yet
reached technological feasibility and had no alternative future use. At the time of the acquisition, VocalData had two significant
IPR&D projects under development related to Versions 5.5 and 5.6 of VocalData's base product. These projects were expected to
enable VocalData to remain competitive in the marketplace. We estimated the fair value of the IPR&D acquired in our acquisition
of VocalData to be $2.4 million and we included $2.4 million of expense relating to this IPR&D under the heading "acquired
in-process research and development" in the statement of operations for 2004. At the date of our acquisition of VocalData, we estimated
that the IPR&D relating to Versions 5.5 and 5.6 was 80% and 40% complete, respectively, and that we expected to incur up to an
additional $4.8 million and $5.1 million in the remainder of 2004 and 2005, respectively, to complete these development projects. Both
Version 5.5 and Version 5.6 were expected to be released in 2005. We estimated the fair value of the IPR&D using the "income"
valuation approach and a discount rate of 31%. The discount rate was selected based in part on our weighted average cost of capital
and the risk associated with achieving forecasted cash flows. The IPR&D amount was recorded as an expense in the third quarter
of 2004. The identifiable assets created as a result of the acquisition will be amortized over their respective estimated useful lives as
follows (in thousands):

|                                |  |  |  |  |   |        |  |  | Estimated
|------------------------------- |  |  |  |  | - | ------ |  |  | ---------
|                                |  |  |  |  |   | Asset  |  |  | Life     
|                                |  |  |  |  |   | Amount |  |  | in Years 
|Acquired technology             |  |  |  |  | $ | 5,200  |  |  | 10       
|Acquired backlog                |  |  |  |  |   | 100    |  |  | 1        
|Trade names and marks           |  |  |  |  |   | 10     |  |  | 1        
|Existing customer relationships |  |  |  |  |   | 500    |  |  | 10       
|Service contracts               |  |  |  |  |   | 500    |  |  | 1        
|Non-compete agreements          |  |  |  |  |   | 200    |  |  | 1        
|                                |  |  |  |  | $ | 6,510  |  |  |          

During the third quarter of 2006, we recognized non-cash impairment charges relating to the goodwill and purchased technology we
recorded as part of our acquisition of VocalData. Please refer to Note 10 for a discussion of these impairment charges.

Taqua, Inc.

On April 8, 2004, we completed the acquisition of all of the outstanding shares of capital stock of privately held
Taqua, Inc. ("Taqua"). Taqua develops, markets and sells products and services for next-generation switches optimized for the small
switch service provider market. The acquisition was accomplished by means of a reverse triangular merger of a new wholly owned
subsidiary of Tekelec into Taqua.

We paid an aggregate cash amount of approximately $86.0 million to the common and preferred stockholders and warrant
holders of Taqua in exchange for their interests in Taqua. In addition, we incurred approximately $2.8 million in direct
acquisition-related costs. As part of the acquisition, we assumed all unexercised outstanding options to purchase shares of common stock of
Taqua. The assumed options were converted, based on exchange ratios specified in the merger agreement, into options to purchase
an aggregate of approximately 500,000 shares of Tekelec Common Stock with an estimated fair value of $7.8 million using
the Black-Scholes option-pricing model. This amount includes approximately $4.2 million related to the intrinsic value of unvested
stock options recorded as deferred stock-based compensation, which is being amortized over the vesting period of the assumed
options. The transaction has been accounted for as an acquisition under the purchase method of accounting, with the Taqua assets
acquired and the liabilities acquired reflected at their estimated fair values. The acquisition of Taqua resulted in the recognition of
deferred tax assets of approximately $31.2 million primarily related to acquired temporary differences and net operating loss
carryforwards and deferred tax liabilities of approximately $10.7 million related to acquired intangible assets. Taqua's operating
results have been included in our consolidated results since the date of acquisition.

F-26



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The transaction resulted in a step-up of approximately $69.3 million of Taqua's assets and liabilities to fair value as follows
(in thousands):

|Total cash paid                                                     |  |  |  |  |  |  |  | $ | 85,966  
|------------------------------------------------------------------- |  |  |  |  |  |  |  | - | --------
|Fair value of stock options assumed                                 |  |  |  |  |  |  |  |   | 7,755   
|Deferred compensation adjustment for unvested stock options         |  |  |  |  |  |  |  |   | (4,231) 
|Direct transaction costs                                            |  |  |  |  |  |  |  |   | 2,751   
|Total fair value of consideration paid and direct transaction costs |  |  |  |  |  |  |  |   | 92,241  
|Less: Taqua's tangible net assets acquired                          |  |  |  |  |  |  |  |   | (2,086) 
|Add: Estimated deferred tax liability                               |  |  |  |  |  |  |  |   | 10,724  
|Less: Estimated deferred tax assets                                 |  |  |  |  |  |  |  |   | (31,204)
|Less: Other adjustments to tangible assets and liabilities          |  |  |  |  |  |  |  |   | (387)   
|Total fair value step-up in Taqua                                   |  |  |  |  |  |  |  | $ | 69,288  

Through this acquisition, we gained a meaningful presence in the next-generation switching space, specifically for the small size
wireline switching market. Because the purchase price was in excess of the fair market value of Taqua's net tangible and intangible
assets acquired, we have recorded goodwill in connection with the transaction.

The total purchase price step-up was allocated among the Taqua assets acquired and liabilities assumed based on their estimated
fair values as follows (in thousands):

|In-process research and development |  |  |  |  |  |  |  | $ | 8,000 
|----------------------------------- |  |  |  |  |  |  |  | - | ------
|Goodwill                            |  |  |  |  |  |  |  |   | 31,978
|Identifiable intangible assets      |  |  |  |  |  |  |  |   | 29,310
|Total purchase price allocation     |  |  |  |  |  |  |  | $ | 69,288

Based on the purchase price allocation, $8.0 million of the purchase price represented acquired IPR&D that had not yet
reached technological feasibility and had no alternative future use. At the time of the acquisition, Taqua had three significant
IPR&D projects under development related to Versions 4.0, 5.0 and 6.0 of Taqua's base product. These projects were expected to
ultimately generate revenues and enable Taqua to remain competitive in the marketplace. We estimated the fair value of the
IPR&D acquired in our acquisition of Taqua to be $8.0 million. We included $8.0 million of expense relating to this IPR&D
under the heading "acquired in-process research and development" in the statement of operations for 2004. At the date of our
acquisition of Taqua, we estimated that the IPR&D relating to the three projects was between 50% and 80% complete and that we
expected to incur up to an additional $2.6 million and $4.8 million in the remainder of 2004 and 2005 to complete these development
projects. At the time of the acquisition, Version 4.0 was expected to be released in 2004 and Versions 5.0 and 6.0 were expected to be
released in 2005. We estimated the fair value of the IPR&D using the "income" valuation approach and a discount rate of 34%.
The discount rate was selected based in part on our weighted average cost of capital and the risk associated with achieving forecasted
cash flows. The IPR&D amount was recorded as an expense in the second quarter of 2004. The identifiable assets created as a
result of the acquisition will be amortized over their respective estimated useful lives as follows (in thousands):

|                                |  |  |  |  |   |        |  |  | Estimated
|------------------------------- |  |  |  |  | - | ------ |  |  | ---------
|                                |  |  |  |  |   | Asset  |  |  | Life     
|                                |  |  |  |  |   | Amount |  |  | in Years 
|Acquired technology             |  |  |  |  | $ | 26,400 |  |  | 15       
|Acquired backlog                |  |  |  |  |   | 1,500  |  |  | 1        
|Trade names and marks           |  |  |  |  |   | 60     |  |  | 1        
|Existing customer relationships |  |  |  |  |   | 10     |  |  | 12       
|Service contracts               |  |  |  |  |   | 630    |  |  | 5        
|Non-compete agreements          |  |  |  |  |   | 710    |  |  | 1        
|                                |  |  |  |  | $ | 29,310 |  |  |          

During the fourth quarter of 2005, we recognized non-cash impairment charges relating to the goodwill and purchased technology
we recorded as part of our acquisition of Taqua. Please refer to Note 10 for a discussion of these impairment charges.

F-27



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Note 4  —  Restructuring and Other Costs

Beginning in 2004 and continuing through 2006, we executed a series of strategic initiatives that we believe will (i) strengthen
our competitive position; (ii) reduce our cost structure, improving our operating margins and our overall operating performance; and (iii)
better integrate and align our operations. These initiatives include (i) a reduction in personnel employed primarily by or supporting our
Switching solutions Group in Plano, Texas (the "2006 Restructuring), (ii) the relocation of our corporate headquarters to Morrisville,
North Carolina and our Taqua facilities to Plano, Texas (the "Corporate Headquarters and Taqua Relocations") and (iii) the
implementation of a global strategic manufacturing plan ("the Manufacturing Restructuring"). These initiatives are collectively referred to
hereafter as "the Restructurings."

2006 Restructuring

In 2006, we committed to a restructuring plan as part of our ongoing efforts to align our cost structure with our business
opportunities in certain business units and operating groups. The restructuring plan involved: (i) the termination of our employment of
152 employees across our business units and related customer service, operations and other personnel; (ii) the decision not to replace
22 employees who left Tekelec during the third quarter of 2006; and (iii) the termination of approximately 25 contractors. The majority
of the terminated employees worked directly for, or in support of, our Switching Solutions Group Business Unit ("SSG") in Plano, Texas.

In addition, as a result of the relocation of our corporate headquarters to North Carolina from California, our California-based Senior
Vice President, Corporate Affairs and General Counsel decided to resign effective December 31, 2006. We incurred charges under a
retention agreement with the General Counsel and are also obligated to pay severance benefits to him under our Executive Officer
Severance Plan due to the relocation of our headquarters.

We recorded pre-tax restructuring charges in the year ended December 31, 2006 of approximately $7.4 million related to
employee severance arrangements associated with the 2006 Restructuring and the resignation of our Senior Vice President, Corporate
Affairs and General Counsel. All of such severance payments are expected to be paid in 2007.

The costs expected to be incurred and cumulative costs incurred related to the 2006
Restructuring are as follows (in thousands):

|                          | Total Costs    |       | Cumulative Costs 
|------------------------- | -------------- | ----- | -----------------
|                          | Expected to be |       | Incurred through 
|                          | Incurred       |       | December 31, 2006
|Severance and other costs | $              | 7,359 |                  

Corporate Headquarters and Taqua Relocations

In April 2005, we announced the relocation of our corporate headquarters from Calabasas, California to our facilities in
Morrisville, North Carolina. The relocation provides us a significant opportunity to improve our operations by integrating our finance,
accounting, corporate and information technology functions into the business units they support. In October 2005, we entered into an
employment severance agreement with our former CEO in connection with his resignation as an executive officer and employee
effective January 1, 2006. In connection with this agreement, we incurred approximately $1.6 million in severance costs that were paid
in 2006 in scheduled monthly installments. Also in 2005, we announced the Taqua Relocation, which involved the relocation of our
Taqua facility from Hyannis, Massachusetts, to our Plano, Texas facilities. Both the Corporate Headquarters and Taqua Relocations
resulted in employee terminations and relocations and qualify as "Exit Activities" as that term is defined in Statement of Financial
Accounting Standards No. 146 "Accounting for Costs Associated with exit or Disposal Activities." The termination costs include
retention bonuses, severance pay and benefit costs extended through the required service period and for up to one year thereafter.
Additionally, in the second quarter of 2005, we recorded a one-time charge of $150,000 related to the termination of our lease in
Hyannis. Other costs related to the management of the relocation projects and the costs to relocate equipment were expensed as
incurred.

During 2004, we entered into a lease agreement for approximately 22,400 square feet of office space in Thousand Oaks, California
through December 2014. During the second quarter of 2005, after being notified by the landlord for this building that it would be
unable to deliver possession of the premises in accordance with the lease terms, we terminated the lease. The landlord disputed our
right to terminate the lease. As a result of our decision to terminate the lease, we recorded a total charge of $319,000 for the year
ended December 31, 2005 comprised of an $87,000 write-off of certain leasehold improvements, $113,000 representing the
possible forfeiture of our deposits paid to the landlord and $119,000 of other costs associated with the disputed termination of the lease.
In 2006, as a result of winning the dispute with the landlord, we reversed $100,000 in other costs related to a revision of our estimate of
total costs to be incurred associated with this dispute.

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The costs expected to be incurred and cumulative costs incurred related to the Corporate Headquarters and Taqua Relocations are
as follows (in thousands):

|                                      |  |   | Total Costs    |  |   | Cumulative Costs 
|------------------------------------- |  | - | -------------- |  | - | -----------------
|                                      |  |   | Expected to be |  |   | Incurred through 
|                                      |  |   | Incurred       |  |   | December 31, 2006
|Severance costs and retention bonuses |  | $ | 4,835          |  | $ | 4,835            
|Employee relocation costs             |  |   | 265            |  |   | 265              
|Facility relocation costs             |  |   | 1,013          |  |   | 1,013            
|Other (1)                             |  |   | 1,336          |  |   | 1,336            
|Total                                 |  | $ | 7,449          |  | $ | 7,449            

(1)    Consists of costs related to the transition of our corporate headquarters including recruitment, signing bonuses and training costs
related to the hiring of finance and administrative personnel in Morrisville as well as travel costs during the transition period. In addition,
other costs include salary costs for duplicative employees during the transition of job responsibilities from employees located in
Calabasas to the successor employees in Morrisville. These transition costs were expensed as incurred.

Manufacturing Relocation

In January 2004, we announced the Manufacturing Restructuring, which included the outsourcing of the majority of our
manufacturing operations and the relocation of our remaining signaling product manufacturing operations from Calabasas, California to
our facilities in Morrisville, North Carolina. The Manufacturing Restructuring included the elimination of approximately 23 positions
during 2004 and one position in 2005, resulting in restructuring costs such as employee severance and relocation costs. This
cost reduction initiative resulted in restructuring charges of approximately $1.8 million through December 31, 2005. We did not incur any
additional costs during the year ended December 31, 2006 and do not expect to incur any additional costs related to the Manufacturing
Restructuring in the future.

The following table summarizes the restructuring and related expenses incurred in connection with the restructurings discussed
above and the remaining obligations as of and for the year ended December 31, 2006 (in thousands):

|                                             |  |   | Severance |  |   |            |  |   |            |  |   |           |  |   |        
|-------------------------------------------- |  | - | --------- |  | - | ---------- |  | - | ---------- |  | - | --------- |  | - | -------
|                                             |  |   | Costs and |  |   | Employee   |  |   | Facility   |  |   |           |  |   |        
|                                             |  |   | Retention |  |   | Relocation |  |   | Relocation |  |   |           |  |   |        
|                                             |  |   | Bonuses   |  |   | Costs      |  |   | Costs      |  |   | Other (1) |  |   | Total  
|Restructuring obligations, December 31, 2005 |  | $ | 3,023     |  | $ | 155        |  | $ | 100        |  | $ | -         |  | $ | 3,278  
|Restructuring and related expenses:          |  |   |           |  |   |            |  |   |            |  |   |           |  |   |        
|Corporate Headquarters and Taqua relocation  |  |   | (127)     |  |   | -          |  |   | (100)      |  |   | 41        |  |   | (186)  
|2006 Restructuring                           |  |   | 7,359     |  |   | -          |  |   | -          |  |   | -         |  |   | 7,359  
|Total restructuring and related expenses     |  |   | 7,232     |  |   | -          |  |   | (100)      |  |   | 41        |  |   | 7,173  
|Cash payments                                |  |   | (7,659)   |  |   | (155)      |  |   | -          |  |   | (41)      |  |   | (7,855)
|Restructuring obligations, December 31, 2006 |  | $ | 2,596     |  | $ | -          |  | $ | -          |  | $ | -         |  | $ | 2,596  

(1)     Consists of costs related to the transition of our corporate headquarters including recruitment, signing bonuses and training costs
related to the hiring of finance and administrative personnel in Morrisville as well as travel costs during the transition period. In addition,
other costs include salary costs for duplicative employees during the transition of job responsibilities from employees located in
Calabasas to the successor employees in Morrisville. These transition costs were expensed as incurred.

Restructuring obligations are included in accrued expenses in the accompanying consolidated balance sheets. We anticipate
settling our remaining obligations relating to the Restructurings in 2007. However, this is based on our current best estimate, which
could change materially if actual activity differs from what is currently expected. We will continue to review the status of our
restructuring activities quarterly and, if appropriate, record changes in our restructuring obligations in current operations based on our
most current estimates.

Note 5  —  Gain (Loss) on Investments

In December 2004, following the acquisition of Spatial Communications Technologies ("Spatial") by Alcatel, Santera exercised

F-29



---



warrants convertible into 1,363,380 shares of freely tradable Alcatel shares valued at $14.91 per share. As a result of this
transaction, Santera recognized a gain of $20.3 million during the year ended December 31, 2004. During the first quarter of
2005, Santera sold 1,263,380 Alcatel shares for proceeds of $17.5 million resulting in a realized loss of $1.3 million in the year ended
December 31, 2005. In addition, in December 2006, we received 89,642 shares of Alcatel-Lucent previously held in escrow pending the
resolution of certain acquisition related indemnification claims made by Alcatel against the former Spatial shareholders, resulting in a
$1.3 million gain upon distribution of these shares.

In August 2004, following the acquisition of Telica by Lucent Technologies Inc. ("Lucent"), we received freely tradable common
stock of Lucent in exchange for our investment in Telica, resulting in a gain of $7.9 million in the year ended December 31, 2004.
In September 2004, we sold 5.8 million of our shares of Lucent stock for proceeds of approximately $17.9 million. In the
first quarter of 2006, we received an additional 642,610 shares of Lucent that were released from escrow, resulting in a $1.8 million
gain upon distribution of these shares. In connection with the merger of Lucent and Alcatel in the fourth quarter of 2006, these shares
were converted to 125,437 shares of Alcatel-Lucent.

As of December 31 2006, we hold 315,079 Alcatel-Lucent shares, which are included in short-term investments in the
accompanying consolidated balance sheet.

On August 30, 2002, we completed the sale of our Network Diagnostics business unit ("NDD") to Catapult Communications
Corporation ("Catapult") for $59.8 million, consisting of cash in the amount of $42.5 million and convertible subordinated
promissory notes (the "Notes") issued by Catapult's wholly owned Irish subsidiary and guaranteed by Catapult in the total principal
amount of $17.3 million. The Notes were convertible into Catapult common stock after August 30, 2003 through maturity at
a conversion rate (subject to certain adjustments) of 62.50 shares of Catapult common stock per $1,000 in principal
(approximately 1.1 million shares for full conversion of the Notes). We exercised our option to convert the Notes into Catapult
common stock in September 2004 and sold our Catapult shares resulting in a pre-tax gain of approximately $2.2 million.

Note 6  —  Financial Statement Details

Other Income and Expense

Other income and expense is composed of the following:

|                                              |  |   | For the Years Ended December 31, | 
|--------------------------------------------- |  | - | -------------------------------- | 
|                                              |  |   | 2006                             | 
|                                              |  |   | (Thousands)                      | 
|Foreign currency transaction gain (loss), net |  | $ | 3,863                            | 
|Net gain (loss) on derivative instruments     |  |   | (3,926)                          | 
|Realized gain (loss) on investments, net      |  |   | 21                               | 
|Other, net                                    |  |   | 66                               | 
|Total other income (expense), net             |  | $ | 24                               | 

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Cash, Cash Equivalents and Investments

Cash and cash equivalents and short-term investments consisted of the following as of December 31, 2006:

|                                    |  |   |             |  |   | Unrealized |  |   |     
|----------------------------------- |  | - | ----------- |  | - | ---------- |  | - | ----
|                                    |  |   | Cost        |  |   | Loss       |  |   | Gain
|                                    |  |   | (Thousands)
|Cash and cash equivalents:          |  |   |             |  |   |            |  |   |     
|Cash                                |  | $ | 13,324      |  | $ | -          |  | $ | -   
|Certificates of deposit             |  |   | 5,389       |  |   | -          |  |   | -   
|Money market securities             |  |   | 26,738      |  |   | -          |  |   | -   
|Total cash and cash equivalents     |  | $ | 45,451      |  | $ | -          |  | $ | -   
|                                    |  |   |             |  |   |            |  |   |     
|Short-term investments:             |  |   |             |  |   |            |  |   |     
|U.S. treasury and agency securities |  | $ | 6,000       |  | $ | (31)       |  | $ | -   
|Municipal securities                |  |   | 336,300     |  |   | (145)      |  |   | -   
|Auction rate preferreds             |  |   | 26,900      |  |   | -          |  |   | -   
|Corporate notes                     |  |   | 5,559       |  |   | (18)       |  |   | -   
|Common shares in Alcatel-Lucent     |  |   | 4,558       |  |   | (78)       |  |   | -   
|Total short-term investments        |  | $ | 379,317     |  | $ | (272)      |  | $ | -   

The following table shows the gross unrealized losses and fair value of our short-term investments, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2006 (in
thousands):

|                                             |  |   | Less than 12 Months |  |   | Greater than 12 Months |  |   | Total     
|-------------------------------------------- |  | - | ------------------- |  | - | ---------------------- |  | - | ----------
|                                             |  |   | Fair Value          |  |   | Unrealized  Loss       |  |   | Fair Value
|U.S. treasury and agency securities          |  | $ | 997                 |  | $ | (3)                    |  | $ | 4,972     
|Municipal securities                         |  |   | 29,348              |  |   | (140)                  |  |   | 3,863     
|Corporate notes                              |  |   | -                   |  |   | -                      |  |   | 5,541     
|Common shares in Alcatel-Lucent              |  |   | 3,206               |  |   | (78)                   |  |   | -         
|Total                                        |  | $ | 33,551              |  | $ | (221)                  |  | $ | 14,376    
|                                             |  |   |                     |  |   |                        |  |   |           
|Number of securities with an unrealized loss |  |   |                     |  |   | 19                     |  |   |           

Cash and cash equivalents and short-term investments consisted of the following as of December 31, 2005:

|                                    |  |   |             |  |   | Unrealized |  |   |     
|----------------------------------- |  | - | ----------- |  | - | ---------- |  | - | ----
|                                    |  |   | Cost        |  |   | Loss       |  |   | Gain
|                                    |  |   | (Thousands)
|Cash and cash equivalents:          |  |   |             |  |   |            |  |   |     
|Cash                                |  | $ | 49,269      |  | $ | -          |  | $ | -   
|Certificates of deposit             |  |   | 2,800       |  |   | -          |  |   | -   
|Total cash and cash equivalents     |  | $ | 52,069      |  | $ | -          |  | $ | -   
|                                    |  |   |             |  |   |            |  |   |     
|Short-term investments:             |  |   |             |  |   |            |  |   |     
|U.S. treasury and agency securities |  | $ | 25,170      |  | $ | (384)      |  | $ | -   
|Municipal securities                |  |   | 112,339     |  |   | (457)      |  |   | -   
|Corporate notes                     |  |   | 33,750      |  |   | (439)      |  |   | -   
|Certificates of deposit             |  |   | 2,968       |  |   |            |  |   |     
|Common shares in Alcatel-Lucent     |  |   | 1,491       |  |   | (251)      |  |   | -   
|Other                               |  |   | 73          |  |   | -          |  |   | -   
|Total short-term investments        |  | $ | 175,791     |  | $ | (1,531)    |  | $ | -   

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The following table shows the gross unrealized losses and fair value of our short-term investments, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2005 (in
thousands):

|                                             |  |   | Less than 12 Months |  |   | Greater than 12 Months |  |   | Total     
|-------------------------------------------- |  | - | ------------------- |  | - | ---------------------- |  | - | ----------
|                                             |  |   | Fair Value          |  |   | Unrealized  Loss       |  |   | Fair Value
|U.S. treasury and agency securities          |  | $ | -                   |  | $ | -                      |  | $ | 24,786    
|Municipal securities                         |  |   | 26,380              |  |   | (142)                  |  |   | 1,340     
|Corporate notes                              |  |   | -                   |  |   | -                      |  |   | 33,311    
|Common shares in Alcatel-Lucent              |  |   | 1,240               |  |   | (251)                  |  |   | -         
|Total                                        |  | $ | 27,620              |  | $ | (393)                  |  | $ | 59,437    
|                                             |  |   |                     |  |   |                        |  |   |           
|Number of securities with an unrealized loss |  |   |                     |  |   | 14                     |  |   |           

Each of the securities in the above tables generally has investment grade ratings and is in an unrealized loss position solely due to
interest rate changes, sector credit rating changes or company-specific rating changes. We currently expect to receive the full principal
or to recover our cost basis on these securities. When evaluating our investments for possible impairment, we review factors such as
the length of time and extent to which fair value has been below our cost basis, the financial condition of the investee, and our ability
and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value. The declines in
the above securities are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of
December 31, 2006.

The following is a summary of the maturities of short-term investments as of December 31, 2006 (in thousands, except
percentages):

|                                    |  |   | Expected Maturity Date
|----------------------------------- |  | - | ----------------------
|                                    |  |   | 2007                  
|U.S. treasury and agency securities |  | $ | 5,969                 
|Municipal securities                |  |   | 28,398                
|Auction rate preferreds             |  |   | -                     
|Corporate notes                     |  |   | 5,541                 
|Total                               |  | $ | 39,908                
|                                    |  |   |                       
|Common shares of Alcatel            |  |   |                       
|Total short-term investments        |  |   |                       

Accounts Receivable, net

Accounts receivable, net consists of the following:

|                                                        |  |  |  |  |  |  |  |   | December 31,
|------------------------------------------------------- |  |  |  |  |  |  |  | - | ------------
|                                                        |  |  |  |  |  |  |  |   | 2006        
|                                                        |  |  |  |  |  |  |  |   | (Thousands) 
|Trade accounts receivable                               |  |  |  |  |  |  |  | $ | 171,908     
|Less: Allowance for doubtful accounts and sales returns |  |  |  |  |  |  |  |   | 9,286       
|                                                        |  |  |  |  |  |  |  | $ | 162,622     

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The following details the changes in the allowance for doubtful accounts and sales returns during the years ended December 31,
2006, 2004 and 2003:

|                                |  |   | For the Years Ended December 31,
|------------------------------- |  | - | --------------------------------
|                                |  |   | 2006                            
|                                |  |   | (Thousands)                     
|Balance at beginning of period  |  | $ | 6,559                           
|Current year provision          |  |   | 3,582                           
|Write-offs net of recoveries(1) |  |   | (855)                           
|Balance at end of period        |  | $ | 9,286                           

(1)	2004 includes increases in the allowance for doubtful accounts of $1,389, $430 and $607 as a result of the acquisitions of
Taqua, VocalData, and Steleus, respectively.

Inventories

Inventories consist of the following:

|                |  |  |  |  |  |  |  |   | December 31,
|--------------- |  |  |  |  |  |  |  | - | ------------
|                |  |  |  |  |  |  |  |   | 2006        
|                |  |  |  |  |  |  |  |   | (Thousands) 
|Raw materials   |  |  |  |  |  |  |  | $ | 35,937      
|Work in process |  |  |  |  |  |  |  |   | 179         
|Finished goods  |  |  |  |  |  |  |  |   | 13,335      
|                |  |  |  |  |  |  |  | $ | 49,451      

Property and Equipment, net

Property and equipment consist of the following:

|                                                |  |  |  |  |  |  |  |   | December 31,
|----------------------------------------------- |  |  |  |  |  |  |  | - | ------------
|                                                |  |  |  |  |  |  |  |   | 2006        
|                                                |  |  |  |  |  |  |  |   | (Thousands) 
|Manufacturing and development equipment         |  |  |  |  |  |  |  | $ | 114,822     
|Furniture and office equipment                  |  |  |  |  |  |  |  |   | 49,742      
|Demonstration equipment                         |  |  |  |  |  |  |  |   | 4,123       
|Leasehold improvements                          |  |  |  |  |  |  |  |   | 14,419      
|                                                |  |  |  |  |  |  |  |   | 183,106     
|Less, accumulated depreciation and amortization |  |  |  |  |  |  |  |   | (129,833)   
|                                                |  |  |  |  |  |  |  | $ | 53,273      

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Accrued expenses

Accrued expenses consist of the following:

|                                            |  |  |  |  |  |  |  |   | December 31,
|------------------------------------------- |  |  |  |  |  |  |  | - | ------------
|                                            |  |  |  |  |  |  |  |   | 2006        
|                                            |  |  |  |  |  |  |  |   | (Thousands) 
|Accrued expenses and other                  |  |  |  |  |  |  |  | $ | 35,843      
|Warranty reserve                            |  |  |  |  |  |  |  |   | 5,094       
|Sales and other taxes payable               |  |  |  |  |  |  |  |   | 1,665       
|Accrued commissions                         |  |  |  |  |  |  |  |   | 2,816       
|Accrued losses on customer contracts        |  |  |  |  |  |  |  |   | 7,075       
|Accrued professional fees and legal accrual |  |  |  |  |  |  |  |   | 9,813       
|Total                                       |  |  |  |  |  |  |  | $ | 62,306      

Accrued payroll and related expenses

Accrued payroll and related expenses consist of the following:

|                 |  |  |  |  |  |  |  |   | December 31,
|---------------- |  |  |  |  |  |  |  | - | ------------
|                 |  |  |  |  |  |  |  |   | 2006        
|                 |  |  |  |  |  |  |  |   | (Thousands) 
|Accrued payroll  |  |  |  |  |  |  |  | $ | 17,943      
|Accrued vacation |  |  |  |  |  |  |  |   | 10,895      
|Payroll taxes    |  |  |  |  |  |  |  |   | 3,458       
|Total            |  |  |  |  |  |  |  | $ | 32,296      

Accumulated Other Comprehensive (Loss) Income

Accumulated other comprehensive (loss) income consists of the following:

|                                                      |  |  |  |  |  |  |  |   | December 31,
|----------------------------------------------------- |  |  |  |  |  |  |  | - | ------------
|                                                      |  |  |  |  |  |  |  |   | 2006        
|                                                      |  |  |  |  |  |  |  |   | (Thousands) 
|Foreign currency translation adjustments              |  |  |  |  |  |  |  | $ | 72          
|Unrealized (losses) gains on securities, net of taxes |  |  |  |  |  |  |  |   |             
|of $99,000 and $539,000, respectively                 |  |  |  |  |  |  |  |   | (173)       
|                                                      |  |  |  |  |  |  |  | $ | (101)       

Note 7  —  Related Party Transactions

During 2003, we entered into a consulting agreement through our then majority owned subsidiary, Santera, with Marty Kaplan,
formerly a Director and Chairman of the Board of Santera and currently a director of Tekelec. Under the terms of the agreement,
Mr. Kaplan received cash compensation of $75,000 per annum through June 2005 and grants in 2004 and 2003 of non-statutory
options to purchase 25,000 and 50,000 shares, respectively, of our Common Stock under our 2003 Stock Option
Plan. The options vested in quarterly installments. This agreement was terminated in June 2005.

Note 8  — Derivative Instruments and Hedging Activities

As discussed in Note 1, we use derivative instruments, primarily foreign currency forward contracts, to manage our
exposure to market risks such as foreign exchange risks. As we do not designate our foreign exchange forward contracts as accounting
hedges, we adjust these instruments to fair value through operations. We do not hold or issue financial instruments for speculative or
trading purposes.

We monitor our exposure to foreign currency fluctuations on a monthly basis. We enter into multiple forward contracts

F-34



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throughout a given month to match and mitigate our changing exposure to foreign currency fluctuations. Our exposure to foreign
currency fluctuations is principally due to receivables generated from sales denominated in foreign currencies. Our exposure fluctuates as we
generate new sales in foreign currencies and as existing receivables related to sales in foreign currencies are collected. Our foreign
currency forward contracts generally will have terms of only one month or less and typically end on the last fiscal day of any given
month. We then immediately enter into new foreign currency forward contracts. As of December 31, 2006 we had four foreign currency
contracts; one to sell 640,000 Australian dollars, a second to sell approximately 25,000,000 euros, a third to sell 19,200,000 Brazilian
reais and a fourth to sell 1,500,000 Canadian dollars. As of December 31, 2005 we had four foreign currency contracts; one to sell
584,770 Australian dollars, a second to sell approximately 16,300,000 euros, a third to sell 15,528,000 Brazilian reais and a fourth to
sell 1,032,000 Canadian dollars. We plan to continue to use foreign currency forward contracts, where appropriate, to manage foreign
currency exchange risks in the future.

Note 9  — Income Taxes

Income (loss) from continuing operations before provision for income taxes is comprised of the following:

|         |  |   | For the Years Ended December 31,
|-------- |  | - | --------------------------------
|         |  |   | 2006                            
|         |  |   | (Thousands)                     
|         |  |   |                                 
|Domestic |  | $ | (142,120)                       
|Foreign  |  |   | 17,026                          
|Total    |  | $ | (125,094)                       

The provision for (benefit from) income taxes consists of the following:

|                                                |  |   | For the Years Ended December 31,
|----------------------------------------------- |  | - | --------------------------------
|                                                |  |   | 2006                            
|                                                |  |   | (Thousands)                     
|Current:                                        |  |   |                                 
|Federal                                         |  | $ | (25,203)                        
|State                                           |  |   | 2,772                           
|Foreign                                         |  |   | 1,582                           
|Deferred:                                       |  |   |                                 
|Federal                                         |  |   | (5,315)                         
|State                                           |  |   | (604)                           
|Foreign                                         |  |   | 4,827                           
|Total provision for (benefit from) income taxes |  | $ | (21,941)                        

Utilization of net operating loss carryforwards provided a current income tax benefit of $9.6 million in 2006, $4.8 million in 2005 and
$3.0 million in 2004.

F-35



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The provision for (benefit from) income taxes differs from the amount obtained by applying the federal statutory income tax rate of
35% to income (loss) before provision for income taxes as follows:

|                                                               |  |   | For the Years Ended December 31, |  |      
|-------------------------------------------------------------- |  | - | -------------------------------- |  | -----
|                                                               |  |   | 2006                             |  |      
|                                                               |  |   | (Thousands)                      |  |      
|Federal statutory provision                                    |  | $ | (43,783)                         |  |      
|State taxes, net of federal benefit                            |  |   | 406                              |  |      
|Research and development credits                               |  |   | (3,546)                          |  |      
|Nondeductible impairment of goodwill                           |  |   | 26,250                           |  |      
|Nondeductible equity-based compensation                        |  |   | 1,252                            |  |      
|Nontaxable foreign source income                               |  |   | (730)                            |  |      
|Acquisition-related intangible assets, net of related deferred |  |   |                                  |  |      
|income tax liability                                           |  |   | -                                |  |      
|Foreign taxes and other                                        |  |   | 1,129                            |  |      
|Domestic production activities deduction                       |  |   | -                                |  |      
|Tax exempt interest                                            |  |   | (2,919)                          |  |      
|Increase in valuation allowance                                |  |   | -                                |  |      
|Total provision for (benefit from) income taxes                |  | $ | (21,941)                         |  | 17.5%

As disclosed in Note 3, prior to October 3, 2005, we had not reached the ownership threshold provided under income tax
regulations for inclusion of Santera in our consolidated federal income tax return. Accordingly, we provided a full valuation allowance
against the deferred tax assets of Santera related to net operating loss carryforwards generated by Santera in each of the above
periods prior to October 3, 2005.

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The components of temporary differences that gave rise to deferred taxes at December 31, 2006 and 2005 are as follows:

|                                                   |  |  |  |  |   | December 31,
|-------------------------------------------------- |  |  |  |  | - | ------------
|                                                   |  |  |  |  |   | 2006        
|                                                   |  |  |  |  |   | (Thousands) 
|Deferred tax assets of continuing operations:      |  |  |  |  |   |             
|Allowance for doubtful accounts                    |  |  |  |  | $ | 2,790       
|Inventory write downs                              |  |  |  |  |   | 3,770       
|Capitalized organization charges                   |  |  |  |  |   | 3,816       
|Depreciation and amortization                      |  |  |  |  |   | -           
|Research and development credit carry forward      |  |  |  |  |   | 7,624       
|Accrued liabilities                                |  |  |  |  |   | 7,053       
|Stock-based compensation                           |  |  |  |  |   | 10,423      
|Deferred revenue                                   |  |  |  |  |   | 656         
|Retirement stock                                   |  |  |  |  |   | 1,912       
|Other                                              |  |  |  |  |   | 4,856       
|Net operating loss carry forward                   |  |  |  |  |   | 64,664      
|Total deferred tax assets                          |  |  |  |  |   | 107,564     
|Valuation allowance for deferred tax assets        |  |  |  |  |   | (3,969)     
|Total deferred tax assets of continuing operations |  |  |  |  | $ | 103,595     
|                                                   |  |  |  |  |   |             
|Deferred tax assets of continuing operations:      |  |  |  |  |   |             
|Current portion                                    |  |  |  |  | $ | 32,206      
|Long-term portion                                  |  |  |  |  |   | 71,389      
|Total deferred tax assets of continuing operations |  |  |  |  | $ | 103,595     
|                                                   |  |  |  |  |   |             
|Deferred tax liabilities:                          |  |  |  |  |   |             
|Acquisition-related intangible assets              |  |  |  |  | $ | 8,712       
|Depreciation and amortization                      |  |  |  |  |   | 2,055       
|Total deferred tax liabilities                     |  |  |  |  | $ | 10,767      
|                                                   |  |  |  |  |   |             
|Deferred tax liabilities:                          |  |  |  |  |   |             
|Current portion                                    |  |  |  |  | $ | -           
|Long term portion                                  |  |  |  |  |   | 10,767      
|Total deferred tax liabilities                     |  |  |  |  | $ | 10,767      

As of December 31, 2006, we have a valuation allowance on our deferred tax assets of approximately $4.0 million, of which
approximately $1.0 million pertains to certain tax credits. The remaining $3.0 million relates to a book-tax basis difference in an
investment in one of our foreign affiliates obtained in connection with our acquisition of Steleus, which was recorded against goodwill
through a purchase price accounting adjustment. The valuation allowance on these deferred tax assets will be reduced in the period in
which we realize a benefit on our tax return from a reduction of income taxes payable stemming from the utilization of these credits and
basis differences. As a result of the acquisition of the remaining interest in Santera on October 3, 2005 (as discussed in Note 3), the
ownership threshold provided under income tax regulations for inclusion of Santera in our consolidated federal income tax return has
been met. We have removed the valuation allowance on Santera's net deferred tax assets because we believe it is more likely than not
that these assets will be realized in our future consolidated federal income tax returns of Tekelec. The elimination of this valuation
allowance was recorded through purchase price accounting as an adjustment to goodwill. Realization of the remaining net deferred tax
assets is dependent on our generating sufficient taxable income in the future in Tekelec's consolidated tax returns. Although realization
is not assured, we believe it is more likely than not that the net deferred tax assets will be realized. The amount of the net deferred tax
assets considered realizable, however, could be reduced in the future if estimates of future taxable income are reduced.

As of December 31, 2006, we have net operating loss carryforwards of approximately $184.9 million available to offset future
taxable income. The utilization of a majority of these net operating losses in future periods is subject to an annual limitation of $16.3
million. If certain substantial changes in the Company's ownership should occur in the future, there would be a change in the
aforementioned annual limitation on the utilization of the net operating loss carryforwards in periods subsequent to the ownership
change. In addition, we have federal and state research and development credit carryforwards of $3.8 million and $2.8 million,
respectively, available to offset future tax liabilities. Our net operating loss carryforwards will begin to expire in 2011, if not utilized. Our
federal research and development tax credit will begin to expire in 2018, if not utilized and our state research and development

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tax credit will begin to expire in 2009, if not utilized.

We provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered
indefinitely reinvested outside of the United States. As of December 31, 2006, we have not provided for deferred income tax of
approximately $3.1 million related to approximately $8.8 million of cumulative undistributed earnings of our foreign affiliates, as we
intend to permanently reinvest these earnings to fund future expansion of these international operations.

We are subject to periodic tax examinations and assessments in various jurisdictions. Accordingly, we assess the probability of
sustaining certain tax positions taken in our income tax returns and, although we believe these positions are fully supportable upon
examination, we have and will record incremental tax expense based on the probable outcomes of such matters.

Our U.S. Federal income tax returns for 2002 and 2004 have been selected for examination by the Internal Revenue Service
("IRS"). While the final resolution of the IRS's pending examination is uncertain, the Company believes it has made adequate provision
in the accompanying consolidated financial statements for any adjustments that the IRS may propose with respect to the U.S. Federal
income tax returns. Although the final resolution of the IRS audit is uncertain, based on currently available information, management
believes that the ultimate outcome will not have a material adverse effect on the Company's financial position, cash flows or overall
trends in results of operations. The Company may receive an assessment related to the audit of its U.S. income tax returns that
exceeds amounts provided for by the Company. In the event of such an assessment, there exists the possibility of a material adverse
impact on the Company's results of operations for the period in which the matter is ultimately resolved, or an unfavorable outcome
becomes probable and reasonably estimable.

Note 10  —  Intangible Assets and Goodwill

Intangible Assets

Intangible assets as of December 31, 2006 and 2005 are as follows:

|                               |  |   | December 31,
|------------------------------ |  | - | ------------
|                               |  |   | 2006        
|                               |  |   | (Thousands) 
|Purchased technology           |  | $ | 35,655      
|Customer relationships         |  |   | 3,368       
|Acquired backlog               |  |   | 1,613       
|Non-compete contracts          |  |   | 240         
|Service contracts              |  |   | 630         
|                               |  |   | 41,506      
|Less: accumulated amortization |  |   | (17,144)    
|Total intangible assets        |  | $ | 24,362      

The weighted average useful lives of the above intangible assets as of December 31, 2006 are as follows:

|                       |  |  |  |  |  | Weighted
|---------------------- |  |  |  |  |  | --------
|                       |  |  |  |  |  | Average 
|                       |  |  |  |  |  | Life    
|Purchased technology   |  |  |  |  |  | 8.2     
|Customer relationships |  |  |  |  |  | 9.7     
|Acquired backlog       |  |  |  |  |  | 1.5     
|Non-compete contracts  |  |  |  |  |  | 3.0     
|Service contracts      |  |  |  |  |  | 5.0     

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The identifiable intangible assets are amortized over their estimated useful lives. The estimated aggregate amortization expense for
intangibles for subsequent years is:

|For the Years Ending December 31, |  |  |  |  |   | (Thousands)
|--------------------------------- |  |  |  |  | - | -----------
|2007                              |  |  |  |  | $ | 3,850      
|2008                              |  |  |  |  |   | 3,543      
|2009                              |  |  |  |  |   | 3,410      
|2010                              |  |  |  |  |   | 3,315      
|2011                              |  |  |  |  |   | 2,651      
|Thereafter                        |  |  |  |  |   | 7,593      
|Total                             |  |  |  |  | $ | 24,362     

Impairment of Purchased Technology

During the fourth quarter of 2005, it became apparent that both revenues and expected orders for the fourth quarter of
2005 and early 2006 related to our Taqua reporting unit would underperform our previous expectations. Accordingly, in connection with
our annual budgeting process performed during the fourth quarter of 2005, we performed a comprehensive evaluation of the outlook for
our Taqua product line and the outlook for the small switch market, which is the focus of our Taqua product line. As a result of this
reassessment and the significant shortfall in orders for these products in the fourth quarter of 2005, we significantly lowered our
forecast of Taqua's future revenues and cash flows. These revised projections, combined with the historical underperformance of the
Taqua product line, indicated that certain identifiable intangible assets acquired as part of the original acquisition of Taqua, specifically
the purchased technology, may be impaired. We determined that impairment indicators were present within the meaning of SFAS 144,
and therefore performed an impairment test during the fourth quarter of 2005.

In accordance with SFAS 144, we first determined if the future expected undiscounted cash flows related to the Taqua purchased
technology were less than the current carrying value of the technology. Applying this initial test, we determined that such cash flows
were less than such carrying value, which indicated that an impairment of the asset existed. To measure the impairment, we
determined the fair value of the purchased technology using a discounted cash flow approach. Using this approach, the purchased
technology was valued at approximately $1.1 million which, when compared to its carrying value of $23.8 million, indicated an
impairment of $22.7 million. Accordingly, we recognized a non-cash impairment charge in the amount of $22.7 million for the year
ended December 31, 2005.

In addition, during the third quarter of 2006, it became apparent that both revenues and expected orders for the second half of 2006
and fiscal year 2007 related to another of our SSG reporting units, consisting of our Santera and VocalData product lines, would
underperform our previous expectations. Accordingly, in connection with our annual budgeting process initiated during the third quarter
of 2006, we performed a comprehensive evaluation of the outlook for this reporting unit and the outlook for the markets that are the
focus of this reporting unit. As a result of this assessment and the anticipated significant shortfall in forecasted orders for these products
in the second half of 2006, we significantly lowered our forecasts of this reporting unit's future revenues and cash flows. These revised
projections indicated that certain identifiable intangible assets acquired as part of the original acquisitions of Santera and VocalData,
specifically the purchased technology, may be impaired. We determined that impairment indicators were present within the meaning of
SFAS 144, and therefore performed an impairment test during the third quarter of 2006.

In applying the initial test in accordance with SFAS 144, we determined that the cash flows related to the purchased technology
within this reporting unit were less than the carrying value, indicating that an impairment of the purchased technology assets existed.
We then determined the associated fair value using a discounted cash flow approach. Using this approach, the purchased technology
was valued at approximately $1.8 million which, when compared to its carrying value of $27.4 million, indicated an
impairment of $25.6 million. Accordingly, we recognized a non-cash impairment charge of $25.6 million in the third quarter
of 2006. Both this charge and the charge taken in the fourth quarter of 2005 are reflected in our consolidated statement of operations as
"Impairment of purchased technology" within cost of sales.

Goodwill

As required by SFAS 142, we do not amortize our goodwill balances, but instead test our goodwill for impairment annually
on October 1st and more frequently upon the occurrence of certain events in accordance with the provisions of SFAS
142. The testing for recoverability of the purchased technology acquired as part of the original acquisitions of Santera and VocalData
discussed above was a triggering event in the third quarter of 2006 under SFAS 142. The impairment of the purchased technology,
coupled with a significant shortfall in orders for the second half of 2006 compared to our earlier expectations, resulted in a significantly
lowered forecast for the reporting unit's future revenues and cash flows. Accordingly, we tested the goodwill related to the reporting unit
within SSG that is comprised of Santera and Vocal Data for impairment as of August 1, 2006. As a result of this testing, we recorded a

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non-cash charge of $75.0 million related to the impairment of the goodwill associated with this reporting unit in the
third quarter of 2006. We determined the amount of this charge using an estimate of the fair value of the reporting unit. This fair value estimate was
calculated using (i) a discounted cash flows approach and (ii) market multiples based on revenues. In
addition, we also performed our 2006 annual impairment test of goodwill required by SFAS 142 on October 1, 2006 and no additional
impairment was indicated.

We performed our required 2005 annual impairment test of goodwill as of October 1, 2005. As a result of this testing, in the fourth
quarter of 2005, we recorded a non-cash impairment charge of $27.2 million related to the impairment of the goodwill associated with
our Taqua reporting unit, which is a component of our Switching Solutions Group segment. We determined the amount of the charge
using an estimate of the fair value of our Taqua reporting unit. This fair value estimate was calculated using (i) a discounted cash flows
approach and (ii) market multiples based on revenues. As previously noted, our Taqua product line has underperformed due primarily
to the lack of market growth and, as a consequence, projections for the business have been significantly lowered.

The Company tested goodwill for impairment as of October 1, 2004 and no impairment was indicated.

The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005 are as follows:

|                                               |  |   | Network   |  |   | Switching |  |   | Communications  |  |   |         
|---------------------------------------------- |  | - | --------- |  | - | --------- |  | - | --------------- |  | - | --------
|                                               |  |   | Signaling |  |   | Solutions |  |   | Software        |  |   |         
|                                               |  |   | Group     |  |   | Group     |  |   | Solutions Group |  |   | Total   
|Balance at December 31, 2004                   |  | $ | -         |  | $ | 96,447    |  | $ | 20,297          |  | $ | 116,744 
|Addition due to the acquisition of iptelorg    |  |   | 3,361     |  |   | -         |  |   | -               |  |   | 3,361   
|Addition due to the acquisition of Santera     |  |   | -         |  |   | 19,803    |  |   | -               |  |   | 19,803  
|Impairment of Taqua goodwill                   |  |   | -         |  |   | (27,245)  |  |   | -               |  |   | (27,245)
|Adjustment to goodwill to record a valuation   |  |   |           |  |   |           |  |   |                 |  |   |         
|allowance related to certain deferred tax      |  |   |           |  |   |           |  |   |                 |  |   |         
|assets acquired as a result of the acquisition |  |   |           |  |   |           |  |   |                 |  |   |         
|of Steleus                                     |  |   | -         |  |   | -         |  |   | 3,044           |  |   | 3,044   
|Adjustments to goodwill, principally related   |  |   |           |  |   |           |  |   |                 |  |   |         
|to deferred tax assets acquired                |  |   | -         |  |   | 443       |  |   | 174             |  |   | 617     
|Balance at December 31, 2005                   |  |   | 3,361     |  |   | 89,448    |  |   | 23,515          |  |   | 116,324 
|Impairment of Santera and VocalData goodwill   |  |   | -         |  |   | (75,000)  |  |   | -               |  |   | (75,000)
|Purchase price adjustments relating to         |  |   |           |  |   |           |  |   |                 |  |   |         
|acquisitions(1)                                |  |   | -         |  |   | (442)     |  |   | -               |  |   | (442)   
|Balance at December 31, 2006                   |  | $ | 3,361     |  | $ | 14,006    |  | $ | 23,515          |  | $ | 40,882  

(1)   Consists primarily of a purchase price adjustment related to our September 2004 acquisition of
VocalData, Inc. ("VocalData"). In January 2006, we reached an agreement to settle certain outstanding escrow claims with the
former stockholders of VocalData. This agreement resulted in 29,686 shares of our common stock being released to us from escrow in
satisfaction of a working capital adjustment claim. These shares were then immediately cancelled. The amount attributable to the
shares has been calculated based upon the original fair market value of the shares assumed as part of the original purchase price
allocation and is being treated as a reduction in the total consideration paid for VocalData, effectively reducing the amount of goodwill
recognized as part of the acquisition.

Note 11  —  Lines of Credit and Notes Payable

As of December 31, 2006, we had a $30.0 million line of credit collateralized by a pledged investment account held with
an intermediary financial institution. This line replaced a similar $30.0 million line of credit that expired in December
2006. The line of credit bears interest at, or in some cases below, the lender's prime rate (8.25% at December 31, 2006), and
expires on December 15, 2007, if not renewed. In the event that we borrow against this line, we will maintain collateral in the
amount of the borrowing in the pledged investment account. The commitment fees paid on the unused line of credit are not significant.
Under the terms of the credit facility, we are required to maintain certain financial covenants. As of December 31, 2006, we were in
compliance with the terms and covenants of the credit facility.

Note 12  — Long-Term Convertible Debt

As of December 31, 2006, we have $125 million outstanding of our 2.25% Senior Subordinated Convertible Notes
due 2008 (the "Notes"). The Notes mature on June 15, 2008, and are convertible prior to the close of business on their maturity
date into shares of

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our Common Stock at a conversion rate of 50.8906 shares per $1,000 principal amount of the Notes, subject
to adjustment in certain circumstances. The Notes carry a cash interest (coupon) rate of 2.25%, payable on June 15 and
December 15 of each year,
commencing on December 15, 2003. Interest expense related to the Notes, including amounts
relating to the amortization of related deferred financing costs, was $3.6 million for each of 2006, 2005 and 2004. The Notes carry no
financial covenants, no restrictions on the paying of dividends nor any restrictions concerning additional indebtedness.

Note 13  —  Commitments and Contingencies

We lease our office and manufacturing facilities together with certain office equipment under operating lease agreements.
Lease terms generally range from one month to ten years; certain building leases contain options for renewal for additional periods and
are subject to periodic increases.

Rent expense, including any applicable rent escalations and rent abatements, is recognized on a straight line basis. Total rent
expense was approximately $8.7 million, $9.8 million, and $9.4 million for 2006, 2005, and 2004, respectively.

Minimum annual non-cancelable lease commitments at December 31, 2006 are:

|For the Years Ending December 31, |  |  |  |  |   | (Thousands)
|--------------------------------- |  |  |  |  | - | -----------
|2007                              |  |  |  |  | $ | 8,469      
|2008                              |  |  |  |  |   | 7,678      
|2009                              |  |  |  |  |   | 7,329      
|2010                              |  |  |  |  |   | 7,201      
|2011                              |  |  |  |  |   | 7,272      
|Thereafter                        |  |  |  |  |   | 11,047     
|Total                             |  |  |  |  | $ | 48,996     

We have agreements with several of our vendors to purchase specified quantities of goods or services at agreed upon prices in the
future. As of December 31, 2006, these unconditional purchase obligations total approximately $2.5 million and will be settled in 2007.
We provide a provision for losses in instances where we expect to incur losses due to our purchase commitments exceeding our
normal or projected inventory requirements. These provisions were not significant at December 31, 2006 and 2005.

Indemnities, Commitments and Guarantees

In the normal course of our business, we make certain indemnities, commitments and guarantees under which we may be
required to make payments in relation to certain transactions. These indemnities, commitments and guarantees include, among others,
intellectual property indemnities to our customers in connection with the sale of our products and licensing of our technology,
indemnities for liabilities associated with the infringement of other parties' technology based upon our products and technology,
guarantees of timely performance of our obligations, indemnities related to the reliability of our equipment, and indemnities to our
directors and officers to the maximum extent permitted by law. The duration of these indemnities, commitments and guarantees varies,
and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees do not provide for any limitation of the
maximum potential future payments that we could be obligated to make. We have not recorded a liability for these indemnities,
commitments or guarantees in the accompanying balance sheets because future payment is not probable.

Litigation

From time to time, various claims and litigation are asserted or commenced against us arising from or related to
contractual matters, intellectual property matters, product warranties and personnel and employment disputes. As to such claims and
litigation, we can give no assurance that we will prevail. However, we currently do not believe that the ultimate outcome of any pending
matters, other than possibly related to the Bouygues litigation, as described below, will have a material adverse effect on our
consolidated financial position, results of operations or cash flows.

Bouygues Telecom, S.A., vs. Tekelec

In February 2005, Bouygues Telecom, S.A. ("Bouygues"), a French telecommunications operator, filed a lawsuit against
Tekelec in a United States District Court in California seeking damages for losses caused by a service interruption that Bouygues
experienced in its cellular telephone network in November 2004. Bouygues originally sought damages of $81 million plus
unspecified punitive damages and attorneys' fees. In its complaint, Bouygues alleged that the service interruption was caused by the
malfunctioning of certain virtual home location register servers (i.e., servers that store and provide information about subscribers in a
cellular network) provided by Tekelec to Bouygues.

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In June 2005, the Court granted our motion to transfer the lawsuit to the United States District Court for the Eastern District of
North Carolina.

In October 2005, Bouygues filed an amended complaint alleging claims for strict products liability, negligence, breach of
express warranty, negligent interference with contract, negligent interference with economic advantage, intentional misrepresentation,
negligent misrepresentation, fraud based on concealment, breach of fiduciary duty, equitable indemnity, unfair competition under
California Business and Professions Code section 17200, unfair and deceptive trade practices, breach of contract, alter ego liability,
and promissory estoppel and a direct claim under French law.

In April 2006, in responses to some of our discovery requests, Bouygues increased its estimated damages to at least
$106 million, not including interest, punitive damages, and attorneys' fees or costs. Bouygues has since provided a claim
summary suggesting that its damages may range from $127 million to $179 million.

The parties participated in a Court-ordered mediation in May 2006, but did not resolve the litigation at that time.

Each party's expert reports were filed in August 2006, and all discovery concluded in October 2006. In October 2006, we filed a
motion seeking summary judgment in our favor with respect to all claims, and Bouygues filed a motion seeking summary judgment in its
favor with respect to a particular issue. Both parties also filed motions to exclude certain testimony and expert reports offered by the
other party in the case.

On January 5, 2007, we presented Bouygues with an Offer of Judgment in response to a request from our insurance carrier. 
The offer of $6.2 million was based on the maximum amount of damages we estimated could be recoverable by Bouygues under the
relevant contract.  Bouygues did not respond to the offer, and it expired ten days after it was presented.  The amount of
this settlement offer was recorded both as a liability and an offsetting receivable (from our insurance carrier) in our 2006 financial
statements. We are unable to estimate any additional potential financial impact this matter could have on the Company.

On January 10, 2007, the Court denied our motion for summary judgment. On February 12, 2007, the Court denied Bouygues'
motion for partial summary judgment. The court has also issued orders denying, to date, motions to exclude certain testimony and
expert reports.

The case is currently set to begin jury selection on February 27, 2007, with the trial scheduled to commence on March 5, 2007 in
Greenville, North Carolina. Each party has been limited to 45 hours to present its case and respond to the other side.

Although we are still evaluating the claims asserted by Bouygues, we intend to defend vigorously against the action and believe
Bouygues' claims could not support the damage figures alleged in the amended complaint. At this stage of the litigation, management
cannot assess the likely outcome of this matter; however, it is possible that an unfavorable outcome could have a material adverse
effect on our consolidated financial position, results of operations or cash flows.

IEX Corporation vs. Blue Pumpkin Software, Inc.

In January 2001, IEX Corporation, then a wholly owned subsidiary of Tekelec ("IEX"), filed suit against Blue Pumpkin
Software, Inc. ("Blue Pumpkin"), in the United States District Court for the Eastern District of Texas, Sherman Division. IEX asserted
that Blue Pumpkin's Director and Director Enterprise products infringed United States Patent No. 6,044,355 held by IEX. In the suit, IEX
sought damages and an injunction prohibiting Blue Pumpkin's further infringement of the patent. In October 2005, Blue Pumpkin
Software LLC ("Blue Pumpkin LLC"), the successor to Blue Pumpkin, filed a lawsuit against IEX Corporation ("IEX"), in the United
States District Court for the Northern District of Georgia, Atlanta Division. Blue Pumpkin LLC asserted that IEX's software products
infringed United States Patent No. 6,952,732 held by Blue Pumpkin LLC. Blue Pumpkin LLC sought damages and an injunction
prohibiting IEX's further alleged infringement of the patent. IEX filed an Answer denying the claims of the suit, and seeking a declaration
that the Blue Pumpkin LLC patent was invalid and not infringed.

In December 2005, the parties entered into a settlement agreement resolving both the IEX litigation against Blue Pumpkin and the
Blue Pumpkin LLC litigation against IEX. Final settlement documents were executed by the parties on April 6, 2006, and both lawsuits
have been dismissed with prejudice. Pursuant to the settlement agreement, each party granted to the other a release and cross-license
of the patents asserted in the lawsuits. Blue Pumpkin made a balancing license payment to IEX in the amount of $8.25 million on April
7, 2006, and Blue Pumpkin is obligated to make six additional annual payments of $500,000 each beginning April 1, 2007 and ending
April 1, 2012.

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Note 14  — Stock-Based Compensation and Employee Benefit Plans

Overview of Employee Stock-Based Compensation Plans

As of December 31, 2006, excluding our employee stock purchase plan described below, we have five stock-based
employee compensation plans with a maximum term of ten years (the "Plans"). Share-based awards are designed to reward
employees for their long term contributions and provide incentives for them to remain with us. The number and frequency of
share-based awards are based on competitive practices, operating results of the company and government regulations.

Under the Plans, there are approximately 35.8 million shares of our common stock authorized for issuance, of which approximately
2.6 million shares are available for issuance as of December 31, 2006. The Plans permit the granting of incentive stock options,
nonstatutory stock options, stock-settled stock appreciation rights ("SARs"), restricted stock and restricted stock units ("RSUs") to
employees, as well as non-employee directors. The terms of equity-based instruments granted under the Plans are determined at the
time of grant. Such instruments generally vest ratably over one to four year periods and contain no performance conditions. The
Compensation Committee of our Board of Directors has the discretion to utilize different vesting schedules. The strike price on options
and stock-settled stock appreciation rights may not be less than the fair market value per share on the date of grant. Historically, stock
options granted under the Plans generally would expire four years from the vesting date. During 2006, we changed our practice with
respect to the contractual terms of stock options and stock-settled stock appreciation rights granted under the Plans such that, going
forward, such instruments generally expire six years from the date of grant.

Upon the exercise of stock options or stock-settled stock appreciation rights, the exercise of the right to purchase shares under our
employee stock purchase plan or vesting of restricted stock units, we issue new shares of our common stock. Currently, we do not
anticipate repurchasing shares to provide a source of shares for our rewards of stock-based compensation.

Stock-Based Awards - Stock Options / SARs

The following table sets forth the summary of option and SAR activity under our Plans for the year ended December 31,
2006 (shares and dollars in thousands):

|                                                     |  |         |  |   |          |  |  | Weighted     |  |   |          
|---------------------------------------------------- |  | ------- |  | - | -------- |  |  | ------------ |  | - | ---------
|                                                     |  |         |  |   | Weighted |  |  | Average      |  |   |          
|                                                     |  |         |  |   | Average  |  |  | Remaining    |  |   | Aggregate
|                                                     |  |         |  |   | Exercise |  |  | Contractual  |  |   | Intrinsic
|                                                     |  | Number  |  |   | Price    |  |  | Life (years) |  |   | Value    
|Outstanding at December 31, 2005                     |  | 23,163  |  | $ | 17.17    |  |  |              |  |   |          
|Options and SARs granted                             |  | 1,835   |  | $ | 12.03    |  |  |              |  |   |          
|Options exercised                                    |  | (1,574) |  | $ | 9.01     |  |  |              |  |   |          
|Options cancelled/forfeited/expired                  |  | (5,299) |  | $ | 18.88    |  |  |              |  |   |          
|Outstanding at December 31, 2006                     |  | 18,125  |  | $ | 16.86    |  |  | 3.62         |  | $ | 20,908   
|                                                     |  |         |  |   |          |  |  |              |  |   |          
|Vested and expected to vest at December 31, 2006 (1) |  | 17,161  |  | $ | 16.95    |  |  | 3.52         |  | $ | 19,835   
|                                                     |  |         |  |   |          |  |  |              |  |   |          
|Exercisable at December 31, 2006                     |  | 12,868  |  | $ | 17.55    |  |  | 2.96         |  | $ | 14,447   

(1) The options expected to vest are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding
options.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e. the aggregate difference between the
closing price of our common stock on December 31, 2006 of $14.83 and the exercise price for in-the-money options and SARs) that
would have been received by the holders if all instruments had been exercised on December 31, 2006. As of December 31, 2006, there
was $34.7 million of unrecognized compensation cost related to our unvested stock options and SARs, which is expected to be
recognized over a weighted average period of 1.9 years. As discussed above, our current practice is to issue new shares to satisfy
option and SAR exercises.

F-43



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The following table summarizes information about stock options and SARs outstanding and exercisable at December 31, 2006
(shares in thousands):

|                        |  | Options and SARs Outstanding |  | Options / SARs Exercisable
|----------------------- |  | ---------------------------- |  | --------------------------
|                        |  |                              |  | Wgtd. Avg.                
|                        |  |                              |  | Remaining                 
|                        |  |                              |  | Contractual               
|Range of Exercise Price |  | Number                       |  | Life (years)              
|$  3.11 to $ 11.96      |  | 3,466                        |  | 4.30                      
|12.15 to    12.56       |  | 118                          |  | 3.44                      
|12.70 to   12.70        |  | 2,020                        |  | 2.63                      
|12.94 to    16.73       |  | 2,411                        |  | 3.49                      
|16.74 to    17.79       |  | 1,881                        |  | 4.08                      
|17.80 to  18.75         |  | 1,884                        |  | 3.87                      
|18.76 to  18.76         |  | 334                          |  | 3.43                      
|18.80 to  18.80         |  | 1,841                        |  | 3.14                      
|19.21 to  21.25         |  | 1,840                        |  | 3.55                      
|21.47 to    2739.21     |  | 2,330                        |  | 3.48                      
|Total                   |  | 18,125                       |  | 3.62                      

Other information pertaining to stock-based awards of options and SARs for the fiscal years ended December 31, 2006, 2005, and
2004 was as follows (in thousands, except per share data):

|                                                                             |   | Years ended December 31,
|---------------------------------------------------------------------------- | - | ------------------------
|                                                                             |   | 2006                    
|Weighted average grant date fair value per share of options and SARs granted | $ | 4.24                    
|Total intrinsic value of options and SARs exercised                          |   | 7,356                   

Stock-Based Awards - RSUs / Restricted Stock

The following table sets forth a summary of RSU and Restricted Stock activity under our Plans for the year ended
December 31, 2006 (shares in thousands):

|                                    |  |        |  |   | Weighted  
|----------------------------------- |  | ------ |  | - | ----------
|                                    |  |        |  |   | Average   
|                                    |  |        |  |   | Grant Date
|                                    |  | Shares |  |   | Fair Value
|Outstanding as of December 31, 2005 |  | 359    |  | $ | 16.39     
|Awarded                             |  | 696    |  |   | 12.01     
|Released                            |  | (56)   |  |   | 14.44     
|Forfeited                           |  | (27)   |  |   | 11.96     
|Outstanding as of December 31, 2006 |  | 972    |  | $ | 13.49     

As of December 31, 2006, there was $10.5 million of unrecognized compensation cost related to unvested RSU and restricted
stock awards, which is expected to be recognized over a weighted average period of 2.6 years.

Employee Stock Purchase Plan

We sponsor the Amended and Restated Tekelec 2005 Employee Stock Purchase Plan (the "2005 ESPP"), under which
1.5 million shares of our common stock have been authorized for issuance. The 2005 ESPP was approved by our shareholders in May
2005. The 2005 ESPP provides for an automatic annual increase in the number of shares authorized and reserved for issuance
thereunder on each August 1 during its ten-year term. Each such increase is equal to the lesser of (a) 500,000 shares, (b) a number of
shares equal to 1% of the number of outstanding shares of our common stock as of the date of the increase and (c) an amount
determined by our Board of

F-44



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Directors. Under the 2005 ESPP as originally approved by the shareholders in May 2005, eligible
employees could authorize payroll deductions of up to 15% of their compensation to purchase shares of common stock at 85% of the
lower of the market price per share at (i) the beginning of the 24-month offering period or (ii) the end of each six-month purchase period
within the 24-month offering period. On June 26, 2006, the Company's Board of Directors amended and restated the 2005 ESPP to: (i)
eliminate the 24-month offering periods and instead provide for consecutive six-month offering periods commencing with the offering
period starting on August 1, 2006; (ii) provide that the offering period that commenced February 1, 2006 would terminate on July 31,
2006, and (iii) reduce the required 90-day holding period of shares acquired under such plan to 30 days. Under SFAS 123R, the
amendment to the terms of the 2005 ESPP is treated as a modification of awards and as a result, $2.6 million of previously
unrecognized compensation cost related to the original award will be recognized over the six-month offering period beginning August 1,
2006.

During 2006, 2005 and 2004, approximately 303,000, 100,000, and 160,000 shares, respectively, were purchased under our
employee stock purchase plan in effect during the given year at weighted average purchase prices of $10.89, $14.28, and $14.26
respectively. At December 31, 2006, 2005 and 2004, there were approximately 1,200,000, 1,000,000, and 552,000 shares,
respectively, available for future purchases.

The following table sets forth a summary of employee withholding and purchase activity related to the 2005 ESPP for the year
ended December 31, 2006:

|                                                                 |  | Dollar Value in
|---------------------------------------------------------------- |  | ---------------
|                                                                 |  | Thousands      
|As of December 31, 2005                                          |  | $              
|Employee withholdings net of employee withdrawals or forfeitures |  |                
|Employee purchases of common stock                               |  |                
|                                                                 |  |                
|As of December 31, 2006                                          |  | $              

Based upon 85% of the lower of the market price per share at the beginning of the current offering period of $10.27 on
August 1, 2006 and our stock price as of December 31, 2006 of $14.83, approximately 152,000 shares could be purchased
based upon employee withholdings as of December 31, 2006. As of December 31, 2006, there was $0.5 million of unrecognized
compensation cost related to our employee stock purchase plan which will be expensed in the first quarter of 2007. The
ultimate number of shares to be purchased and the expense to be recognized under our employee stock purchase plan will vary based
upon, among other factors, fluctuations in the fair market value of our common stock and employee participation levels.

Stock-Based Compensation Valuation and Expense

Effective January 1, 2006, we account for our employee stock-based compensation plans using the fair value
method, as prescribed by SFAS 123R. Accordingly, we estimate the grant date fair value of our stock-based awards and amortize this
fair value to compensation expense over the requisite service period or vesting term. To estimate the fair value of our stock option
awards and employee stock purchase plan shares we currently use the Black-Scholes option-pricing model. The determination of the
fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over
the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.
Due to the inherent limitations of option-valuation models available today, including future events that are unpredictable and the
estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by our employees may
vary significantly from the amounts expensed in our financial statements. For restricted stock or restricted stock unit awards, we
measure the grant date fair value based upon the market price of our common stock on the date of the grant and amortize this fair
value to compensation expense over the requisite service period or vesting term.

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from initial estimates. Forfeitures were estimated based on historical experience and we expect forfeitures to be 10%
annually. Stock-based compensation expense was recorded net of estimated forfeitures for the year ended December 31, 2006 such
that expense was recorded only for those stock-based awards that are expected to vest.

SFAS 123R also requires that cash flows resulting from the gross benefit of tax deductions related to stock-based
compensation in excess of the grant date fair value of the related stock-based awards be presented as part of cash flows from financing
activities. This amount is shown as a reduction to cash flows from operating activities and an increase to cash flow from financing
activities. Total cash flows remain unchanged from what would have been reported prior to the adoption of SFAS 123R.

F-45



---



Total stock-based compensation expense recognized in year ended December 31, 2006 under SFAS 123R, and in the years
ended December 31, 2005 and 2004 under APB 25, was as follows (in thousands):

|                                               |  |   | Option and |  |   |            |  |   |       
|---------------------------------------------- |  | - | ---------- |  | - | ---------- |  | - | ------
|                                               |  |   | SAR Grants |  |   |            |  |   |       
|                                               |  |   | and Stock  |  |   | Restricted |  |   |       
|                                               |  |   | Purchase   |  |   | Stock      |  |   |       
|Income Statement Classifications               |  |   | Rights     |  |   | and RSUs   |  |   | Total 
|Year ended December 31, 2006 (under SFAS 123R) |  |   |            |  |   |            |  |   |       
|Cost of goods sold                             |  | $ | 4,528      |  | $ | 57         |  | $ | 4,585 
|Research and development                       |  |   | 14,546     |  |   | 56         |  |   | 14,602
|Sales and marketing                            |  |   | 6,541      |  |   | 149        |  |   | 6,690 
|General and administrative                     |  |   | 6,517      |  |   | 2,315      |  |   | 8,832 
|Total continuing operations                    |  |   | 32,132     |  |   | 2,577      |  |   | 34,709
|Discontinued operations                        |  |   | 997        |  |   | -          |  |   | 997   
|Total                                          |  | $ | 33,129     |  | $ | 2,577      |  | $ | 35,706
|                                               |  |   |            |  |   |            |  |   |       
|Year ended December 31, 2005 (under APB 25)    |  |   |            |  |   |            |  |   |       
|Cost of goods sold                             |  | $ | 7          |  | $ | 1          |  | $ | 8     
|Research and development                       |  |   | 353        |  |   | (45)       |  |   | 308   
|Sales and marketing                            |  |   | -          |  |   | -          |  |   | -     
|General and administrative                     |  |   | 732        |  |   | 2,329      |  |   | 3,061 
|Total                                          |  | $ | 1,092      |  | $ | 2,285      |  | $ | 3,377 
|                                               |  |   |            |  |   |            |  |   |       
|Year ended December 31, 2004 (under APB 25)    |  |   |            |  |   |            |  |   |       
|Cost of goods sold                             |  | $ | 10         |  | $ | -          |  | $ | 10    
|Research and development                       |  |   | 386        |  |   | 42         |  |   | 428   
|Sales and marketing                            |  |   | -          |  |   | -          |  |   | -     
|General and administrative                     |  |   | 1,316      |  |   | 389        |  |   | 1,705 
|Total                                          |  | $ | 1,712      |  | $ | 431        |  | $ | 2,143 

Components of 2004 and 2005 Stock-Based Compensation Expense - Prior to our adoption of SFAS 123R, we generally
recognized no stock-based compensation expense related to the majority of awards under the Plans as such awards consisted
primarily of stock options whose strike price equaled the fair market value of our common stock on the grant date. Stock-based
compensation expense recognized in 2005 and 2004 consisted primarily of the following:

- Taqua Options - In 2004, in connection with the acquisition of Taqua, we assumed unvested options (the "Taqua options")
that had an exercise price that was below our common stock price or were "in-the-money" and which had an intrinsic value at the date
of acquisition of $4.2 million. For the years ended December 31, 2005 and 2004, we recognized approximately $1.1 million and $1.3
million, respectively, of compensation expense related to the Taqua options.
- Restricted Stock and Restricted Stock Units ("RSUs") - In 2005, in connection with the acquisition of iptelorg (see
Note 3 for further details) we granted a total of 236,546 shares of restricted stock subject to certain repurchase rights. The
value of these shares at the grant date was approximately $4.1 million, which is being amortized to expense on a straight-line basis as
the restrictions on the shares lapse over a period of four years. For the year ended December 31, 2005, we recognized approximately
$0.5 million of compensation expense related to these grants. Also during 2005, six employees were granted a total of 122,281 RSUs.
The intrinsic value of these RSUs as of the grant date was approximately $1.8 million, which is being amortized to expense on a
straight-line basis over each award's vesting period, which ranges from one to four years. For the year ended December 31, 2005 we
recognized approximately $0.4 million of compensation expense relating to these grants. In 2004, we issued RSUs for
116,510 shares to employees of VocalData and Steleus which had intrinsic value as of the grant date of approximately
$2.0 million. These RSUs vested over a one-year period ending in 2005. For the years ended December 31, 2005 and 2004, we
recognized approximately $1.4 million and $0.4 million respectively, of compensation expense related to these grants.

F-46



---



- Santera Advisory Board Options -We formed a Santera Advisory Board in 2004 with three non-employee members. As
part of this arrangement, we issued 7,500 options to these advisors. These options vested over one year and were accounted for under
FIN 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans." We valued the options using
the Black-Scholes model and recognized compensation expense over the vesting period. The options became fully vested during the
year ended December 31, 2004 and we recognized consulting expense related to the options of approximately $93,000 in
2004.

The effect of adopting SFAS 123R for the year ended December 31, 2006 was as follows (in thousands,
except per share data):

|                                                                                          |   | 2006    
|----------------------------------------------------------------------------------------- | - | --------
|Stock-based compensation expense by type of award:                                        |   |         
|Stock options / SARs                                                                      | $ | 29,679  
|Employee stock purchase plan                                                              |   | 3,449   
|Restricted stock units                                                                    |   | 2,578   
|Less: Stock-based compensation related to discontinued operations                         |   | (997)   
|Total stock-based compensation included in operating income (loss)                        |   | 34,709  
|Income tax benefit of stock-based compensation                                            |   | (12,148)
|Net stock-based compensation expense included in income (loss) from continuing operations |   | 22,561  
|Stock-based compensation expense included in discontinued operations, net of tax          |   | 638     
|Net stock-based compensation expense included in net income                               | $ | 23,199  
|                                                                                          |   |         
|Decrease in earnings per share from continuing operations:                                |   |         
|Basic                                                                                     | $ | (0.34)  
|Diluted                                                                                   | $ | (0.34)  
|                                                                                          |   |         
|Decrease in earnings per share:                                                           |   |         
|Basic                                                                                     | $ | (0.34)  
|Diluted                                                                                   | $ | (0.34)  
|                                                                                          |   |         
|Increase (Decrease) in:                                                                   |   |         
|Cash flows from operating activities                                                      | $ | (1,991) 
|Cash flows from financing activities                                                      | $ | 1,991   

As of December 31, 2006, there was approximately $45.6 million of total unrecognized compensation cost, adjusted for
estimated forfeitures, related to our non-vested share-based payment arrangements (i.e., stock options, SARs, RSUs, ESPP shares,
etc.). Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. This cost is expected to be
recognized over a weighted-average period of approximately 2.0 years.

F-47



---



Results of operations for the fiscal years ended December 31, 2005 and 2004 have not been restated to reflect recognition of
stock-based compensation expense in accordance with SFAS 123R. Had the Company determined compensation expense based on
the fair value at the grant date for stock options and the fair value of the discount related to the employee stock purchase plan under
SFAS 123 for periods prior to January 1, 2006, the Company's net income (loss) and earnings (loss) per share would have been
reported as shown below (in thousands, except per share data):

|                                                            | Years ended December 31,
|----------------------------------------------------------- | ------------------------
|                                                            |                         
|Net Income (Loss)                                           |                         
|As Reported                                                 | $                       
|Add: stock-based compensation expense included              |                         
|in reported net income, net of tax                          |                         
|Less: fair value of stock-based compensation                |                         
|expense, net of tax                                         |                         
|Pro Forma                                                   | $                       
|                                                            |                         
|Basic (Loss) Earnings Per Share                             |                         
|As Reported                                                 | $                       
|Pro Forma                                                   | $                       
|                                                            |                         
|Diluted (Loss) Earnings Per Share                           |                         
|As Reported                                                 | $                       
|Pro Forma                                                   | $                       
|                                                            |                         
|Weighted average number of shares outstanding - as reported |                         
|Basic                                                       |                         
|Diluted                                                     |                         
|                                                            |                         
|Weighted average number of shares outstanding - pro forma   |                         
|Basic                                                       |                         
|Diluted                                                     |                         

The total income tax benefit recognized in the consolidated statements of operations for share-based compensation arrangements
was approximately $1.2 million and $0.7 million for 2005 and 2004, respectively. No compensation cost was capitalized as part of
inventory or fixed assets during fiscal 2005 or 2004.

Determination of and Assumptions used in Valuation Model

To determine the grant date fair value of our stock option and SAR awards and rights of purchase under our employee
stock purchase plan, we currently use the Black-Scholes option-pricing model. The use of this model requires us to make a number of
subjective assumptions. The following addresses each of these assumptions and describes our methodology for determining each
assumption:

Expected Life

The expected life represents the period that the stock option awards are expected to be outstanding. In determining the
appropriate expected life of our stock options and SARs, we segregate our grantees into categories principally based upon employee
levels that are expected to be indicative of similar option related behavior. We estimate the expected useful lives for each of these
categories giving consideration to (i) the weighted average vesting periods, (ii) the contractual lives of the stock options
and SARs (iii) the relationship between the exercise price and the fair market value of our common stock, (iv) expected
employee turnover, (v) the expected future volatility of our common stock, and (vi) past and expected exercise behavior,
among other factors. For purchase rights under our employee stock purchase plan, we determine the expected life based upon the
purchase periods remaining in the applicable offering period.

F-48



---



Expected Volatility

We estimate expected volatility giving consideration to the expected life of the respective award, our current expected growth
rate, implied volatility in traded options for our common stock, and the historical volatility of our common stock.

Risk-Free Interest Rate

We estimate the risk-free interest rate using the U.S. Treasury bill rate with a remaining term equal to the expected life of the
award.

Expected Dividend Yield

We estimate the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in
the future considering our current plans and projections. We do not currently calculate a discount for any post-vesting restrictions to
which our awards may be subject.

The weighted average assumptions used to value option/SAR grants and purchase rights under our 2005 ESPP were as follows:

|Weighted average assumptions used to value option and SAR grants:      |                           |   |      |      |      |  |      |  
|---------------------------------------------------------------------- | ------------------------- | - | ---- | ---- | ---- |  | ---- | -
|                                                                       | Years ended December 31, 
|                                                                       | 2006                      |   | 2005 |      | 2004
|Expected life (in years)                                               | 3.74                      |   |      | 3.6  |      |  | 3.3  |  
|Expected volatility                                                    | 38.1                      | % |      | 55   | %    |  | 60   | %
|Risk free interest rate                                                | 4.9                       | % |      | 4.0  | %    |  | 2.8  | %
|Expected dividend yield                                                | 0                         | % |      | 0    | %    |  | 0    | %
|                                                                       |                           |   |      |      |      |  |      |  
|Weighted average assumptions used to value purchase rights under ESPP: |                           |   |      |      |      |  |      |  
|                                                                       | Years ended December  31,
|                                                                       | 2006                      |   | 2005 |      | 2004
|Expected life (in years)                                               | 0.5-2.0                   |   |      | 1.25 |      |  | 1.25 |  
|Expected volatility                                                    | 32.0-39.0                 | % |      | 60   | %    |  | 60   | %
|Risk free interest rate                                                | 4.0-5.2                   | % |      | 3.9  | %    |  | 3.2  | %
|Expected dividend yield                                                | 0                         | % |      | 0    | %    |  | 0    | %

Modifications of Stock-Based Awards

On February 16, 2006, in connection with our 2006 restatement of certain prior period financial statements, we initiated a
"blackout" period, whereby we prohibited our option holders from exercising their stock options. In response to this blackout, we
modified certain employee stock option awards in order to provide option holders with an opportunity to exercise or realize the benefit of
their fully vested awards that, as a result of the blackout, otherwise were expected to contractually expire unexercised. In total, in March
2006, stock option awards held by 43 current or former employees to purchase in aggregate 282,074 shares of our common stock were
modified. Stock option awards to purchase 56,755 of such shares of our common stock were modified to provide for a cash payment
based upon the intrinsic value of the awards calculated using an average fair market value of our common stock for a ten-day period
beginning immediately following the end of the blackout period. Stock option awards to purchase 225,319 of such shares of our
common stock, including awards to purchase 146,875 shares of our common stock held by our former Chief Executive Officer, were
modified to extend the contractual life of the awards outside of the expected end of the blackout period. Due to these modifications, we
incurred approximately $217,000 of incremental compensation expense in March 2006, of which $169,000 related to awards to
be settled in cash and the remaining $48,000 related to awards in which the contractual life was extended. The awards to be settled in
cash were settled or expired in the third quarter of 2006.

In addition to the March 2006 modifications discussed above, on July 6, 2006, we modified certain other employee stock option
awards in order to provide those option holders with an opportunity to exercise or realize the benefit of their fully vested awards that, as
a result of the blackout, otherwise were expected to contractually expire unexercised. In this modification, stock option awards held by
12 current or former employees to purchase in aggregate 61,729 shares of our common stock were modified. Stock option awards to
purchase 25,391 of such shares of our common stock were modified to provide for a cash payment based upon the intrinsic value of
the awards calculated using an average fair market value of our common stock for a ten-day period beginning immediately following the
end of the blackout period. Stock option awards to purchase 36,338 of such shares of our common stock were modified

F-49



---



to extend the contractual life of the awards outside of the expected end of the blackout period. Due to these additional modifications, we incurred
approximately $134,000 of incremental compensation expense in July 2006, of which $128,000 related to awards to be settled in
cash and the remaining $6,000 related to awards in which the contractual life was extended. The awards to be settled in cash were
settled or expired in the third quarter of 2006.

On October 26, 2005, we amended the original terms of approximately 575,000 stock options ("the Options") with various
exercise prices held by our then Chief Executive Officer in connection with his resignation as an executive officer and employee,
effective January 1, 2006. We also agreed, as part of his employment separation agreement, to modify the terms of the Options
to extend the expiration date from April 1, 2006 to June 30, 2006. In accordance with FASB Interpretation No. 44
"Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25" ("FIN 44"), we remeasured the
intrinsic value of the Options as of the date of the modification. As, at the date of this modification, our stock price
was below the exercise price of the Options, no intrinsic value existed and accordingly no additional compensation expense was
recognized.

Employee 401(k) Plan

We sponsor a 401(k) tax-deferred savings plan to provide retirement benefits for our employees (the "Plan"). As allowed
under Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred salary contributions for eligible employees.
Participants in the Plan may authorize from 2% to 50% of their compensation to be invested in employee-elected investment funds
managed by an independent trustee, subject to certain annual contribution limitations determined by the IRS. We generally contribute
matching funds of up to 50% of the employees' first 12% of payroll deductions. During 2006, 2005 and 2004, our contributions
amounted to $6.1 million, $5.7 million, and $4.4 million, respectively.

Note 15  —  Earnings Per Share - Continuing Operations

The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) from
continuing operations per share computations for the years ended December 31, 2006, 2005 and 2004:

|                                                    |  |   | Income                                |  |               |  |   |          
|--------------------------------------------------- |  | - | ------------------------------------- |  | ------------- |  | - | ---------
|                                                    |  |   | (Loss) from                           |  |               |  |   |          
|                                                    |  |   | Continuing                            |  |               |  |   |          
|                                                    |  |   | Operations                            |  | Shares        |  |   | Per-Share
|                                                    |  |   | (Numerator)                           |  | (Denominator) |  |   | Amount   
|                                                    |  |   | (Thousands, except per share amounts)
|For the Year Ended December 31, 2006:               |  |   |                                       |  |               |  |   |          
|Basic loss from continuing operations per share     |  | $ | (103,153)                             |  | 67,340        |  | $ | (1.53)   
|Effect of Dilutive Securities                       |  |   | -                                     |  | -             |  |   |          
|Diluted loss from continuing operations per share   |  | $ | (103,153)                             |  | 67,340        |  | $ | (1.53)   
|                                                    |  |   |                                       |  |               |  |   |          
|For the Year Ended December 31, 2005:               |  |   |                                       |  |               |  |   |          
|Basic loss from continuing operations per share     |  | $ | (44,868)                              |  | 66,001        |  | $ | (0.68)   
|Effect of Dilutive Securities                       |  |   | -                                     |  | -             |  |   |          
|Diluted loss from continuing operations per share   |  | $ | (44,868)                              |  | 66,001        |  | $ | (0.68)   
|                                                    |  |   |                                       |  |               |  |   |          
|For the Year Ended December 31, 2004:               |  |   |                                       |  |               |  |   |          
|Basic income from continuing operations per share   |  | $ | 10,096                                |  | 63,131        |  | $ | 0.16     
|Effect of Dilutive Securities                       |  |   | -                                     |  | 3,191         |  |   |          
|Diluted income from continuing operations per share |  | $ | 10,096                                |  | 66,322        |  | $ | 0.15     

F-50



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The computation of diluted earnings (loss) from continuing operations per share excludes unexercised stock options and warrants
and potential shares issuable upon conversion of our senior subordinated convertible notes that are anti-dilutive. The following common
stock equivalents were excluded from the earnings (loss) from continuing operations per share computation, as their inclusion would
have been anti-dilutive:

|                                                                   |  |  | For the Years Ended December 31,
|------------------------------------------------------------------ |  |  | --------------------------------
|                                                                   |  |  | 2006                            
|                                                                   |  |  | (Thousands)                     
|Weighted average number of stock options and SARs excluded         |  |  |                                 
|due to the exercise price exceeding the average fair value of our  |  |  |                                 
|Common Stock during the period                                     |  |  | 16,830                          
|Weighted average number of stock options, SARs, RSUs and           |  |  |                                 
|restricted stock, calculated using the treasury stock method, that |  |  |                                 
|were excluded due to the reporting of a net loss for the period    |  |  | 1,221                           
|Shares issuable upon conversion of our long-term convertible debt  |  |  | 6,361                           
|Total common stock equivalents excluded from diluted net           |  |  |                                 
|income (loss) from continuing operations per share computation     |  |  | 24,412                          

There were no transactions subsequent to December 31, 2006, which, had they occurred prior to January 1, 2007, would have
changed materially the number of shares in the basic or diluted earnings per share computations.

Note 16  —  Operating Segment Information

We are organized into three major operating groups: the Network Signaling Group, the Switching Solutions Group and the
Communications Software Solutions Group. As discussed in Note 2, we sold our IEX Contact Center Group on July 6, 2006. Prior to
our decision in the second quarter of 2006 to sell our IEX Contact Center Group, this business unit was treated as a separate
reportable operating segment. Prior period segment information has been adjusted to conform to our current organization.

Network Signaling Group. Our Network Signaling Group products help direct and control voice and data communications.
They enable carriers to establish, control and terminate calls. They also enable carriers to offer intelligent services, which include any
services other than the call or data transmission itself. Examples of such services include products such as voice messaging, text
messaging, toll free calls (e.g., "800" calls), prepaid calling cards and number portability.

Switching Solutions Group. The switching portion of a network carries and routes the actual voice or data comprising a
"call." Our Switching Solutions Group is focused primarily on creating and enhancing next-generation voice switching products and
services for both traditional circuit-based applications and newer packet-based applications. In a traditional circuit-based application,
electronic signals carrying a voice message traverse the network following a dedicated path, or circuit, from one user to the other.
Packet-based switching, however, breaks down the voice message into packets. These packets then individually traverse the network,
often taking separate paths, and are then reassembled on the other side of the network prior to delivery to the recipient. Packet-based
switching may utilize one of many protocols, the most common of which are Asynchronous Transfer Mode ("ATM") and Internet
Protocol ("IP"). Voice transported using the IP protocol is often referred to as Voice over IP ("VoIP"). We offer switching products and
services that allow network service providers to migrate their network infrastructure from circuit-based technology to packet-based
technology. In addition, we offer a suite of professional services that includes network design and capacity planning, as well as
installation and cutover services.

Communications Software Solutions Group. Our Communications Software Solutions Group is focused on providing
network-related intelligence products and services to telecommunications operators. These products and services enable operators to
monitor their service and network performance by accessing and analyzing critical business data such as such as call volumes,
subscriber behavior and traffic types and volumes. As part of our communications software portfolio, we offer call management,
revenue assurance, monitoring, network optimization, quality of service and marketing intelligence applications. In addition, as more
network providers transition from circuit to packet technology, we offer products and services that enable operators to monitor their
service and network performance during the transition, helping to speed up the implementation of packet networks, while lowering the
risk.

Transfers between operating segments are made at prices reflecting market conditions. The allocation of revenues from external
customers by geographical area is determined by the destination of the sale.

F-51



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Revenues and income (loss) from continuing operations for each of our operating segments are as follows (in thousands):

|                                        |  |   | Net Revenues                    
|--------------------------------------- |  | - | --------------------------------
|                                        |  |   | For the Years Ended December 31,
|                                        |  |   | 2006                            
|Network Signaling Group                 |  | $ | 368,862                         
|Switching Solutions Group               |  |   | 110,301                         
|Communications Software Solutions Group |  |   | 74,484                          
|Intercompany eliminations               |  |   | -                               
|Total net revenues                      |  | $ | 553,647                         



|                                        |  |   | Income (Loss) from Operations   
|--------------------------------------- |  | - | --------------------------------
|                                        |  |   | For the Years Ended December 31,
|                                        |  |   | 2006                            
|Network Signaling Group                 |  | $ | 134,304                         
|Switching Solutions Group               |  |   | (85,428)                        
|Communications Software Solutions Group |  |   | (1,446)                         
|General Corporate(1)                    |  |   | (182,740)                       
|Total loss from operations(2)           |  | $ | (135,310)                       

(1)    General Corporate includes acquisition-related charges and amortization of $9,337, $13,685 and $22,923 for 2006, 2005 and
2004, respectively, and other corporate expenses, including restructuring and other charges, that are not specifically allocated to the
operating segments or used by operating segment management to evaluate their segment performance. For the year ended December
31, 2006, General Corporate also includes non-cash impairment charges for purchased technology and goodwill of $25,615 and
$75,000, respectively. For the year ended December 31, 2005, General Corporate also includes non-cash impairment charges for
purchased technology and goodwill of $22,660 and $27,245, respectively.

(2)    Income (loss) from continuing operations for 2006 has been reduced by $34.7 million of stock-based compensation as a result of
the adoption of SFAS 123R. The following table reflects the stock-based compensation expense included above (in
thousands):

|                                        |  |   | Stock-Based Compensation        
|--------------------------------------- |  | - | --------------------------------
|                                        |  |   | For the Years Ended December 31,
|                                        |  |   | 2006                            
|                                        |  |   | (Thousands)                     
|Network Signaling Group                 |  | $ | 9,275                           
|Switching Solutions Group               |  |   | 15,163                          
|Communications Software Solutions Group |  |   | 2,842                           
|General Corporate                       |  |   | 7,429                           
|Total stock-based compensation          |  | $ | 34,709                          

Enterprise Wide Disclosures

The following table sets forth revenues from external customers by principal product line:

|                                        |  |   | Revenues from External Customers
|--------------------------------------- |  | - | --------------------------------
|                                        |  |   | For the Years Ended December 31,
|                                        |  |   | 2006                            
|                                        |  |   | (Thousands)                     
|Network Signaling Group                 |  | $ | 368,862                         
|Switching Solutions Group               |  |   | 110,301                         
|Communications Software Solutions Group |  |   | 74,484                          
|Total net revenues                      |  | $ | 553,647                         

F-52



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The following table sets forth revenues for our products/services and warranty offerings:

|                            |  |   | Revenues by Type                
|--------------------------- |  | - | --------------------------------
|                            |  |   | For the Years Ended December 31,
|                            |  |   | 2006                            
|                            |  |   | (Thousands)                     
|Products and services       |  | $ | 499,019                         
|Extended warranty contracts |  |   | 54,628                          
|Total net revenues          |  | $ | 553,647                         

We conduct business in a number of foreign countries and are organized into three geographic territories. The three territories are:
(1) North America, comprised of the United States and Canada, (2) "EAAA," comprised of Europe and the Middle East, Asia Pacific
(including China and India), Africa and Australia and (3) "CALA," comprised of the Caribbean and Latin America, including Mexico. Prior
to the third quarter of 2006, EAAA was presented as two separate geographic territories, (i) Europe, the Middle East and Africa
and (ii) Asia Pacific (including China and India). The following table sets forth revenues from external customers by geographic
territory:

|                                       |  |   | Revenues from External Customers
|-------------------------------------- |  | - | --------------------------------
|                                       |  |   | by Geographic Territory         
|                                       |  |   | For the Years Ended December 31,
|                                       |  |   | 2006                            
|                                       |  |   | (Thousands)                     
|North America(1)                       |  | $ | 335,250                         
|EAAA                                   |  |   | 140,396                         
|CALA                                   |  |   | 78,001                          
|Total revenues from external customers |  | $ | 553,647                         

(1)	North America includes revenues in the United States of $312,139, $352,548 and $239,761, for 2006, 2005 and 2004,
respectively.

The following table sets forth, as of December 31, 2006 and 2005, our long-lived assets including net property and equipment,
investment in a privately-held company and other assets by geographic area:

|                        |  |  |  |  |   | 2006        |  |   | 2005  
|----------------------- |  |  |  |  | - | ----------- |  | - | ------
|                        |  |  |  |  |   | (Thousands)
|United States           |  |  |  |  | $ | 60,609      |  |   | 50,191
|Other                   |  |  |  |  |   | 3,507       |  |   | 3,652 
|Total long-lived assets |  |  |  |  | $ | 64,116      |  | $ | 53,843

F-53



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Note 17 —  Quarterly Financial Summary (Unaudited) (in thousands, except per share amounts)

The following tables present selected quarterly financial data for 2006 and 2005:

|                                                         |  |   | Quarters                          
|-------------------------------------------------------- |  | - | ----------------------------------
|For the Year Ended December 31, 2006                     |  |   | First                             
|                                                         |  |   | (Thousands, except per share data)
|Revenues                                                 |  | $ | 94,104                            
|Gross profit                                             |  |   | 40,389                            
|Impairment of purchased technology                       |  |   | -                                 
|Impairment of goodwill                                   |  |   | -                                 
|Income (loss) from continuing operations                 |  |   |                                   
|before provision for income taxes(1)                     |  |   | (30,915)                          
|Income (loss) from discontinued operations, net of taxes |  |   | 2,953                             
|Net income (loss)                                        |  |   | (16,509)                          
|                                                         |  |   |                                   
|Earnings (loss) per share from continuing operations:    |  |   |                                   
|Basic                                                    |  | $ | (0.29)                            
|Diluted                                                  |  |   | (0.29)                            
|Earnings per share from discontinued operations:         |  |   |                                   
|Basic                                                    |  | $ | 0.04                              
|Diluted                                                  |  |   | 0.04                              
|Earnings (loss) per share:                               |  |   |                                   
|Basic                                                    |  | $ | (0.25)                            
|Diluted                                                  |  |   | (0.25)                            
|                                                         |  |   |                                   
|Weighted average number of shares outstanding:           |  |   |                                   
|Basic                                                    |  |   | 66,833                            
|Diluted                                                  |  |   | 66,833                            



|                                                      |  |   | Quarters                          
|----------------------------------------------------- |  | - | ----------------------------------
|For the Year Ended December 31, 2005                  |  |   | First                             
|                                                      |  |   | (Thousands, except per share data)
|Revenues                                              |  | $ | 128,027                           
|Gross profit                                          |  |   | 86,742                            
|Impairment of purchased technology                    |  |   | -                                 
|Impairment of goodwill                                |  |   | -                                 
|Income (loss) from continuing operations              |  |   |                                   
|before provision for income taxes(2)                  |  |   | 20,854                            
|Minority interest                                     |  |   | 4,782                             
|Income from discontinued operations, net of taxes     |  |   | 1,773                             
|Net income (loss)                                     |  |   | 17,475                            
|                                                      |  |   |                                   
|Earnings (loss) per share from continuing operations: |  |   |                                   
|Basic                                                 |  | $ | 0.24                              
|Diluted                                               |  |   | 0.22                              
|Earnings per share from discontinued operations:      |  |   |                                   
|Basic                                                 |  | $ | 0.03                              
|Diluted                                               |  |   | 0.02                              
|Earnings (loss) per share:                            |  |   |                                   
|Basic                                                 |  | $ | 0.27                              
|Diluted                                               |  |   | 0.24                              
|                                                      |  |   |                                   
|Weighted average number of shares outstanding:        |  |   |                                   
|Basic                                                 |  |   | 65,598                            
|Diluted                                               |  |   | 74,407                            

F-54



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(1)    Restructuring charges for each of the three months ended March 31, 2006, June 30, 2006, September 30, 2006
and December 31, 2006 were $164,000, $3,255,000, $(7,000) and $3,761,000, respectively. IPR&D charges resulting from
acquisitions (see Note 3 - Acquisitions) were $2.1 million for the three months ended December 31,
2006. Also, during the three months ended September 30, 2006, we incurred impairment charges of $25.6 million and $75.0
million relating to the purchased technology and goodwill, respectively, associated with one of our SSG reporting units, consisting of our
Santera and VocalData product lines.

(2)    Restructuring charges for each of the three months ended March 31, 2005, June 30, 2005, September 30, 2005
and December 31, 2005 were $257,000, $2,503,000, $1,589,000 and $3,386,000, respectively. IPR&D charges resulting
from acquisitions (see Note 3 - Acquisitions) were $1.2 million and $2.4 million for the three months
ended September 30, 2005 and December 31, 2005, respectively. Also, during the three months ended
December 31, 2005, we incurred (i) certain warranty expenses aggregating $8.7 million, (ii) expected losses
on customer contracts of approximately $9.9 million, and (iii) impairment charges of $22.7 million and $27.2 million
relating to the purchased technology and goodwill, respectively, associated with our T7000 product line within our Taqua reporting
unit.

F-55



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EXHIBIT INDEX



|Exhibit  Number |    | Description
|--------------- | -- | -----------
|                |    |            
|                | 10 | .24        
|                | 21 | .1         
|                | 23 | .1         
|                | 31 | .1         
|                | 31 | .2         
|                | 32 | .1         
|                | 32 | .2         



---