##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2004


Commission file number 0-15135


Tekelec


(Exact name of registrant as specified in its charter)


|                                                                                           |  |                                                   
|------------------------------------------------------------------------------------------ |  | --------------------------------------------------
|California(State or other jurisdiction of
     incorporation or organization)              |  | 95-2746131(I.R.S. Employer
    Identification No.)
|26580 West Agoura Road,
     Calabasas, California(Address of principal executive offices) |  | 91302(Zip Code)                                   

Registrants telephone number, including area code:


(818) 880-5656


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


None


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


Common Stock, without par value


þ o


o


þ o






DOCUMENTS INCORPORATED BY REFERENCE












---










TEKELEC


INDEX TO ANNUAL REPORT ON FORM 10-K


For the Fiscal Year Ended December 31, 2004


|              |  |                                                                                                                             |  |      |    | 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                                                             |  | Page |   
|              |  |                                                                                                                             |  |      |   
|PART I       
|Item 1.       |  | Business                                                                                                                    |  |      | 1  | 
|Item 2.       |  | Properties                                                                                                                  |  |      | 27 | 
|Item 3.       |  | Legal Proceedings                                                                                                           |  |      | 28 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                                     |  |      | 29 | 
|PART II      
|Item 5.       |  | Market for Registrants Common Equity
    and Related Stockholder Matters and Issuer Purchases of
    Registered Securities |  |      | 30 | 
|Item 6.       |  | Selected Financial Data                                                                                                     |  |      | 30 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                   |  |      | 31 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                              |  |      | 48 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                             |  |      | 48 | 
|Item 9.       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                    |  |      | 48 | 
|Item 9A.      |  | Controls and Procedures                                                                                                     |  |      | 48 | 
|Item 9B.      |  | Other Information                                                                                                           |  |      | 49 | 
|PART III     
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                                                      |  |      | 50 | 
|Item 11.      |  | Executive Compensation                                                                                                      |  |      | 50 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                          |  |      | 50 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                          |  |      | 50 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                                                      |  |      | 50 | 
|PART IV      
|Item 15.      |  | Exhibits and Financial Statement
    Schedules                                                                              |  |      | 51 | 
|Exhibit 10.17
|Exhibit 10.18
|Exhibit 10.19
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 31.1 
|Exhibit 32.1 



i



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PART I







|        |          
|------- | ---------
|Item 1. | Business.

Overview
















Industry Background






1



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| |                                                               
| | --------------------------------------------------------------
| | Recent Changes in Telecommunications Operating
    Environment







2



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| |                                  
| | ---------------------------------
| | Challenges Service Providers Face





| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expanding and/or upgrading their signaling network to support
    new and enhanced converged services and growing volumes of
    signaling traffic, particularly on signaling-intensive wireless
    networks which generate several times the amount of signaling
    traffic as wireline networks;
|
| |  | expanding and/or upgrading their switching network to support
    new and enhanced IP services, and competing with loss of lines
    to wireless, cable, and broadband voice offerings;                                                                                                             
|
| |  | building and managing networks that can cost-effectively support
    circuit and packet network convergence; and                                                                                                                                                                                    
|
| |  | managing stringent network optimization, revenue assurance, and
    billing practices in convergent networks to enable higher profit
    margins from services provided, and remaining competitive with
    new market entrants.                                                                    

3



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| |                                   
| | ----------------------------------
| | Signaling and Intelligent Services





Signal Transfer Point (STP)


Service Switching Point (SSP)


Service Control Point (SCP)


Signaling Links






| |                                                   
| | --------------------------------------------------
| | Unique Signaling Requirements of Wireless Networks



4



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| |                                      
| | -------------------------------------
| | Supporting Voice and Data Convergence









Signal Transfer Point


Service Control Point


Signaling Gateway


Media Gateway Controller


Media Gateway


5



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Application Server


SIP Server






The Tekelec Solution








6



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7



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Business Strategy




Maintaining Technology Leadership.


Targeting the Convergence of Voice and Data Networks.




8



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Expanding Globally.


Focus on Continued Operating Improvements.


Pursuing Additional Strategic Relationships, Original
Equipment Manufacturers (OEM) Partners and
Acquisitions.


Pursuing New Market Segments.


Seeking Additional Opportunities to Provide Upgrades,
Extensions and Service Agreements.


Products




9



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| |                                                                           
| | --------------------------------------------------------------------------
| | Network Signaling Group Products (formerly Network
    Signaling Division)



|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                              |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|EAGLE 5 Signaling Application System |  | Our EAGLE 5 Signaling Application System (EAGLE 5 SAS) is a
    multi-disciplined, high-capacity, highly flexible, and highly
    reliable signaling platform designed to be the heart of the
    mobile, fixed line and IP networks of today and tomorrow. EAGLE
    5 SAS provides products and services in five functional areas:
    Signal Transfer, Signaling Gateway, Number Portability, Data
    Acquisition, and Integrated Applications. The Signal Transfer
    Function is tailored to the global CCS7 switching needs of
    wireline carriers, network service providers and wireless
    operators, among others. It offers high capacity and throughput,
    features a fully distributed, standards-based, open architecture
    and is scalable from 2 to 2,000 links with growth up to 7,000
    links. The Signaling Gateway Function can provide signaling
    information to media gateway controllers and IP-signaling
    enabled SCPs in multiple locations. It can deliver these
    services in multi-protocol, multi-vendor converged networks or
    in circuit switched networks that deploy signaling over IP
    primarily to realize economic benefits. It provides the
    capability for next-generation IP signaling, and bridges the gap
    between legacy networks and next-generation packet telephony
    capabilities.
|                                    
|                                     |  | The EAGLE 5 SAS platform also provides a complete line of fully
    integrated EAGLE 5 database and advanced routing
    applications, deployment of advanced value-added applications
    and data mining capabilities as described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                    
|                                     |  | The Number Portability function introduces products and services
    for wireline and wireless networks worldwide with a combination
    of capacity and performance. The Data Acquisition function
    provides a base for Revenue Gateway, Fraud Protection and other
    capabilities within a signaling network. The Integrated
    Applications Function delivers mediation, mobility, and
    Intelligent Network applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                    
|Tekelec 1000 APS                     |  | Our Tekelec 1000 APS provides a fully integrated
    application-hosting environment directly on top of the Tekelec
    EAGLE 5 SAS,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                    
|Tekelec 500 Signaling Edge           |  | Our Tekelec 500 SE is a multi-protocol link concentrator that
    delivers IP connectivity to the edge of the SS7 network.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

10



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| |                                                                            
| | ---------------------------------------------------------------------------
| | Switching Solutions Group Products (formerly
    Next-Generation Switching)



|                                      |  |                                                                                                                                                                                                                
|------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                               |  | Description                                                                                                                                                                                                    
|                                      |  |                                                                                                                                                                                                                
|Tekelec 9000 DSS                      |  | Our Tekelec 9000 DSS is an integrated voice and data switching
    solutions, capable of simultaneously delivering full-featured
    IXC Tandem, Class 4 and Class 5 functionality.                            
|                                     
|Tekelec 8000 WMG                      |  | Our Tekelec 8000 Wireless Media Gateway is a highly flexible,
    scalable and reliable mobile solution that can handle circuit
    switched TDM traffic as well as packet-based voice traffic
    efficiently.
|                                     
|Tekelec 7000 C5                       |  | Our Tekelec 7000 C5 delivers voice switching for both circuit
    and packet-based networks.                                                                                                                   
|                                     
|Tekelec 700 LAG                       |  | Our Tekelec 700 Line Access Gateway is a high density, central
    office line replacement platform used in conjunction with the
    Tekelec 7000 C5 and the Tekelec 9000 DSS.                                 
|                                     
|Tekelec 6000 VoIP Applications Server |  | Our Tekelec 6000 VoIP Application Server provides IP-based
    business services, such as IP Centrex, hosted PBX, and business
    trunking in addition to residential broadband.                              



| |                                        
| | ---------------------------------------
| | Communications Software Solutions Group



|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Integrated Application Solutions (IAS) |  | IAS is a suite of business-oriented applications designed to
    provide real time performance management capabilities and
    critical business intelligence used in:                                                                                                                                                                                                                                                                                                                                               
|                                       |  |  Traffic management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                       |  |  Roaming management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                       |  |  Billing management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                       |  |  Market intelligence                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                       |  |  Fraud management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                       |  |  Security management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                       |  |  Fault management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                       |  |  Lawful intercept                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                       |  | Using data collected from the network, the IAS collects,
    correlates, processes, and then stores this data into a data
    warehouse, where various operations within the operators
    organization can mine this data to produce relevant reports used
    for Revenue Assurance, revenue generation, and even operational
    improvement. More importantly, IAS supports wireline and
    wireless networks either traditional TDM-based or new generation
    IP-based networks such as GPRS, UMTS, and SIP.

11



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|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                       |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Service Creation System (SCS) |  | The Service Creation System (SCS) provides operators with
    an alternative to traditional, legacy IN/ AIN-based platforms.
    The SCS is offered with pre-packaged solutions allowing
    operators to immediately launch their own services, eliminating
    lengthy development cycles.                                                                                                                                                                                                                                                                                                      
|                             
|                              |  | At the same time, a full creation environment is provided
    allowing these customers to continue customization of the
    existing services, as well as create new, competitive services
    themselves. This system is based on our ASi4000 platform
    previously acquired from IEX, and installed in a number of
    locations.                                                                                                                                                                                                                                                             
|                             
|Sentinel                      |  | Sentinel is a data acquisition product capturing data from
    signaling networks. Associated value-added applications provide
    network maintenance, surveillance and revenue assurance products
    and services that enable service providers to ensure the
    reliability of telecommunication products and services
    implemented across their SS7/ IP networks. Sentinel also enables
    revenue assurance features such as fraud prevention, billing and
    billing verification. Sentinel can be deployed on a standalone
    basis or as an integrated feature of the EAGLE 5 SAS.



| |                                                                
| | ---------------------------------------------------------------
| | IEX Contact Center Group Products (formerly Contact
    Center)



|                               |  |                                                                                                                                                                             
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                        |  | Description                                                                                                                                                                 
|                               |  |                                                                                                                                                                             
|TotalView Workforce Management |  | Our TotalView Workforce Management product encompasses a set of
    standard and advanced features for contact center planning,
    management and analysis.                
|                               |  |  TotalView Central provides core
    workforce management functionality including: forecasting,
    scheduling, change management, planning and performance
    management.
|                               |  |  TotalView WebStation uses standard Web
    browser technology to improve agent and supervisor productivity.                                                               
|                               |  |  TotalView SmartSync Suite enables
    seamless, trouble-free integration with other contact center
    systems and applications.                                          
|                               |  |  TotalView Multiskill enables contact
    centers to better utilize advanced contact routing technologies
    and agents with multiple skill sets.                         
|                               |  |  TotalView Multimedia extends the
    benefits of TotalView to non-telephone contact channels such as
    email and chat.                                                  
|                               |  |  TotalView Adherence Suite provides
    real-time and historical information on how well agents keep to
    their assigned schedules.                                      
|                               |  |  TotalView Vacation and Holiday Planner
    automates the management and processing of time off requests.                                                                  

12



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Product Development


rd










Sales and Marketing




Distribution.


13



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Strategic Relationships.




| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enhance our presence and strengthen the our competitive position
    in our target markets;                                                                                                                  
|
| |  | offer products that complement our network signaling and
    switching solutions 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.





| |   |                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an agreement with Harris whereby we will market and resell its
    operations, administration and maintenance network management
    system;                                                                                                                      
|
| |  | an exclusive distribution and OEM agreement with Mercury under
    which Mercury distributes our Eagle STP in South Korea;                                                                                                                                        
|
| |  | agreements with Merced Systems and BayBridge Decision
    Technologies whereby our contact center group resells these
    companies Performance Management and Strategic Planning
    products and services respectively:                                        
|
| |  | agreements with the Call Center Professional Services groups of
    SBC and Bell Canada, among others, under which those
    organizations market and resell the TotalView Workforce
    Management solution; and                                                 
|
| |  | an agreement with Alcatel, as a result of their acquisition of
    Spatial Communications Technologies (Spatial),
    whereby Spatial acts as a reseller of Santeras media
    gateways in the wireless market on an original equipment
    manufacturer basis.





Service, Support and Warranty




14



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Customers




Backlog








15



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Competition


Network Signaling Group Products.






Switching Solutions Group Products.




Communications Software Solutions Group Products.


IEX Contact Center Products.


16



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Intellectual Property








Employees




17



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Risk Factors






| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Because our quarterly operating results are difficult to
    predict and may fluctuate, the market price for our stock may be
    volatile.





| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the amount of product and service revenue recognized is impacted
    by our judgments as to whether an arrangement includes multiple
    elements and if so, whether vendor specific objective evidence
    of fair value exists for those elements;                                          
|
| |  | the success or failure of our strategic alliances and
    acquisitions;                                                                                                                                                                                                                       
|
| |  | the introduction and market acceptance of our and our
    competitors new products, services and technologies;                                                                                                                                                                               
|
| |  | the timing of the deployment by our customers of new
    technologies and services, including VoIP;                                                                                                                                                                                           
|
| |  | changes in accounting rules, such as the implementation of rules
    requiring the recording of employee stock option grants as
    expense;                                                                                                                                                  
|
| |  | changes in overall telecommunications spending;                                                                                                                                                                                                                                               
|
| |  | changes in general economic conditions and specific market
    conditions in the telecommunications industry;                                                                                                                                                                                 
|
| |  | fluctuations in demand for our products and the size, timing,
    terms and conditions of orders and shipments;                                                                                                                                                                               
|
| |  | the lengthy sales cycle of our signaling, switching solutions
    and communications software solutions products, especially with
    respect to our international customers, and the reduced
    visibility into our customers spending plans for those
    products and associated revenue;
|
| |  | the progress and timing of the convergence of voice and data
    networks and other convergence-related risks described below;                                                                                                                                                                
|
| |  | the ability of carriers to utilize excess capacity of signaling
    infrastructure and related products in their networks;                                                                                                                                                                    
|
| |  | the capital spending patterns of our customers, including
    deferrals or cancellations of purchases by customers;                                                                                                                                                                           
|
| |  | the trend toward industry consolidation among our customers;                                                                                                                                                                                                                                  
|
| |  | our ability to achieve targeted cost and expense reductions;                                                                                                                                                                                                                                  

18



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| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | our dependence on wireless carriers for a significant percentage
    of our revenues;                                       
|
| |  | unanticipated delays or problems in developing or releasing new
    products or services;                                   
|
| |  | the mix of products and services that we sell;                                                                              
|
| |  | the geographic mix of our revenues and the associated impact on
    gross margins;                                          
|
| |  | foreign currency exchange rate fluctuations;                                                                                
|
| |  | the ability of our customers to obtain financing or to otherwise
    fund capital expenditures;                             
|
| |  | the timing and level of our research and development
    expenditures and other expenditures;                               
|
| |  | the expansion of our marketing and support operations, both
    domestically and internationally;                           
|
| |  | changes in our pricing policies and those of our competitors;                                                               
|
| |  | worldwide economic or political instability; and                                                                            
|
| |  | failure of certain customers to successfully and timely
    reorganize their operations, including emerging from bankruptcy.







| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 and if we are not able to develop and
    market additional and enhanced product offerings.



19



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| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If wireless carriers do not continue to grow and to buy
    our Network Signaling products and services, our Network
    Signaling business would be harmed.





| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | continuing or worsening weakness 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 carriers to obtain financing on favorable
    terms;
|
| |  | delays or scaling back of plans for the deployment by wireless
    network operators of new wireless broadband
    technologies; and  
|
| |  | slowing growth of wireless network subscribers, minutes of use
    or adoption of new services.                                       





| |                                                                          
| | -------------------------------------------------------------------------
| | Risks related to the potential convergence of voice and
    data networks







| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the failure to solve or difficulty in solving certain technical
    obstacles to the transmission of voice conversations over a
    packet network;
|
| |  | delays in the formulation of standards for the transmission of
    voice conversations over a packet network; and                                  
|
| |  | the imposition on packet network operators of access fees, which
    they currently do not pay.                                                    



20



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| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | The integration of the business operations of our
    acquisitions may not be successful.







| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | Problems or delays integrating or assimilating the acquired
    operations, technologies or products;       
|
| |  | Unanticipated costs associated with the acquisition;                                                        
|
| |  | Diversion of managements attention from our core business;                                                 
|
| |  | Adverse effects on existing business relationships with
    suppliers, contract manufacturers and customers;
|
| |  | Risks associated with entering markets in which we have no or
    limited prior experience; and             
|
| |  | Potential loss of the acquired organizations or our own
    key employees.                                 





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | We may have difficulty in identifying and executing any
    acquisitions, strategic alliances and joint ventures.



21



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





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







| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on a limited number of customers for a
    substantial portion of our revenues, and the loss of one or more
    of these customers could adversely affect our operating
    results.



22



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





| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Our relationships with strategic partners and distributors
    and other resellers are important to our future growth.





23



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| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our compliance with telecommunications regulations and
    standards may be time consuming, difficult and costly, and if we
    fail to comply, our product sales would decrease.









| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | We have significant international sales, and international
    markets have inherent risks.





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| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our loss of services of key personnel or failure to
    attract and retain additional key personnel could adversely
    affect our ability to operate our company effectively.





| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 would adversely affect our business and
    results of operations and harm our customer
    relationships.







26



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| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on third parties to provide many of our subsystems
    and components. If we are unable to obtain our subsystems and
    components 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.





| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | We are exposed to the credit risk of some of our customers
    and to credit exposures in weakened markets.





| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Business disruptions could adversely affect our business
    and financial results.








|        |            
|------- | -----------
|Item 2. | Properties.







27



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|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.



Bouygues Telecom, S.A., vs. Tekelec






28



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IEX Corporation vs. Blue Pumpkin Software, Inc.




Lemelson Medical, Education and Research Foundation, Limited
Partnership vs. Tekelec






Syndia Corporation









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



29



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PART II







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



|     |                |      |   |       |     |  |   |       | 
|---- | -------------- | ---- | - | ----- | --- |  | - | ----- | 
|     |                | High |   |       | Low | 
|     |                |      |   |       |     | 
|2003 |                |      |   |       |     |  |   |      
|     | First Quarter  |      | $ | 12.06 |     |  | $ | 8.04  | 
|     | Second Quarter |      |   | 14.29 |     |  |   | 8.72  | 
|     | Third Quarter  |      |   | 18.08 |     |  |   | 11.34 | 
|     | Fourth Quarter |      |   | 18.00 |     |  |   | 14.68 | 
|2004 |                |      |   |       |     |  |   |      
|     | First Quarter  |      | $ | 21.25 |     |  | $ | 15.46 | 
|     | Second Quarter |      |   | 18.65 |     |  |   | 15.30 | 
|     | Third Quarter  |      |   | 19.86 |     |  |   | 15.90 | 
|     | Fourth Quarter |      |   | 25.76 |     |  |   | 17.17 | 








|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.



30



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Five-Year Selected Financial Data


|                                                                               |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |         |        |   |   |         |        | 
|------------------------------------------------------------------------------ | ------- | ---------------------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | 
|                                                                               |         | For the Years Ended December 31,   |        
|                                                                               |         |                                    |        
|                                                                               |         | 2004                               |         |        | 2003 |   |         | 2002   |  |   | 2001    |        |   | 2000 |        
|                                                                               |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |        
|                                                                               |         | (Thousands, except per share data) |        
|Statement of Operations Data:                                                  |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |         |        |   |   |         |       
|Revenues                                                                       |         | $                                  | 397,072 |        |      | $ | 263,700 |        |  | $ | 260,341 |        |   | $    | 249,369 |        |   | $ | 252,327 |       
|Income (Loss) from continuing operations before provision for
    income taxes |         |                                    | 48,979  |        |      |   | 8,967   |        |  |   | 24,054  |        |   |      | (488    | )      |   |   | 21,754  |       
|Income (Loss) from continuing operations                                       |         |                                    | 36,373  |        |      |   | 15,159  |        |  |   | 15,914  |        |   |      | (6,610  | )      |   |   | 6,228   |       
|Income (Loss) from discontinued operation, net of income taxes                 |         |                                    |        |        |      |   |        |        |  |   | (3,308  | )      |   |      | (289    | )      |   |   | 6,668   |       
|Gain on sale of discontinued operation, net of income taxes                    |         |                                    |        |        |      |   | 3,293   |        |  |   | 28,312  |        |   |      |        |        |   |   |        |       
|Net income (loss)                                                              |         |                                    | 36,373  |        |      |   | 18,452  |        |  |   | 40,918  |        |   |      | (6,899  | )      |   |   | 12,896  |       
|Earnings (Loss) per share from continuing operations:                          |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |         |        |   |   |         |       
|                                                                               | Basic   |                                    | $       | 0.58   |      |   | $       | 0.25   |  |   | $       | 0.26   |   |      | $       | (0.11  | ) |   | $       | 0.11   | 
|                                                                               | Diluted |                                    |         | 0.53   |      |   |         | 0.24   |  |   |         | 0.26   |   |      |         | (0.11  | ) |   |         | 0.10   | 
|Earnings (Loss) per share from discontinued operation:                         |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |         |        |   |   |         |       
|                                                                               | Basic   |                                    | $       |       |      |   | $       |       |  |   | $       | (0.05  | ) |      | $       | (0.01  | ) |   | $       | 0.11   | 
|                                                                               | Diluted |                                    |         |       |      |   |         |       |  |   |         | (0.05  | ) |      |         | (0.01  | ) |   |         | 0.10   | 
|Earnings per share from gain on sale of discontinued operation:                |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |         |        |   |   |         |       
|                                                                               | Basic   |                                    | $       |       |      |   | $       | 0.05   |  |   | $       | 0.47   |   |      | $       |       |   |   | $       |       | 
|                                                                               | Diluted |                                    |         |       |      |   |         | 0.05   |  |   |         | 0.46   |   |      |         |       |   |   |         |       | 
|Earnings (Loss) per share:                                                     |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |         |        |   |   |         |       
|                                                                               | Basic   |                                    | $       | 0.58   |      |   | $       | 0.30   |  |   | $       | 0.68   |   |      | $       | (0.12  | ) |   | $       | 0.22   | 
|                                                                               | Diluted |                                    |         | 0.53   |      |   |         | 0.29   |  |   |         | 0.67   |   |      |         | (0.12  | ) |   |         | 0.20   | 
|Weighted average number of shares outstanding:                                 |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |         |        |   |   |         |       
|                                                                               | Basic   |                                    |         | 63,131 |      |   |         | 61,163 |  |   |         | 60,358 |   |      |         | 59,574 |   |   |         | 57,823 | 
|                                                                               | Diluted |                                    |         | 72,683 |      |   |         | 62,911 |  |   |         | 61,386 |   |      |         | 59,574 |   |   |         | 64,123 | 
|Balance Sheet Data (at December 31):                                           |         |                                    |         |        |      |   |         |        |  |   |         |        |   |      |         |        |   |   |         |       
|Cash and liquid investments                                                    |         | $                                  | 276,982 |        |      | $ | 339,359 |        |  | $ | 309,830 |        |   | $    | 225,956 |        |   | $ | 151,308 |       
|Working capital                                                                |         |                                    | 200,002 |        |      |   | 135,039 |        |  |   | 187,912 |        |   |      | 185,168 |        |   |   | 218,935 |       
|Total assets                                                                   |         |                                    | 781,643 |        |      |   | 614,933 |        |  |   | 525,683 |        |   |      | 484,404 |        |   |   | 458,524 |       
|Long-term liabilities                                                          |         |                                    | 146,851 |        |      |   | 132,051 |        |  |   | 145,098 |        |   |      | 137,929 |        |   |   | 136,050 |       
|Shareholders equity                                                           |         |                                    | 428,998 |        |      |   | 328,811 |        |  |   | 302,007 |        |   |      | 248,822 |        |   |   | 237,597 |       






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations.



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7 7 7 i i


Overview


www.tekelec.com




Network Signaling Group (formerly Network Signaling). e.g.,




Switching Solutions Group (formerly Next-Generation
Switching).




32



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##### Table of Contents







Communications Software Solutions Group.


IEX Contact Center Group (formerly Contact Center).








33



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| |                                           
| | ------------------------------------------
| | Critical Accounting Policies and Estimates







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue Recognition Policy. Revenues are derived from
    sales of network signaling, contact center, switching solutions
    and communications software solutions products and services.
    Revenues are recognized upon the transfer of title, generally at
    the time of shipment to the customers final site and
    satisfaction of related Company obligations, if any, provided
    that persuasive evidence of an arrangement exists, the fee is
    fixed and determinable and collectability is deemed probable.
    For certain products, our sales arrangements include acceptance
    provisions which are based on our published specifications.
    Revenue is recognized upon shipment of these products assuming
    all other revenue recognition criteria are met, provided that we
    have previously demonstrated that the product meets the
    specified criteria and has established a history with
    substantially similar transactions. Revenue is

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | deferred for sales arrangements that include customer-specific
    acceptance provisions where we are unable to reliably
    demonstrate that the delivered product meets all of the
    specified criteria until customer acceptance is obtained.
    Revenues associated with multiple-element arrangements are
    allocated to each element based on vendor specific objective
    evidence of fair value. The amount of product and service
    revenue recognized is impacted by our judgments as to whether an
    arrangement includes multiple elements and, if so, whether
    vendor-specific objective evidence of fair value exists for
    those elements. Changes to the elements in an arrangement and
    our ability to establish vendor-specific objective evidence for
    those elements could affect the timing of revenue recognition.
    Revenues associated with installation services, if provided, are
    deferred based on the fair value of such services and are
    recognized upon completion. Revenue is recognized for extended
    warranty and maintenance agreements ratably over the contract
    term. Significant management judgments and estimates must be
    made and used in connection with the revenue recognized in any
    accounting period. Material differences may result in the amount
    and timing of our revenue for any period if management made
    different judgments or utilized different estimates.
|
| |  | Allowance for Doubtful Accounts. An allowance for
    doubtful accounts is maintained for estimated losses resulting
    from the inability of our customers to make required payments.
    If the financial condition of our customers were to deteriorate,
    resulting in an impairment of their ability to make payments,
    additional allowances may be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Inventories. Inventory levels are based on projections of
    future demand and market conditions. Any sudden decline in
    demand and/or rapid product improvements and technological
    changes can result in excess and/or obsolete inventories. On an
    ongoing basis inventories are reviewed and written down for
    estimated obsolescence or unmarketable inventories equal to the
    difference between the costs of inventories and the estimated
    net realizable value based upon forecasts for future demand and
    market conditions. If actual market conditions are less
    favorable than our forecasts, additional inventory write downs
    may be required. Estimates could be influenced by sudden decline
    in demand due to economic downturn, rapid product improvements
    and technological changes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Investments. Our 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. 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. At
    December 31, 2004 and 2003, net unrealized gains or losses
    on available-for-sale securities were not significant. We
    utilize specific identification in computing realized gains and
    losses on the sale of investments. Realized gains and losses are
    reported in other income and expense, and were not significant
    for 2004, 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 periodically
    review these investments for other-than-temporary declines in
    fair value and write down investments to their fair value when
    an other-than-temporary decline has occurred. Fair values for
    investments in privately-held companies are estimated based on
    several factors including; the values for recent rounds of
    financing; quoted market prices for comparable public companies
    or market values for recent acquisitions of similar private
    companies; and pricing models using historical and forecasted
    financial information. To date, there have been no impairments
    of investments in privately-held companies.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Convertible Notes Receivable. As a result of the
    sale of our NDD business to Catapult Communications, Inc. in
    August 2002, we recognized a receivable at the estimated fair
    value determined with the assistance of a third party appraisal.
    The fair value was computed by discounting the face value amount
    to present value using a fair value rate of interest and then
    determining the fair value of the conversion

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | option using the Black-Scholes valuation model. The fair value
    was amortized to the redemption value as of the date of
    maturity. See Note C  Disposition of Network
    Diagnostics Business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Deferred Taxes. A valuation allowance is recorded to
    reduce deferred tax assets to the amount that is more likely
    than not to be realized. We have provided an $82.3 million
    valuation allowance against the deferred tax assets of Santera,
    due to uncertainties surrounding the timing and realization of
    the benefits from Santeras tax attributes in future tax
    returns. Realization of the remaining deferred tax assets of
    $61.6 million 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 asset in the
    future, an adjustment to the deferred tax asset would reduce
    income in the period such determination was made.                                                                                                                                                                                                                          
|
| |  | Goodwill and Purchased Intangible Assets. The purchase
    method of accounting for acquisitions requires extensive use of
    accounting estimates and judgments to allocate the purchase
    price paid to the fair value of the net tangible assets and
    intangible assets acquired, including in-process research and
    development (IPR&D). 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.                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Impairment of Goodwill and Other Long-Lived Assets.
    Effective January 1, 2002, we adopted the provisions of
    Statement of Financial Accounting Standards (SFAS)
    No. 142, Goodwill and Other Intangible Assets.
    SFAS No. 142 eliminated the amortization of goodwill.
    Instead, goodwill is reviewed for impairment at least annually
    thereafter. In connection with our performance of the impairment
    tests, we obtained valuations of our individual reporting units
    from an independent third-party valuation firm. The valuation
    methodologies included, but were not limited to, estimated net
    present value of the projected cash flows of these reporting
    units. As a result of these impairment tests, we determined that
    there was no goodwill impairment in 2003 or 2004. If actual
    results are substantially lower than our projections underlying
    these valuations, or if market discount rates increase, this
    could adversely affect our future valuations and result in
    future impairment charges.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We assess potential impairment of our finite lived, intangible
    assets and other long-lived assets when there is evidence that
    recent events or changes in circumstances indicate that their
    carrying value may not be recoverable. Reviews are performed to
    determine whether the carrying value of assets is impaired based
    on a comparison to the undiscounted estimated future cash flows.
    If the comparison indicates that there is impairment, the
    impaired asset is written down to fair value, which is typically
    calculated using discounted estimated future cash flows. The
    amount of impairment would be recognized as the excess of the
    assets carrying value over its fair value. Events or
    changes in circumstances which may cause impairment include:
    significant changes in the manner of use of the acquired asset,
    negative industry or economic trends, and significant
    underperformance relative to historical or projected future
    operating results.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Product Warranty. We generally warrant our products
    against defects in materials and workmanship for one year after
    sale and provide for estimated future warranty costs at the time
    revenue is recognized. 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.
|
| |  | Leases. At the time a lease is entered, we determine the
    classification of the lease as either a capital lease or an
    operating lease based on the factors listed in SFAS 13. Our
    lease terms generally range from one month to ten years with
    rent expense recorded on a straight line basis for financial
    reporting. We include all applicable rent escalations and
    abatements in our deferred rent amortization. All of our
    operating leases are for a fixed period of time with
    pre-determined rent escalations.                   

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leasehold Improvements. If, at any time during our
    tenancy, we elect to construct or otherwise invest in leasehold
    improvements to the property, we capitalize the improvements.
    Leasehold improvements are amortized over the shorter of the
    useful life of the improvement, or the original lease term.                                                                                                                                           
|
| |  | Contingencies and Litigation. We evaluate contingent
    liabilities including threatened or pending litigation in
    accordance with SFAS No. 5, Accounting for
    Contingencies and record accruals when the outcome of
    these matters is deemed probable and the liability is reasonably
    estimable. We make these assessments based on the facts and
    circumstances and in some instances based in part on the advice
    of outside legal counsel.

Results of Operations




|                                                                        |                                                       |                     |                            |      |      |     |       |      |     |     |       |      |      |     | 
|----------------------------------------------------------------------- | ----------------------------------------------------- | ------------------- | -------------------------- | ---- | ---- | --- | ----- | ---- | --- | --- | ----- | ---- | ---- | --- | 
|                                                                        |                                                       | Percentage of       |                           
|                                                                        |                                                       | Revenues            |                           
|                                                                        |                                                       | for the Years Ended |                           
|                                                                        |                                                       | December 31,        |                           
|                                                                        |                                                       |                     |                           
|                                                                        |                                                       | 2004                |                            |      | 2003 |     |       | 2002 |    
|                                                                        |                                                       |                     |                            |      |      |     |       |      |    
|Revenues                                                                |                                                       |                     | 100.0                      | %    |      |     | 100.0 | %    |     |     | 100.0 | %   
|                                                                        | Cost of goods sold                                    |                     |                            | 25.6 |      |     |       | 22.3 |     |     |       | 25.6 |     
|                                                                        | Amortization of purchased technology                  |                     |                            | 2.3  |      |     |       | 4.2  |     |     |       | 3.9  |     
|                                                                        |                                                       |                     |                            |      |      |     |       |      |    
|Gross Profit                                                            |                                                       |                     | 72.1                       |      |      |     | 73.5  |      |     |     | 70.5  |     
|                                                                        | Research and development                              |                     |                            | 24.7 |      |     |       | 27.8 |     |     |       | 22.9 |     
|                                                                        | Selling, general and administrative                   |                     |                            | 38.2 |      |     |       | 39.6 |     |     |       | 36.9 |     
|                                                                        | Acquired in-process research and development          |                     |                            | 3.6  |      |     |       | 1.1  |     |     |       |     |     
|                                                                        | Amortization of intangible assets                     |                     |                            | 0.6  |      |     |       | 0.7  |     |     |       | 0.6  |     
|                                                                        | Restructuring                                         |                     |                            | 0.4  |      |     |       |     |     |     |       |     |     
|                                                                        |                                                       |                     |                            |      |      |     |       |      |    
|Income from operations                                                  |                                                       |                     | 4.6                        |      |      |     | 4.3   |      |     |     | 10.1  |     
|                                                                        | Interest and other income (expense), net              |                     |                            | 7.8  |      |     |       | (1.0 | )   |     |       | (0.9 | )   
|                                                                        |                                                       |                     |                            |      |      |     |       |      |    
|Income from continuing operations before provision for income
    taxes |                                                       |                     | 12.4                       |      |      |     | 3.3   |      |     |     | 9.2   |     
|                                                                        |                                                       |                     | Provision for income taxes |      |      | 8.4 |       |      |     | 5.1 |       |      |      | 3.1 | 
|                                                                        |                                                       |                     |                            |      |      |     |       |      |    
|Income (Loss) before minority interest                                  |                                                       |                     | 4.0                        |      |      |     | (1.8  | )    |     |     | 6.1   |     
|Minority interest                                                       |                                                       |                     | 5.2                        |      |      |     | 7.5   |      |     |     |      |     
|                                                                        |                                                       |                     |                            |      |      |     |       |      |    
|Income from continuing operations                                       |                                                       |                     | 9.2                        |      |      |     | 5.7   |      |     |     | 6.1   |     
|                                                                        | Loss from discontinued operation, net of income taxes |                     |                            |     |      |     |       |     |     |     |       | (1.3 | )   
|Gain on sale from discontinued operation, net of income taxes           |                                                       |                     |                           |      |      |     | 1.3   |      |     |     | 10.9  |     
|                                                                        |                                                       |                     |                            |      |      |     |       |      |    
|                                                                        |                                                       | Net income          |                            |      | 9.2  | %   |       |      | 7.0 | %   |       |      | 15.7 | %  
|                                                                        |                                                       |                     |                            |      |      |     |       |      |    



|                                        |       |                     |    |     |      |  |    |      |   |  |    |     |  
|--------------------------------------- | ----- | ------------------- | -- | --- | ---- |  | -- | ---- | - |  | -- | --- | -
|                                        |       | Percentage of       |   
|                                        |       | Revenues            |   
|                                        |       | for the Years Ended |   
|                                        |       | December 31,        |   
|                                        |       |                     |   
|                                        |       | 2004                |    |     | 2003 |  |    | 2002 |  
|                                        |       |                     |    |     |      |  |    |      |  
|Network Signaling Group                 |       |                     | 72 | %   |      |  | 77 | %    |   |  | 79 | %  
|Switching Solutions Group               |       |                     | 14 |     |      |  | 4  |      |   |  |   |    
|Communications Software Solutions Group |       |                     | 4  |     |      |  | 5  |      |   |  | 6  |    
|IEX Contact Center Group                |       |                     | 10 |     |      |  | 14 |      |   |  | 15 |    
|                                        |       |                     |    |     |      |  |    |      |  
|                                        | Total |                     |    | 100 | %    |  |    | 100  | % |  |    | 100 | %
|                                        |       |                     |    |     |      |  |    |      |  

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|                               |       |                     |    |     |      |  |    |      |   |  |    |     |  
|------------------------------ | ----- | ------------------- | -- | --- | ---- |  | -- | ---- | - |  | -- | --- | -
|                               |       | Percentage of       |   
|                               |       | Revenues            |   
|                               |       | for the Years Ended |   
|                               |       | December 31,        |   
|                               |       |                     |   
|                               |       | 2004                |    |     | 2003 |  |    | 2002 |  
|                               |       |                     |    |     |      |  |    |      |  
|North America                  |       |                     | 77 | %   |      |  | 83 | %    |   |  | 82 | %  
|Europe, Middle East and Africa |       |                     | 10 |     |      |  | 9  |      |   |  | 12 |    
|Caribbean and Latin America    |       |                     | 7  |     |      |  | 4  |      |   |  | 2  |    
|Asia Pacific                   |       |                     | 6  |     |      |  | 4  |      |   |  | 4  |    
|                               |       |                     |    |     |      |  |    |      |  
|                               | Total |                     |    | 100 | %    |  |    | 100  | % |  |    | 100 | %
|                               |       |                     |    |     |      |  |    |      |  



| |                        
| | -----------------------
| | 2004 Compared with 2003

Revenues.












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Gross Profit.




Research and Development.




Selling, General and Administrative Expenses.


Acquired In-Process Research and Development.


Restructuring Charges.


39



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Amortization of Intangible Assets.


Interest Income and (Expense).


Gain on Sale of Catapult Stock.


Gain on Sale of Investment in Privately Held Company.




Gain on Warrants in Privately Held Company.


Provision for Income Taxes.


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Minority Interest.


|                                                                                                                      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Santera net loss (includes amortization of intangibles of $4,291)                                                     |  | $ | 33,418 |  
|Percentage of losses attributable to the minority interest based
    on capital structure and liquidation preferences |  |   | 62     | %
|                                                                                                                      |  |   |       
|Net loss allocated to minority interest                                                                               |  | $ | 20,719 |  
|                                                                                                                      |  |   |       

Net income.




| |                        
| | -----------------------
| | 2003 Compared with 2002

Revenues.










41



---



##### Table of Contents





Gross Profit.


Research and Development.


Selling, General and Administrative Expenses.


Acquired In-Process Research and Development.


Amortization of Intangible Assets.


Interest and Other Income (Expense), net.


Provision for Income Taxes.


42



---



##### Table of Contents





Minority Interest.


|                                                                                                                      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Santera net loss (includes amortization of intangibles and IPRD
    charges of $4,069 and $2,900, respectively)       |  | $ | 31,922 |  
|Percentage of losses attributable to the minority interest based
    on capital structure and liquidation preferences |  |   | 62     | %
|                                                                                                                      |  |   |       
|Net loss allocated to minority interest                                                                               |  | $ | 19,792 |  
|                                                                                                                      |  |   |       

Loss from Discontinued Operation.


Gain on Disposal of Discontinued Operation.


Net income.




| |                                
| | -------------------------------
| | Liquidity and Capital Resources





43



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44



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##### Table of Contents









| |                        
| | -----------------------
| | Contractual Obligations



|                                           |  |                |         |           |        |   |        |           |  |   |           |  |  |         |         |  |  |   |        | 
|------------------------------------------ |  | -------------- | ------- | --------- | ------ | - | ------ | --------- |  | - | --------- |  |  | ------- | ------- |  |  | - | ------ | 
|                                           |  |                |         | Less Than |        |   |        |           |  |   | More Than | 
|                                           |  | Total          |         |           | 1 Year |   |        | 1-3 Years |  |   | 3-5 Years |  |  | 5 Years |        
|                                           |  |                |         |           |        |   |        |           |  |   |           |  |  |         |        
|                                           |  | (In thousands) |        
|Notes Payable                              |  | $              | 3,021   |           |        | $ | 3,021  |           |  | $ |          |  |  | $       |        |  |  | $ |       | 
|Long-term convertible debt                 |  |                | 125,000 |           |        |   |       |           |  |   |          |  |  |         | 125,000 |  |  |   |       | 
|Interest due on long-term convertible debt |  |                | 9,843   |           |        |   | 2,812  |           |  |   | 5,625     |  |  |         | 1,406   |  |  |   |       | 
|Capital lease obligations                  |  |                | 323     |           |        |   | 245    |           |  |   | 78        |  |  |         |         |  |  |   |        | 
|Operating lease obligations                |  |                | 58,679  |           |        |   | 9,284  |           |  |   | 16,432    |  |  |         | 14,221  |  |  |   | 18,742 | 
|Purchase obligations(1)                    |  |                |        |           |        |   |       |           |  |   |          |  |  |         |        |  |  |   |       | 
|                                           |  |                |         |           |        |   |        |           |  |   |           |  |  |         |        
|Total                                      |  | $              | 196,866 |           |        | $ | 15,362 |           |  | $ | 22,135    |  |  | $       | 140,627 |  |  | $ | 18,742 | 
|                                           |  |                |         |           |        |   |        |           |  |   |           |  |  |         |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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 which 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.







| |                                 
| | --------------------------------
| | Litigation with Bouygues Telecom



45



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##### Table of Contents





| |               
| | --------------
| | Financial Risk















| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements



46



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##### Table of Contents

















47



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##### Table of Contents










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
















|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary Data.








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








|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.





48



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##### Table of Contents






























|         |                  
|-------- | -----------------
|Item 9B. | Other Information



49



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##### Table of Contents






PART III







|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant.








|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.








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










|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



50



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##### Table of Contents






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, 2004           |  |      | F-3 | 
|Consolidated Statements of Comprehensive Income for each of the
    three years in the period ended December 31, 2004 |  |      | F-4 | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                                          |  |      | F-5 | 
|Consolidated Statements of Cash Flows for each of the three
    years in the period ended December 31, 2004           |  |      | F-6 | 
|Consolidated Statements of Shareholders Equity for each of
    the three years in the period ended December 31, 2004 |  |      | F-8 | 
|Notes to Consolidated Financial Statements                                                                            |  |      | F-9 | 

2 Consolidated Financial Statement Schedule


|                                                                                                                                     |  |  |      | 
|------------------------------------------------------------------------------------------------------------------------------------ |  |  | ---- | 
|Schedule II Valuation and Qualifying Accounts and Reserves
    for each of the three years in the period ended
    December 31, 2004 |  |  | F-47 | 



3 List of Exhibits


|       |   |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------ | - | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |   | Exhibit
|       |   |        
|       | 2 | .1      |  | Agreement and Plan of Merger dated April 30, 2003 by and
    among Tekelec, Luke Acquisition Corp., Certain Stockholders of
    Santera Systems Inc., Santera Systems Inc. and Austin Ventures
    VI, L.P., as the Representative, including form of Certificate
    of Merger and of Amended and Restated Certificate of
    Incorporation of Santera Systems Inc. (schedules and certain
    exhibits are omitted from this agreement and from the other
    agreements filed herewith as Exhibits 2.5, 2.8 and 2.10,
    and Tekelec agrees to furnish supplementally a copy of any such
    schedule or exhibit to the Commission upon request)(1)
|      
|       | 2 | .2      |  | Escrow Agreement dated as of April 30, 2003 by and among
    Tekelec, Santera Systems Inc., Certain Stockholders of Santera
    Systems Inc., Austin Ventures VI, L.P., as the Representative,
    and J.P. Morgan Trust Company, National Association, as
    Escrow Agent(1)                                                                                                                                                                                                                                                                                                                                                                         
|      
|       | 2 | .3      |  | Stockholders Agreement dated as of April 30, 2003 between
    Tekelec and Santera Systems Inc.(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      
|       | 2 | .4      |  | Registration Rights Agreement dated as of April 30, 2003 by
    and among Tekelec, Santera Systems Inc., Certain Stockholders of
    Santera Systems Inc. and Austin Ventures VI, L.P., as the
    Representative(1)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      
|       | 2 | .5      |  | Agreement and Plan of Merger dated as of February 25, 2004
    by and among Tekelec, Buckaroo, Inc., Taqua, Inc. and, as
    representatives of the stockholders of Taqua, Inc., Bessemer
    Venture Partners V L.P. and Columbia Capital, L.L.C.(2) as
    amended by First Amendment thereto dated as of February 26,
    2004(3)                                                                                                                                                                                                                                                                                                                   
|      
|       | 2 | .6      |  | Indemnification Agreement dated as of February 25, 2004 and
    among Tekelec, Buckaroo, Inc., Taqua, Inc. and certain
    stockholders of Taqua, Inc.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      
|       | 2 | .7      |  | Escrow Agreement dated as of April 8, 2004 by and among
    Tekelec, Taqua, Inc. and, as representatives of the stockholders
    of Taqua, Inc., Bessemer Venture Paratners V L. P. and Columbia
    Capital, L.L.C. and U.S. Bank Association(3)                                                                                                                                                                                                                                                                                                                                                                                                      

51



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|       |    |     |         |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------ | -- | --- | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    |     | Exhibit
|       |    |     |        
|      
|       | 2  | .8  |         | Agreement and Plan of Merger dated as of September 14, 2004
    by and among Tekelec, Punkydoo Inc., VocalData, Inc. and Core
    Capital Partners, L.P., as Representative(4)                                                                                                                                                                                                                                                       
|      
|       | 2  | .9  |         | Escrow Agreement dated as of September 20, 2004 by and
    among Tekelec, Core Capital Partners, L.P., as Representative,
    and U.S. Bank National Association(4)                                                                                                                                                                                                                                                                  
|      
|       | 2  | .10 |         | Agreement and Plan of Merger dated as of August 19, 2004 by
    and among Tekelec, Buckdanger, Inc., Steleus Group, Inc. and
    certain stockholders of Steleus Group, Inc.(5), as amended by
    Amendment thereto dated as of October 1, 2004(6)                                                                                                                                                                                  
|      
|       | 2  | .11 |         | Escrow Agreement dated as of October 1, 2004 by and among
    Tekelec, U.S. Bank National Association and the former
    preferred stockholders of Steleus Group, Inc.(6)                                                                                                                                                                                                                                                            
|      
|       | 3  | .1  |         | Amended and Restated Articles of Incorporation(7)                                                                                                                                                                                                                                                                                                                                                                                    
|      
|       | 3  | .2  |         | Bylaws, as amended(8)                                                                                                                                                                                                                                                                                                                                                                                                                
|      
|       | 4  | .1  |         | Rights Agreement dated as of August 25, 1997 between the
    Registrant and U.S. Stock Transfer Corporation as Rights
    Agent(9)                                                                                                                                                                                                                                                                                                   
|      
|       | 4  | .2  |         | Indenture dated as of June 17, 2003 between Registrant and
    Deutsche Bank Trust Company Americas, including form of
    Registrants 2.25% Senior Subordinated Convertible
    Notes due 2008(10)                                                                                                                                                                                                                                 
|      
|       | 4  | .3  |         | Registration Rights Agreement dated as of June 17, 2003
    between Registrant and Morgan Stanley & Co.
    Incorporated(10)                                                                                                                                                                                                                                                                                                         
|      
|       | 10 | .1  |         | Amended and Restated Non-Employee Director Equity Incentive
    Plan(11), as amended by Amendment No. 1 thereto dated
    February 21, 1996(12)(13)                                                                                                                                                                                                                                                                                  
|      
|       | 10 | .2  |         | Form of Indemnification Agreement between the Registrant and all
    directors of the Registrant(12)(14)                                                                                                                                                                                                                                                                                                                             
|      
|       | 10 | .3  |         | Amended and Restated 1994 Stock Option Plan, including form of
    stock option agreement(15), as amended by Amendment 1 thereto
    dated May 8, 2003(10)(12)                                                                                                                                                                                                                                                                       
|      
|       | 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(16)
|      
|       | 10 | .5  |         | Officer Severance Plan, including form of Employment Separation
    Agreement(14), as amended March 8, 1999(18) and
    February 4, 2000(12)(19)                                                                                                                                                                                                                                                                                     
|      
|       | 10 | .6  |         | Amended and Restated Employee Stock Purchase Plan, including
    form of subscription agreement(12)(20)                                                                                                                                                                                                                                                                                                                              
|      
|       | 10 | .7  |         | Lease Agreement dated as of November 6, 1998 between the
    Registrant and Weeks Realty, L.P., covering certain of the
    Registrants facilities in Morrisville, North Carolina(18)
    as amended by First Amendment thereto dated May 27, 1999,
    Second Amendment thereto dated October 1, 1999, Third
    Amendment thereto dated November 30, 1999, and Fourth
    Amendment thereto dated July 19, 2000(21)               
|      
|       | 10 | .8  |         | Lease Agreement as of July 19, 2000 between the Registrant
    and Duke Construction Limited Partnership covering certain of
    our facilities in Morrisville, North Carolina(21)                                                                                                                                                                                                                                                   
|      
|       | 10 | .9  |         | Nonstatutory Stock Option Agreement dated February 1, 2001
    between the Registrant and Frederick M. Lax(12)(22)                                                                                                                                                                                                                                                                                                                   
|      
|       | 10 | .10 |         | Stock Award Agreement dated February 1, 2001 between the
    Registrant and Frederick M. Lax(12)(21)                                                                                                                                                                                                                                                                                                                                 
|      
|       | 10 | .11 |         | Amended and Restated Non-Employee Director Stock Option Plan,
    including form of stock option agreement(12)(23)                                                                                                                                                                                                                                                                                                                   
|      
|       | 10 | .12 |         | Nonstatutory Stock Option Agreement dated January 18, 2002
    between the Registrant and Lori A. Craven(12)(24)                                                                                                                                                                                                                                                                                                                     
|      
|       | 10 | .13 |         | Amended and Restated 2003 Stock Option Plan(12)(25)                                                                                                                                                                                                                                                                                                                                                                                  

52



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##### Table of Contents



|       |    |     |         |                                                                                                                                                                                                                                             
|------ | -- | --- | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    |     | Exhibit
|       |    |     |        
|      
|       | 10 | .14 |         | Consulting Agreement dated June 25, 2003 between Santera
    Systems Inc. and Martin A. Kaplan(10)(12)                                                                                                                                      
|      
|       | 10 | .15 |         | Indemnification Agreement dated as of June 27, 2003 between
    Registrant and Martin A. Kaplan(10)(12)                                                                                                                                     
|      
|       | 10 | .16 |         | 2004 Equity Incentive Plan for New Employees(8)(12), as amended
    by Amendment No. 1 thereto dated September 13, 2004
    and Amendment No. 2 thereto dated March 18,
    2005.(12)(26)                                                   
|      
|       | 10 | .17 |         | 2004 Executive Officer Bonus Plan(12)                                                                                                                                                                                                       
|      
|       | 10 | .18 |         | Credit Agreement dated December 15, 2004 between the
    Registrant and Wells Fargo Bank, National Association                                                                                                                              
|      
|       | 10 | .19 |         | Office Lease dated as of December 14, 2004 between Grenhill
    Development Corporation and the Registrant covering our proposed
    new facility in Westlake Village, California.                                                          
|      
|       | 14 | .1  |         | Code of Ethics for Chief Executive and Senior Financial
    Officers(25)                                                                                                                                                                    
|      
|       | 21 | .1  |         | Subsidiaries of the Registrant                                                                                                                                                                                                              
|      
|       | 23 | .1  |         | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                       
|      
|       | 31 | .1  |         | Certification of President, Chief Executive Officer and Acting
    Principal Financial Officer of 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 | .1  |         | Certification of Chief Executive Officer and Acting Principal
    Financial Officer of Tekelec pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                            






| |     |                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Registrants Current
    Report on Form 8-K (File No. 0-15135) filed with the
    Commission on May 7, 2003.      
|
| | (2) | Incorporated by reference to the Registrants Current
    Report on Form 8-K (File No. 0-15135) filed with the
    Commission on March 4, 2004.    
|
| | (3) | Incorporated by reference to the Registrants Current
    Report on Form 8-K filed with the Commission on
    April 23, 2004 (File No. 0-15135)    
|
| | (4) | Incorporated by reference to the Registrants Current
    Report on Form 8-K filed with the Commission on
    September 24, 2004 (File No. 0-15135)
|
| | (5) | Incorporated by reference to the Registrants Current
    Report on Form 8-K filed with the Commission on
    September 2, 2004 (File No. 0-15135) 
|
| | (6) | Incorporated by reference to the Registrants Current
    Report on Form 8-K filed with the Commission on
    October 21, 2004 (File No. 0-15135)  
|
| | (7) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 0-15135) for the quarter
    ended June 30, 1998.        
|
| | (8) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 0-15135) for the quarter
    ended September 30, 2004.   
|
| | (9) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 0-15135) for the quarter
    ended September 30, 1997.   



|     |                                                                                                                                                                               
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 0-15135) for the quarter
    ended June 30, 2003                                    
|    
|(11) | 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.
|    
|(12) | 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.                
|    
|(13) | 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.             

53



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##### Table of Contents





|     |                                                                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(14) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K (File No. 0-15135) for the year ended
    December 31, 1987.                                      
|    
|(15) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K (File No. 0-15135) for the year ended
    December 31, 2002.                                      
|    
|(16) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 0-15135) for the quarter
    ended June 30, 1988.                                    
|    
|(17) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K (File No. 0-15135) for the year ended
    December 31, 1993.                                      
|    
|(18) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K (File No. 0-15135) for the year ended
    December 31, 1998.                                      
|    
|(19) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K (File No. 0-15135) for the year ended
    December 31, 1999.                                      
|    
|(20) | Incorporated by reference to the Registrants Registration
    Statement on Form S-8 (Registration Statement
    No. 333-105879) filed with the Commission on June 5,
    2003.
|    
|(21) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K (File No. 0-15135) for the year ended
    December 31, 2000.                                      
|    
|(22) | Incorporated by reference to the Registrants Quarterly
    Report on 10-Q (File No. 0-15135) for the quarter
    ended March 31, 2001.                                        
|    
|(23) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 0-15135) for the quarter
    ended June 30, 2004.                                    
|    
|(24) | Incorporated by reference to the Registrants Quarterly
    Report on 10-Q (File No. 0-15135) for the quarter
    ended March 31, 2002.                                        
|    
|(25) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K (File No. 0-15135) for the year ended
    December 31, 2003.                                      
|    
|(26) | Incorporated by reference to the Registrants Current
    Report on Form 8-K filed with the Commission on
    March 24, 2005.                                                  

(c) Exhibits




| |                                                                                     
| | ------------------------------------------------------------------------------------
| | See the list of Exhibits under Item 15(a) 3 of this Annual
    Report on Form  10-K.

(d) Financial Statement Schedules




| |                                                                            
| | ---------------------------------------------------------------------------
| | See the Schedule under Item 15(a) 2 of this Annual Report
    on Form 10-K.

54



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##### Table of Contents






SIGNATURES






| |        
| | -------
| | TEKELEC



| |     |                     
| | --- | --------------------
| | By: | /s/ FREDERICK M. LAX

| |                                      
| | -------------------------------------
| |                                      
| | Frederick M. Lax                     
| | President and Chief Executive Officer





|                                               |  |                                                                                              |  |                |  | 
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                      |  | Title                                                                                        |  | Date          
|                                               |  |                                                                                              |  |               
|                                              
|/s/ JEAN-CLAUDE ASSCHERJean-Claude
    Asscher |  | Chairman of the Board                                                                        |  | March 30, 2005
|                                              
|/s/ FREDERICK M. LAXFrederick
    M. Lax       |  | President, Chief Executive
    Officer and Director
    (Acting Principal Financial Officer) |  | March 30, 2005
|                                              
|/s/ ROBERT V. ADAMSRobert
    V. Adams         |  | Director                                                                                     |  | March 30, 2005
|                                              
|/s/ DANIEL L. BRENNERDaniel
    L. Brenner     |  | Director                                                                                     |  | March 30, 2005
|                                              
|/s/ MARTIN A. KAPLANMartin
    A. Kaplan       |  | Director                                                                                     |  | March 30, 2005
|                                              
|/s/ MARK A. FLOYDMark
    A. Floyd             |  | Director                                                                                     |  | March 30, 2005
|                                              
|/s/ JON F. RAGERJon
    F. Rager               |  | Director                                                                                     |  | March 30, 2005
|                                              
|/s/ CHRISTINA N. GIBSONChristina
    N. Gibson |  | Assistant Vice President and Corporate Controller
    (Acting Principal Accounting Officer)  |  | March 30, 2005

55



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##### Table of Contents



Index to 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,
    2004           |  |      | F-3  | 
|Consolidated Statements of Comprehensive
    Income for each of the three years in the period ended
    December 31, 2004 |  |      | F-4  | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                                          |  |      | F-5  | 
|Consolidated Statements of Cash Flows for
    each of the three years in the period ended December 31,
    2004           |  |      | F-6  | 
|Consolidated Statements of
    Shareholders Equity for each of the three years in the
    period ended December 31, 2004 |  |      | F-8  | 
|Notes to Consolidated Financial
    Statements                                                                            |  |      | F-9  | 
|Schedule II  Valuation and
    Qualifying Accounts and Reserves                                                          |  |      | F-47 | 

56



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##### Table of Contents






Report of Independent Registered Public Accounting Firm






Consolidated financial statements and financial statement
schedule






Internal control over financial reporting


Internal Control  Integrated Framework Internal Control 
Integrated Framework




F-1



---



##### Table of Contents















F-2



---



##### Table of Contents



TEKELEC





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                        |                                                      |                                    |         |         |         |   |         |         |         |   |         |        |         |  
|----------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------ | ------- | -
|                                                                        |                                                      | For the Years Ended December 31,   |        
|                                                                        |                                                      |                                    |        
|                                                                        |                                                      | 2004                               |         |         | 2003    |   |         | 2002    |        
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|                                                                        |                                                      | (Thousands, except per-share data) |        
|Revenues                                                                |                                                      | $                                  | 397,072 |         |         | $ | 263,700 |         |         | $ | 260,341 |       
|Cost of Sales:                                                          |                                                      |                                    |         |         |         |   |         |         |         |   |         |       
|                                                                        | Cost of goods sold                                   |                                    |         | 101,451 |         |   |         | 58,697  |         |   |         | 66,536 |        
|                                                                        | Amortization of purchased technology                 |                                    |         | 9,128   |         |   |         | 11,178  |         |   |         | 10,169 |        
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|                                                                        |                                                      | Total cost of sales                |         |         | 110,579 |   |         |         | 69,875  |   |         |        | 76,705  |  
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|                                                                        |                                                      | Gross profit                       |         |         | 286,493 |   |         |         | 193,825 |   |         |        | 183,636 |  
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|Operating expenses:                                                     |                                                      |                                    |         |         |         |   |         |         |         |   |         |       
|                                                                        | Research and development                             |                                    |         | 98,192  |         |   |         | 73,328  |         |   |         | 59,746 |        
|                                                                        | Selling, general and administrative                  |                                    |         | 151,796 |         |   |         | 104,247 |         |   |         | 95,973 |        
|                                                                        | Acquired in-process research and development         |                                    |         | 14,200  |         |   |         | 2,900   |         |   |         |       |        
|                                                                        | Restructuring                                        |                                    |         | 1,666   |         |   |         |        |         |   |         |       |        
|                                                                        | Amortization of intangible assets                    |                                    |         | 2,505   |         |   |         | 1,900   |         |   |         | 1,600  |        
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|                                                                        |                                                      | Total operating expenses           |         |         | 268,359 |   |         |         | 182,375 |   |         |        | 157,319 |  
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|                                                                        |                                                      | Income from operations             |         |         | 18,134  |   |         |         | 11,450  |   |         |        | 26,317  |  
|Interest and other income (expense):                                    |                                                      |                                    |         |         |         |   |         |         |         |   |         |       
|                                                                        | Interest income                                      |                                    |         | 4,697   |         |   |         | 6,259   |         |   |         | 6,685  |        
|                                                                        | Interest expense                                     |                                    |         | (4,519  | )       |   |         | (8,828  | )       |   |         | (9,201 | )      
|                                                                        | Gain on sale of Catapult Stock                       |                                    |         | 2,186   |         |   |         |        |         |   |         |       |        
|                                                                        | Gain on sale of investment in privately held company |                                    |         | 7,877   |         |   |         |        |         |   |         |       |        
|                                                                        | Gain on warrants in privately held company           |                                    |         | 20,321  |         |   |         |        |         |   |         |       |        
|                                                                        | Other, net                                           |                                    |         | 283     |         |   |         | 86      |         |   |         | 253    |        
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|                                                                        |                                                      | Total other income (expense)       |         |         | 30,845  |   |         |         | (2,483  | ) |         |        | (2,263  | )
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|Income from continuing operations before provision for income
    taxes |                                                      |                                    | 48,979  |         |         |   | 8,967   |         |         |   | 24,054  |       
|                                                                        | Provision for income taxes                           |                                    |         | 33,325  |         |   |         | 13,600  |         |   |         | 8,140  |        
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|Income (loss) before minority interest                                  |                                                      |                                    | 15,654  |         |         |   | (4,633  | )       |         |   | 15,914  |       
|Minority interest                                                       |                                                      |                                    | 20,719  |         |         |   | 19,792  |         |         |   |        |       
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|Income from continuing operations                                       |                                                      |                                    | 36,373  |         |         |   | 15,159  |         |         |   | 15,914  |       
|Loss from discontinued operation, net of income taxes                   |                                                      |                                    |        |         |         |   |        |         |         |   | (3,308  | )     
|Gain on sale of discontinued operation, net of income taxes             |                                                      |                                    |        |         |         |   | 3,293   |         |         |   | 28,312  |       
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|                                                                        |                                                      | Net income                         |         | $       | 36,373  |   |         | $       | 18,452  |   |         | $      | 40,918  |  
|                                                                        |                                                      |                                    |         |         |         |   |         |         |        
|Earnings per share from continuing operations:                          |                                                      |                                    |         |         |         |   |         |         |         |   |         |       
|                                                                        | Basic                                                |                                    | $       | 0.58    |         |   | $       | 0.25    |         |   | $       | 0.26   |        
|                                                                        | Diluted                                              |                                    |         | 0.53    |         |   |         | 0.24    |         |   |         | 0.26   |        
|Loss per share from discontinued operation:                             |                                                      |                                    |         |         |         |   |         |         |         |   |         |       
|                                                                        | Basic                                                |                                    | $       |        |         |   | $       |        |         |   | $       | (0.05  | )      
|                                                                        | Diluted                                              |                                    |         |        |         |   |         |        |         |   |         | (0.05  | )      
|Earnings per share from gain on sale of discontinued
    operation:     |                                                      |                                    |         |         |         |   |         |         |         |   |         |       
|                                                                        | Basic                                                |                                    | $       |        |         |   | $       | 0.05    |         |   | $       | 0.47   |        
|                                                                        | Diluted                                              |                                    |         |        |         |   |         | 0.05    |         |   |         | 0.46   |        
|Earnings per share:                                                     |                                                      |                                    |         |         |         |   |         |         |         |   |         |       
|                                                                        | Basic                                                |                                    | $       | 0.58    |         |   | $       | 0.30    |         |   | $       | 0.68   |        
|                                                                        | Diluted                                              |                                    |         | 0.53    |         |   |         | 0.29    |         |   |         | 0.67   |        
|Weighted average number of shares outstanding:                          |                                                      |                                    |         |         |         |   |         |         |         |   |         |       
|                                                                        | Basic                                                |                                    |         | 63,131  |         |   |         | 61,163  |         |   |         | 60,358 |        
|                                                                        | Diluted                                              |                                    |         | 72,683  |         |   |         | 62,911  |         |   |         | 61,386 |        



F-3



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##### Table of Contents



TEKELEC





CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


|                            |                                                             |                                  |        |      |      |   |        |      |  |   |        |       | 
|--------------------------- | ----------------------------------------------------------- | -------------------------------- | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ----- | 
|                            |                                                             | For the Years Ended December 31, |       
|                            |                                                             |                                  |       
|                            |                                                             | 2004                             |        |      | 2003 |   |        | 2002 | 
|                            |                                                             |                                  |        |      |      |   |        |      | 
|                            |                                                             | (Thousands)                      |       
|Net income                  |                                                             | $                                | 36,373 |      |      | $ | 18,452 |      |  | $ | 40,918 |      
|Other comprehensive income: |                                                             |                                  |        |      |      |   |        |      |  |   |        |      
|                            | Foreign currency translation adjustments                    |                                  |        | 18   |      |   |        | 78   |  |   |        | 1,836 | 
|                            | Net unrealized (loss) gain on available-for-sale securities |                                  |        | (472 | )    |   |        | 643  |  |   |        |      | 
|                            |                                                             |                                  |        |      |      |   |        |      | 
|Comprehensive income        |                                                             | $                                | 35,919 |      |      | $ | 19,173 |      |  | $ | 42,754 |      
|                            |                                                             |                                  |        |      |      |   |        |      | 



F-4



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##### Table of Contents



TEKELEC





CONSOLIDATED BALANCE SHEETS


|                                                                 |                                                                                                                                               |                                            |         |         |         |  |         |         |         | 
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                                                 |                                                                                                                                               | December 31,                               |        
|                                                                 |                                                                                                                                               |                                            |        
|                                                                 |                                                                                                                                               | 2004                                       |         |         | 2003    | 
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|                                                                 |                                                                                                                                               | (Thousands, except                         |        
|                                                                 |                                                                                                                                               | share data)                                |        
|ASSETS                                                          
|Current assets:                                                  |                                                                                                                                               |                                            |         |         |         |  |         |        
|                                                                 | Cash and cash equivalents                                                                                                                     |                                            | $       | 48,925  |         |  | $       | 45,261  |        
|                                                                 | Short-term investments, at fair value                                                                                                         |                                            |         | 134,435 |         |  |         | 83,800  |        
|                                                                 | Accounts receivable, less allowances of $4,847and
    $2,619, respectively                                                                    |                                            |         | 107,850 |         |  |         | 52,781  |        
|                                                                 | Convertible notes receivable ($17,300 principal amount)                                                                                       |                                            |         |        |         |  |         | 17,580  |        
|                                                                 | Inventories                                                                                                                                   |                                            |         | 33,654  |         |  |         | 21,434  |        
|                                                                 | Deferred income taxes, net                                                                                                                    |                                            |         | 15,804  |         |  |         | 4,958   |        
|                                                                 | Prepaid expenses and other current assets                                                                                                     |                                            |         | 44,639  |         |  |         | 22,088  |        
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|                                                                 |                                                                                                                                               | Total current assets                       |         |         | 385,307 |  |         |         | 247,902 | 
|Long-term investments, at fair value                             |                                                                                                                                               |                                            | 93,622  |         |         |  | 210,298 |        
|Property and equipment, net                                      |                                                                                                                                               |                                            | 30,617  |         |         |  | 22,172  |        
|Investments in privately-held companies                          |                                                                                                                                               |                                            | 7,322   |         |         |  | 17,322  |        
|Deferred income taxes                                            |                                                                                                                                               |                                            | 45,748  |         |         |  | 7,876   |        
|Other assets                                                     |                                                                                                                                               |                                            | 6,757   |         |         |  | 6,342   |        
|Goodwill                                                         |                                                                                                                                               |                                            | 128,732 |         |         |  | 68,903  |        
|Intangible assets, net                                           |                                                                                                                                               |                                            | 83,538  |         |         |  | 34,118  |        
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|                                                                 |                                                                                                                                               | Total assets                               |         | $       | 781,643 |  |         | $       | 614,933 | 
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|                                                                
|LIABILITIES AND SHAREHOLDERS EQUITY                            
|Current liabilities:                                             |                                                                                                                                               |                                            |         |         |         |  |         |        
|                                                                 | Trade accounts payable                                                                                                                        |                                            | $       | 35,316  |         |  | $       | 8,974   |        
|                                                                 | Accrued expenses                                                                                                                              |                                            |         | 30,417  |         |  |         | 30,812  |        
|                                                                 | Accrued payroll and related expenses                                                                                                          |                                            |         | 23,478  |         |  |         | 17,967  |        
|                                                                 | Short-term notes and current portion of notes payable                                                                                         |                                            |         | 3,266   |         |  |         | 3,934   |        
|                                                                 | Current portion of deferred revenues                                                                                                          |                                            |         | 92,182  |         |  |         | 50,105  |        
|                                                                 | Income taxes payable                                                                                                                          |                                            |         | 646     |         |  |         | 1,071   |        
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|                                                                 |                                                                                                                                               | Total current liabilities                  |         |         | 185,305 |  |         |         | 112,863 | 
|Notes payable                                                    |                                                                                                                                               |                                            | 78      |         |         |  | 2,574   |        
|Long-term convertible debt                                       |                                                                                                                                               |                                            | 125,000 |         |         |  | 125,000 |        
|Deferred income taxes                                            |                                                                                                                                               |                                            | 19,586  |         |         |  | 790     |        
|Long-term portion of deferred revenues                           |                                                                                                                                               |                                            | 2,187   |         |         |  | 3,687   |        
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|                                                                 |                                                                                                                                               | Total liabilities                          |         |         | 332,156 |  |         |         | 244,914 | 
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|Minority interest                                                |                                                                                                                                               |                                            | 20,489  |         |         |  | 41,208  |        
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|Commitments and Contingencies (Note Q)
    Shareholders equity: |                                                                                                                                               |                                            |         |         |         |  |         |        
|                                                                 | Common stock, without par value, 200,000,000 shares
    authorized; 65,543,767 and 61,625,518 shares issued and
    outstanding, respectively |                                            |         | 258,656 |         |  |         | 189,908 |        
|                                                                 | Deferred stock-based compensation                                                                                                             |                                            |         | (4,480  | )       |  |         |        |        
|                                                                 | Retained earnings                                                                                                                             |                                            |         | 174,268 |         |  |         | 137,895 |        
|                                                                 | Accumulated other comprehensive income                                                                                                        |                                            |         | 554     |         |  |         | 1,008   |        
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|                                                                 |                                                                                                                                               | Total shareholders equity                 |         |         | 428,998 |  |         |         | 328,811 | 
|                                                                 |                                                                                                                                               |                                            |         |         |         | 
|                                                                 |                                                                                                                                               | Total liabilities and shareholders equity |         | $       | 781,643 |  |         | $       | 614,933 | 
|                                                                 |                                                                                                                                               |                                            |         |         |         | 



F-5



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##### Table of Contents






TEKELEC


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                      |                                                                                              |                                           |                                           |          |         |         |   |          |        |          |   |          |         |         |  
|------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | -------- | ------- | ------- | - | -------- | ------ | -------- | - | -------- | ------- | ------- | -
|                                      |                                                                                              | For the Years Ended December 31,          |                                          
|                                      |                                                                                              |                                           |                                          
|                                      |                                                                                              | 2004                                      |                                           |          | 2003    |         |   | 2002     |       
|                                      |                                                                                              |                                           |                                           |          |         |         |   |          |       
|                                      |                                                                                              | (Thousands)                               |                                          
|Cash flows from operating activities: |                                                                                              |                                           |                                           |          |         |         |   |          |        |          |   |         
|                                      | Net income                                                                                   |                                           | $                                         | 36,373   |         |         | $ | 18,452   |        |          | $ | 40,918   |        
|                                      | Adjustments to reconcile net income to net cash provided by
    operating activities:        |                                           |                                           |          |         |         |   |          |        |          |   |          |        
|                                      | Gain on sale of Catapult Stock                                                               |                                           |                                           | (2,186   | )       |         |   |         |        |          |   |         |        
|                                      | Gain on warrants in privately-held company                                                   |                                           |                                           | (20,321  | )       |         |   |         |        |          |   |         |        
|                                      | Gain on sale of investments in privately-held company                                        |                                           |                                           | (7,877   | )       |         |   |         |        |          |   |         |        
|                                      | Minority interest                                                                            |                                           |                                           | (20,719  | )       |         |   | (19,792  | )      |          |   |         |        
|                                      | Restructuring accrual                                                                        |                                           |                                           | (271     | )       |         |   |         |        |          |   |         |        
|                                      | Net gain on sale of discontinued operation                                                   |                                           |                                           |         |         |         |   | (3,293   | )      |          |   | (28,312  | )      
|                                      | Net loss from discontinued operation                                                         |                                           |                                           |         |         |         |   |         |        |          |   | 3,308    |        
|                                      | Allowance for doubtful accounts                                                              |                                           |                                           | 820      |         |         |   | 415      |        |          |   | 950      |        
|                                      | Inventory write downs                                                                        |                                           |                                           | 2,249    |         |         |   | 1,558    |        |          |   | 6,177    |        
|                                      | Depreciation                                                                                 |                                           |                                           | 14,986   |         |         |   | 14,493   |        |          |   | 15,618   |        
|                                      | Amortization                                                                                 |                                           |                                           | 12,460   |         |         |   | 14,147   |        |          |   | 11,661   |        
|                                      | Acquired in-process research and development                                                 |                                           |                                           | 14,200   |         |         |   | 2,900    |        |          |   |         |        
|                                      | Amortization of deferred financing costs                                                     |                                           |                                           | 1,112    |         |         |   | 2,121    |        |          |   | 819      |        
|                                      | Convertible debt accretion                                                                   |                                           |                                           | 279      |         |         |   | 2,335    |        |          |   | 3,981    |        
|                                      | Deferred income taxes                                                                        |                                           |                                           | 274      |         |         |   | 501      |        |          |   | (3,908   | )      
|                                      | Stock-based compensation                                                                     |                                           |                                           | 2,143    |         |         |   | 459      |        |          |   | 5,612    |        
|                                      | Tax benefit related to stock options exercised                                               |                                           |                                           | 9,750    |         |         |   | 1,213    |        |          |   | 929      |        
|                                      | Changes in operating assets and liabilities (net of business
    disposal and acquisitions): |                                           |                                           |          |         |         |   |          |        |          |   |          |        
|                                      |                                                                                              | Accounts and notes receivable             |                                           |          | (42,521 | )       |   |          | (7,342 | )        |   |          | 10,188  |        
|                                      |                                                                                              | Inventories                               |                                           |          | (11,510 | )       |   |          | (7,027 | )        |   |          | (1,955  | )      
|                                      |                                                                                              | Prepaid expenses and other current assets |                                           |          | (19,855 | )       |   |          | (9,644 | )        |   |          | 3,315   |        
|                                      |                                                                                              | Trade accounts payable                    |                                           |          | 20,676  |         |   |          | (957   | )        |   |          | (7,890  | )      
|                                      |                                                                                              | Accrued expenses                          |                                           |          | (17,728 | )       |   |          | (5,908 | )        |   |          | 8,311   |        
|                                      |                                                                                              | Accrued payroll and related expenses      |                                           |          | 4,139   |         |   |          | 6,600  |          |   |          | 3,311   |        
|                                      |                                                                                              | Deferred revenues                         |                                           |          | 36,525  |         |   |          | 16,192 |          |   |          | (13,861 | )      
|                                      |                                                                                              | Income taxes payable                      |                                           |          | 8,160   |         |   |          | (115   | )        |   |          | (12,791 | )      
|                                      |                                                                                              |                                           |                                           |          |         |         |   |          |       
|                                      |                                                                                              |                                           | Total adjustments                         |          |         | (15,215 | ) |          |        | 8,856    |   |          |         | 5,463   |  
|                                      |                                                                                              |                                           |                                           |          |         |         |   |          |       
|                                      |                                                                                              |                                           | Net cash provided by operating activities |          |         | 21,158  |   |          |        | 27,308   |   |          |         | 46,381  |  
|                                      |                                                                                              |                                           |                                           |          |         |         |   |          |       
|Cash flows from investing activities: |                                                                                              |                                           |                                           |          |         |         |   |          |        |          |   |         
|                                      | Proceeds from maturity of available-for-sale securities                                      |                                           |                                           | 498,024  |         |         |   | 302,036  |        |          |   | 437,067  |        
|                                      | Purchase of available-for-sale securities                                                    |                                           |                                           | (406,712 | )       |         |   | (407,297 | )      |          |   | (486,453 | )      
|                                      | Purchase of property and equipment                                                           |                                           |                                           | (18,278  | )       |         |   | (6,509   | )      |          |   | (5,500   | )      
|                                      | Net cash acquired from acquisition of majority interest in
    Santera                       |                                           |                                           |         |         |         |   | 12,335   |        |          |   |         |        
|                                      | Cash paid for Taqua, net of cash acquired                                                    |                                           |                                           | (86,994  | )       |         |   |         |        |          |   |         |        
|                                      | Cash paid for VocalData, net of cash acquired                                                |                                           |                                           | (13,222  | )       |         |   |         |        |          |   |         |        
|                                      | Cash paid for Steleus, net of cash acquired                                                  |                                           |                                           | (52,484  | )       |         |   |         |        |          |   |         |        
|                                      | Investments in privately-held companies                                                      |                                           |                                           |         |         |         |   | (797     | )      |          |   |         |        
|                                      | Proceeds from sale of Catapult stock                                                         |                                           |                                           | 19,486   |         |         |   |         |        |          |   |         |        
|                                      | Purchase of technology                                                                       |                                           |                                           | (662     | )       |         |   | (3,166   | )      |          |   | (1,089   | )      
|                                      | Proceeds from sale and warrants of privately-held companies                                  |                                           |                                           | 17,877   |         |         |   |         |        |          |   |         |        
|                                      | Proceeds from sale of discontinued operation                                                 |                                           |                                           |         |         |         |   | 3,293    |        |          |   | 37,883   |        
|                                      | Decrease (Increase) in other assets                                                          |                                           |                                           | (1,878   | )       |         |   | (602     | )      |          |   | 177      |        
|                                      |                                                                                              |                                           |                                           |          |         |         |   |          |       
|                                      |                                                                                              |                                           | Net cash used in investing activities     |          |         | (44,843 | ) |          |        | (100,707 | ) |          |         | (17,915 | )
|                                      |                                                                                              |                                           |                                           |          |         |         |   |          |       

F-6



---



##### Table of Contents



TEKELEC


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)


|                                                                       |                                            |                                                      |        |        |        |   |         |          |         |   |         |        |        | 
|---------------------------------------------------------------------- | ------------------------------------------ | ---------------------------------------------------- | ------ | ------ | ------ | - | ------- | -------- | ------- | - | ------- | ------ | ------ | 
|                                                                       |                                            | For the Years Ended December 31,                     |       
|                                                                       |                                            |                                                      |       
|                                                                       |                                            | 2004                                                 |        |        | 2003   |   |         | 2002     |        
|                                                                       |                                            |                                                      |        |        |        |   |         |          |        
|                                                                       |                                            | (Thousands)                                          |       
|Cash flows from financing activities:                                  |                                            |                                                      |        |        |        |   |         |          |         |   |         |       
|                                                                       | Payments on retirement of convertible debt |                                                      |        |       |        |   |         | (129,307 | )       |   |         |       |       
|                                                                       | Proceeds from issuance of convertible debt |                                                      |        |       |        |   |         | 125,000  |         |   |         |       |       
|                                                                       | Debt issuance costs                        |                                                      |        |       |        |   |         | (3,816   | )       |   |         |       |       
|                                                                       | Payments on notes payable                  |                                                      |        | (8,894 | )      |   |         | (1,224   | )       |   |         |       |       
|                                                                       | Proceeds from issuance of common stock     |                                                      |        | 35,851 |        |   |         | 5,959    |         |   |         | 3,890  |       
|                                                                       |                                            |                                                      |        |        |        |   |         |          |        
|                                                                       |                                            | Net cash provided by (used in) financing activities  |        |        | 26,957 |   |         |          | (3,388  | ) |         |        | 3,890  | 
|                                                                       |                                            |                                                      |        |        |        |   |         |          |        
|Effect of exchange rate changes on cash                                |                                            |                                                      | 392    |        |        |   | 412     |          |         |   | 125     |       
|                                                                       |                                            |                                                      |        |        |        |   |         |          |        
|Net cash flows from discontinued operation                             |                                            |                                                      |       |        |        |   |        |          |         |   | 2,007   |       
|                                                                       |                                            |                                                      |        |        |        |   |         |          |        
|                                                                       |                                            | Net increase (decrease) in cash and cash equivalents |        |        | 3,664  |   |         |          | (76,375 | ) |         |        | 34,488 | 
|                                                                       |                                            |                                                      |        |        |        |   |         |          |        
|Cash and cash equivalents at beginning of the year                     |                                            |                                                      | 45,261 |        |        |   | 121,636 |          |         |   | 87,148  |       
|                                                                       |                                            |                                                      |        |        |        |   |         |          |        
|Cash and cash equivalents at end of the year                           |                                            | $                                                    | 48,925 |        |        | $ | 45,261  |          |         | $ | 121,636 |       
|                                                                       |                                            |                                                      |        |        |        |   |         |          |        
|Supplemental disclosure of cash flow information:                      |                                            |                                                      |        |        |        |   |         |          |         |   |         |       
|Cash paid during the year for:                                         |                                            |                                                      |        |        |        |   |         |          |         |   |         |       
|                                                                       | Interest                                   |                                                      | $      | 3,115  |        |   | $       | 17,417   |         |   | $       | 4,396  |       
|                                                                       | Income taxes                               |                                                      |        | 22,294 |        |   |         | 11,034   |         |   |         | 15,093 |       
|Assets and Liabilities recognized in connection with
    acquisitions: |                                            |                                                      |        |        |        |   |         |          |         |   |         |       
|                                                                       | Accounts receivable                        |                                                      | $      | 14,237 |        |   | $       | 2,173    |         |   |         |       |       
|                                                                       | Other current assets                       |                                                      |        | 12,443 |        |   |         | 18,239   |         |   |         |       |       
|                                                                       | Investments                                |                                                      |        | 485    |        |   |         |         |         |   |         |       |       
|                                                                       | Property and Equipment                     |                                                      |        | 6,051  |        |   |         | 8,754    |         |   |         |       |       
|                                                                       | Other Assets                               |                                                      |        | 476    |        |   |         | 1,861    |         |   |         |       |       
|                                                                       | Deferred income tax asset                  |                                                      |        | 59,098 |        |   |         | 1,731    |         |   |         |       |       
|                                                                       | Intangibles                                |                                                      |        | 74,590 |        |   |         | 30,600   |         |   |         |       |       
|                                                                       | Goodwill                                   |                                                      |        | 60,460 |        |   |         | 24,104   |         |   |         |       |       
|                                                                       | Accounts payable                           |                                                      |        | 5,644  |        |   |         | 3,250    |         |   |         |       |       
|                                                                       | Other current liabilities                  |                                                      |        | 24,651 |        |   |         | 18,602   |         |   |         |       |       
|                                                                       | Other liabilities                          |                                                      |        | 1,301  |        |   |         | 5,115    |         |   |         |       |       
|                                                                       | Deferred income tax liability              |                                                      |        | 21,601 |        |   |         | 505      |         |   |         |       |       



F-7



---



##### Table of Contents



TEKELEC





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                           |                                                                                                                 |                                |        |       |          |   |             |              |             |          |          |        |               |               |         |               |        |   |        |       |   |   |         |        |  
|-------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------ | ----- | -------- | - | ----------- | ------------ | ----------- | -------- | -------- | ------ | ------------- | ------------- | ------- | ------------- | ------ | - | ------ | ----- | - | - | ------- | ------ | -
|                           |                                                                                                                 | Common Stock                   |        |       |          |   |             |              | Accumulated |          |          |       
|                           |                                                                                                                 |                                |        |       | Deferred |   |             |              |             | Other    |          |        | Total         |              
|                           |                                                                                                                 | Number                         |        |       |          |   | Stock-Based |              |             | Retained |          |        | Comprehensive |               |         | Shareholders |       
|                           |                                                                                                                 | of Shares                      |        |       | Amount   |   |             | Compensation |             |          | Earnings |        |               | Income (Loss) |         |               | Equity |  
|                           |                                                                                                                 |                                |        |       |          |   |             |              |             |          |          |        |               |               |         |               |        |  
|                           |                                                                                                                 | (Thousands, except share data) |       
|Balance, December 31, 2001 |                                                                                                                 |                                | 60,107 |       |          | $ | 171,846     |              |             | $        |         |        |               | $             | 78,525  |               |        | $ | (1,549 | )     |   | $ | 248,822 |       
|                           | Exercise of stock options and warrants and issuance of shares
    under employee stock purchase plan            |                                |        | 786   |          |   |             | 3,890        |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 3,890  |  
|                           | Compensation related to vesting of restricted stock                                                             |                                |        |      |          |   |             | 328          |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 328    |  
|                           | Stock-based compensation charge for stock option modification                                                   |                                |        |      |          |   |             | 5,284        |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 5,284  |  
|                           | Stock option tax benefits                                                                                       |                                |        |      |          |   |             | 929          |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 929    |  
|                           | Translation adjustment                                                                                          |                                |        |      |          |   |             |             |             |          |          |       |               |               |         |              |        |   |        | 1,836 |   |   |         | 1,836  |  
|                           | Net income                                                                                                      |                                |        |      |          |   |             |             |             |          |          |       |               |               |         | 40,918        |        |   |        |      |   |   |         | 40,918 |  
|                           |                                                                                                                 |                                |        |       |          |   |             |              |             |          |          |        |               |               |         |               |        |  
|Balance, December 31, 2002 |                                                                                                                 |                                | 60,893 |       |          | $ | 182,277     |              |             | $        |         |        |               | $             | 119,443 |               |        | $ | 287    |       |   | $ | 302,007 |       
|                           |                                                                                                                 |                                |        |       |          |   |             |              |             |          |          |        |               |               |         |               |        |  
|                           | Exercise of stock options and warrants and issuance of shares
    under employee stock purchase plan            |                                |        | 733   |          |   |             | 5,959        |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 5,959  |  
|                           | Compensation related to vesting of restricted stock                                                             |                                |        |      |          |   |             | 459          |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 459    |  
|                           | Stock option tax benefits                                                                                       |                                |        |      |          |   |             | 1,213        |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 1,213  |  
|                           | Net unrealized gain on available-for-sale securities, net of tax
    benefit                                    |                                |        |      |          |   |             |             |             |          |          |       |               |               |         |              |        |   |        | 643   |   |   |         | 643    |  
|                           | Translation adjustment                                                                                          |                                |        |      |          |   |             |             |             |          |          |       |               |               |         |              |        |   |        | 78    |   |   |         | 78     |  
|                           | Net income                                                                                                      |                                |        |      |          |   |             |             |             |          |          |       |               |               |         | 18,452        |        |   |        |      |   |   |         | 18,452 |  
|                           |                                                                                                                 |                                |        |       |          |   |             |              |             |          |          |        |               |               |         |               |        |  
|Balance, December 31, 2003 |                                                                                                                 |                                | 61,626 |       |          | $ | 189,908     |              |             | $        |         |        |               | $             | 137,895 |               |        | $ | 1,008  |       |   | $ | 328,811 |       
|                           |                                                                                                                 |                                |        |       |          |   |             |              |             |          |          |        |               |               |         |               |        |  
|                           | Exercise of stock options and warrants and issuance of shares
    under employee stock purchase plan            |                                |        | 3,131 |          |   |             | 35,851       |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 35,851 |  
|                           | Deferred stock-based compensation on stock options assumed in
    acquisitions and issuance of restricted stock |                                |        |      |          |   |             | 6,244        |             |          |          | (6,244 | )             |               |         |              |        |   |        |      |   |   |         |       |  
|                           | Amortization of deferred stock-based compensation related to
    vesting of restricted stock and stock options  |                                |        |      |          |   |             | 286          |             |          |          | 1,764  |               |               |         |              |        |   |        |      |   |   |         | 2,050  |  
|                           | Stock option tax benefits                                                                                       |                                |        |      |          |   |             | 9,750        |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 9,750  |  
|                           | Vested stock options assumed in the Taqua acquisition                                                           |                                |        |      |          |   |             | 3,524        |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 3,524  |  
|                           | Stock options granted to Santera advisory board                                                                 |                                |        | 7     |          |   |             | 93           |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 93     |  
|                           | Shares issued related to VocalData acquisition                                                                  |                                |        | 780   |          |   |             | 13,000       |             |          |          |       |               |               |         |              |        |   |        |      |   |   |         | 13,000 |  
|                           | Net unrealized loss on available-for-sale securities, net of tax
    benefit                                    |                                |        |      |          |   |             |             |             |          |          |       |               |               |         |              |        |   |        | (472  | ) |   |         | (472   | )
|                           | Translation adjustment                                                                                          |                                |        |      |          |   |             |             |             |          |          |       |               |               |         |              |        |   |        | 18    |   |   |         | 18     |  
|                           | Net income                                                                                                      |                                |        |      |          |   |             |             |             |          |          |       |               |               |         | 36,373        |        |   |        |      |   |   |         | 36,373 |  
|                           |                                                                                                                 |                                |        |       |          |   |             |              |             |          |          |        |               |               |         |               |        |  
|Balance, December 31, 2004 |                                                                                                                 |                                | 65,544 |       |          | $ | 258,656     |              |             | $        | (4,480   | )      |               | $             | 174,268 |               |        | $ | 554    |       |   | $ | 428,998 |       
|                           |                                                                                                                 |                                |        |       |          |   |             |              |             |          |          |        |               |               |         |               |        |  



F-8



---



##### Table of Contents



TEKELEC





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note A  Summary of Significant Accounting
Policies




| |         
| | --------
| | Business





| |                                             
| | --------------------------------------------
| | Principles of Consolidation and Presentation





| |                                                  
| | -------------------------------------------------
| | Use of Estimates and Critical Accounting Policies







| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                    
| | -------------------
| | Accounts Receivable





F-9



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                |  |                                  |       |  |      |   |        |      |  |   |        |  
|------------------------------- |  | -------------------------------- | ----- |  | ---- | - | ------ | ---- |  | - | ------ | -
|                                |  | For the Years Ended December 31, |      
|                                |  |                                  |      
|                                |  | 2004                             |       |  | 2003 |   |        | 2002 | 
|                                |  |                                  |       |  |      |   |        |      | 
|                                |  | (Thousands)                      |      
|Balance at beginning of period  |  | $                                | 2,619 |  |      | $ | 4,860  |      |  | $ | 5,349  |  
|Current year provision          |  |                                  | 820   |  |      |   | 415    |      |  |   | 950    |  
|Write-offs net of recoveries(1) |  |                                  | 1,408 |  |      |   | (2,656 | )    |  |   | (1,439 | )
|                                |  |                                  |       |  |      |   |        |      | 
|Balance at end of period        |  | $                                | 4,847 |  |      | $ | 2,619  |      |  | $ | 4,860  |  
|                                |  |                                  |       |  |      |   |        |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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. 2003 includes an
    increase in the allowance for doubtful accounts of $527 as a
    result of the acquisition of a majority interest in Santera.
    2002 includes a decrease in the allowance for doubtful accounts
    of $782 related to the disposition of NDD.



| |            
| | -----------
| | Investments







| |            
| | -----------
| | Inventories





| |                       
| | ----------------------
| | Property and Equipment



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

F-10



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                    
| | -----------------------------------
| | Software Developed for Internal Use





| |                           
| | --------------------------
| | Software Development Costs





| |                                                            
| | -----------------------------------------------------------
| | Goodwill, Intangible Assets and Other Long-Lived
    Assets









F-11



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                       
| | ----------------------
| | Product Warranty Costs





|                                      |  |                                  |        |   |      |   |        |      |  |   |        |  
|------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                      |  | For the Years Ended December 31, |       
|                                      |  |                                  |       
|                                      |  | 2004                             |        |   | 2003 |   |        | 2002 | 
|                                      |  |                                  |        |   |      |   |        |      | 
|Balance at beginning of period        |  | $                                | 5,059  |   |      | $ | 5,271  |      |  | $ | 5,462  |  
|Current year provision                |  |                                  | 618    |   |      |   | 1,396  |      |  |   | 3,617  |  
|Expenditures and other adjustments(1) |  |                                  | (1,648 | ) |      |   | (1,608 | )    |  |   | (3,808 | )
|                                      |  |                                  |        |   |      |   |        |      | 
|Balance at end of period              |  | $                                | 4,029  |   |      | $ | 5,059  |      |  | $ | 5,271  |  
|                                      |  |                                  |        |   |      |   |        |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2004 includes an increase in warranty reserve of $1,121 and $50
    as a result of the acquisitions of Taqua and VocalData,
    respectively. 2003 includes an increase in warranty reserve of
    $438 as a result of the acquisition of a majority interest in
    Santera. 2002 includes a decrease in warranty reserves of $442
    related to the disposition of NDD.



| |                    
| | -------------------
| | Revenue Recognition



F-12



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |             
| | ------------
| | Income Taxes





| |            
| | -----------
| | Advertising





| |                         
| | ------------------------
| | Stock-Based Compensation









F-13



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                      |                                                                                                                              | For the Years Ended December 31,   |  
|                                      |                                                                                                                              |                                    |  
|                                      |                                                                                                                              | 2004                               |   |         | 2003 |  |   | 2002    |  
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  
|                                      |                                                                                                                              | (Thousands, except per share data) |  
|Stock-based compensation, net of tax: |                                                                                                                              |                                    |   |         |      |  |   |         |   |  |   |        
|                                      | As reported                                                                                                                  |                                    | $ | 1,404   |      |  | $ | 303     |   |  | $ | 3,648   |  
|                                      | Additional stock-based compensation expense determined under the
    fair value method, net of tax                           |                                    |   | 18,181  |      |  |   | 16,810  |   |  |   | 14,891  |  
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  
|                                      | Pro forma                                                                                                                    |                                    | $ | 19,585  |      |  | $ | 17,113  |   |  | $ | 18,539  |  
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  
|Net income:                           |                                                                                                                              |                                    |   |         |      |  |   |         |   |  |   |        
|                                      | As reported                                                                                                                  |                                    | $ | 36,373  |      |  | $ | 18,452  |   |  | $ | 40,918  |  
|                                      | Less: additional stock-based compensation expense determined
    under the fair value method, net of tax                     |                                    |   | (18,181 | )    |  |   | (16,810 | ) |  |   | (14,891 | )
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  
|                                      | Pro forma                                                                                                                    |                                    | $ | 18,192  |      |  | $ | 1,642   |   |  | $ | 26,027  |  
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  
|Earnings per share-basic:             |                                                                                                                              |                                    |   |         |      |  |   |         |   |  |   |        
|                                      | As reported                                                                                                                  |                                    | $ | 0.58    |      |  | $ | 0.30    |   |  | $ | 0.68    |  
|                                      | Less: per share effect of additional stock-based compensation
    expense determined under the fair value method, net of tax |                                    |   | (0.29   | )    |  |   | (0.28   | ) |  |   | (0.25   | )
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  
|                                      | Pro forma                                                                                                                    |                                    | $ | 0.29    |      |  | $ | 0.02    |   |  | $ | 0.43    |  
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  
|Earnings per share-diluted:           |                                                                                                                              |                                    |   |         |      |  |   |         |   |  |   |        
|                                      | As reported                                                                                                                  |                                    | $ | 0.53    |      |  | $ | 0.29    |   |  | $ | 0.67    |  
|                                      | Less: per share effect of additional stock-based compensation
    expense determined under the fair value method, net of tax |                                    |   | (0.26   | )    |  |   | (0.27   | ) |  |   | (0.25   | )
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  
|                                      | Pro forma                                                                                                                    |                                    | $ | 0.27    |      |  | $ | 0.02    |   |  | $ | 0.42    |  
|                                      |                                                                                                                              |                                    |   |         |      |  |   |         |  





| |                 
| | ----------------
| | Foreign Currency

Foreign Currency Translation


F-14



---



##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                   
| | ------------------
| | Earnings Per Share





| |                     
| | --------------------
| | Comprehensive Income



Segment Information






| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements







F-15



---



##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












Note B  Acquisitions




F-16



---



##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Steleus Group Inc.












F-17



---



##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                            |                                                                         |             |         |        | 
|------------------------------------------- | ----------------------------------------------------------------------- | ----------- | ------- | ------ | 
|                                            |                                                                         | (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 |                                                                         |             | (1,757  | )     
|Add: Estimated deferred tax liability       |                                                                         |             | 8,599   |       
|Less: Estimated deferred tax assets         |                                                                         |             | (15,641 | )     
|                                            |                                                                         |             |        
|                                            | Total fair value step-up in Steleus                                     |             | $       | 49,804 | 
|                                            |                                                                         |             |        





|                                    |                                 |             |        |        | 
|----------------------------------- | ------------------------------- | ----------- | ------ | ------ | 
|                                    |                                 | (Thousands) |       
|                                    |                                 |             |       
|In-process research and development |                                 | $           | 3,800  |       
|Goodwill                            |                                 |             | 21,434 |       
|Identifiable intangible assets      |                                 |             | 24,570 |       
|                                    |                                 |             |       
|                                    | Total purchase price allocation |             | $      | 49,804 | 
|                                    |                                 |             |       



|                                |  |             |        |  |                |  |     | 
|------------------------------- |  | ----------- | ------ |  | -------------- |  | --- | 
|                                |  | Asset       |        |  | Estimated Life | 
|                                |  | Amount      |        |  | in Years       | 
|                                |  |             |        |  |                | 
|                                |  | (Thousands) |        |  |               
|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-18



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




VocalData, Inc.












F-19



---



##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |                                                                         |             |         |        | 
|---------------------------------------------- | ----------------------------------------------------------------------- | ----------- | ------- | ------ | 
|                                               |                                                                         | (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 |                                                                         |             | (2,585  | )     
|Add: Estimated deferred tax liability          |                                                                         |             | 2,278   |       
|Less: Estimated deferred tax assets            |                                                                         |             | (12,253 | )     
|                                               |                                                                         |             |        
|                                               | Total fair value step-up in VocalData                                   |             | $       | 15,294 | 
|                                               |                                                                         |             |        





|                                    |                                 |             |       |        | 
|----------------------------------- | ------------------------------- | ----------- | ----- | ------ | 
|                                    |                                 | (Thousands) |      
|                                    |                                 |             |      
|In-process research and development |                                 | $           | 2,400 |       
|Goodwill                            |                                 |             | 6,384 |       
|Identifiable intangible assets      |                                 |             | 6,510 |       
|                                    |                                 |             |      
|                                    | Total purchase price allocation |             | $     | 15,294 | 
|                                    |                                 |             |      



|                                |  |             |       |  |                |  |    | 
|------------------------------- |  | ----------- | ----- |  | -------------- |  | -- | 
|                                |  | Asset       |       |  | Estimated Life | 
|                                |  | Amount      |       |  | in Years       | 
|                                |  |             |       |  |                | 
|                                |  | (Thousands) |       |  |               
|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 |  |                |  |    | 
|                                |  |             |       |  |                | 

F-20



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Taqua, Inc.








|                                                            |                                                                         |             |         |        | 
|----------------------------------------------------------- | ----------------------------------------------------------------------- | ----------- | ------- | ------ | 
|                                                            |                                                                         | (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                  |                                                                         |             | (1,422  | )     
|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                                       |             | $       | 69,952 | 
|                                                            |                                                                         |             |        



F-21



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                    |                                 |             |        |        | 
|----------------------------------- | ------------------------------- | ----------- | ------ | ------ | 
|                                    |                                 | (Thousands) |       
|                                    |                                 |             |       
|In-process research and development |                                 | $           | 8,000  |       
|Goodwill                            |                                 |             | 32,642 |       
|Identifiable intangible assets      |                                 |             | 29,310 |       
|                                    |                                 |             |       
|                                    | Total purchase price allocation |             | $      | 69,952 | 
|                                    |                                 |             |       



|                                |  |             |        |  |                |  |    | 
|------------------------------- |  | ----------- | ------ |  | -------------- |  | -- | 
|                                |  | Asset       |        |  | Estimated Life | 
|                                |  | Amount      |        |  | in Years       | 
|                                |  |             |        |  |                | 
|                                |  | (Thousands) |        |  |               
|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 |  |                |  |    | 
|                                |  |             |        |  |                | 



Majority Interest in Santera






F-22



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                           |  |             |        |  
|------------------------------------------ |  | ----------- | ------ | -
|                                           |  | (Thousands) |       
|                                           |  |             |       
|Fair value of Santera                      |  | $           | 61,000 |  
|Direct acquisition costs                   |  |             | 3,700  |  
|Less: Santera tangible net assets acquired |  |             | (7,767 | )
|                                           |  |             |       
|Fair value step-up                         |  | $           | 56,933 |  
|                                           |  |             |       





|                                    |  |             |        | 
|----------------------------------- |  | ----------- | ------ | 
|                                    |  | (Thousands) |       
|                                    |  |             |       
|In-process research and development |  | $           | 2,900  | 
|Goodwill                            |  |             | 25,835 | 
|Identifiable intangible assets      |  |             | 27,200 | 
|Acquired backlog                    |  |             | 500    | 
|Inventory fair value step-up        |  |             | 498    | 
|                                    |  |             |       
|                                    |  | $           | 56,933 | 
|                                    |  |             |       







F-23



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                      |  |             |        |  
|--------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | -
|                                                                                                                      |  | (Thousands) |       
|                                                                                                                      |  |             |       
|Santera net loss (includes amortization of intangibles of $4,291)                                                     |  | $           | 33,418 |  
|Percentage of losses attributable to the minority interest based
    on capital structure and liquidation preferences |  |             | 62     | %
|                                                                                                                      |  |             |       
|Minority interest losses                                                                                              |  | $           | 20,719 |  
|                                                                                                                      |  |             |       









F-24



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                             |         |                     |         |      |      |   |         |       |  
|---------------------------- | ------- | ------------------- | ------- | ---- | ---- | - | ------- | ----- | -
|                             |         | For the Years Ended |        
|                             |         | December 31,        |        
|                             |         |                     |        
|                             |         | 2004                |         |      | 2003 |  
|                             |         |                     |         |      |      |  
|                             |         | (Thousands, except  |        
|                             |         | per-share data)     |        
|Revenues                     |         | $                   | 420,501 |      |      | $ | 304,713 |      
|Net income (loss)(1)         |         |                     | 7,103   |      |      |   | (25,140 | )    
|Net income (loss) per share: |         |                     |         |      |      |   |         |      
|                             | Basic   |                     | $       | 0.11 |      |   | $       | (0.41 | )
|                             | Diluted |                     |         | 0.11 |      |   |         | (0.41 | )






|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes one-time IPRD charges of $14.2 million and
    $2.9 million for the years ended December 31, 2004 and
    2003, respectively.

Note C  Disposition of Network Diagnostics
Business






|                                         |  |              |   |      |  |      |   |  |  |   |         |  
|---------------------------------------- |  | ------------ | - | ---- |  | ---- | - |  |  | - | ------- | -
|                                         |  | December 31, |  
|                                         |  |              |  
|                                         |  | 2004         |   | 2003 |  | 2002 |  
|                                         |  |              |   |      |  |      |  
|                                         |  | (Thousands)  |  
|Revenues                                 |  | $            |  |      |  | $    |  |  |  | $ | (26,556 | )
|Pre-tax loss from discontinued operation |  |              |  |      |  |      |  |  |  |   | (6,015  | )
|Benefit from income taxes                |  |              |  |      |  |      |  |  |  |   | (2,707  | )
|Loss from discontinued operation         |  | $            |  |      |  | $    |  |  |  | $ | (3,308  | )





F-25



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                        |                                        |              |        |        | 
|--------------------------------------- | -------------------------------------- | ------------ | ------ | ------ | 
|                                        |                                        | December 31, |       
|                                        |                                        | 2003         |       
|                                        |                                        |              |       
|                                        |                                        | (Thousands)  |       
|Notes: face value at $17,300            |                                        | $            | 14,869 |       
|Fair value of conversion option feature |                                        |              | 3,246  |       
|                                        |                                        |              |       
|                                        | Fair value of Notes at August 30, 2002 |              |        | 18,115 | 
|Less, accumulated amortization          |                                        |              | (535   | )     
|                                        |                                        |              |       
|                                        | Carrying value of Notes                |              | $      | 17,580 | 
|                                        |                                        |              |       



Note D  Restructuring Costs








|                                      |       |                |     |                |                    |   |            |                   |  |   |     |       | 
|------------------------------------- | ----- | -------------- | --- | -------------- | ------------------ | - | ---------- | ----------------- |  | - | --- | ----- | 
|                                      |       |                |     | Costs Incurred |                    |   | Cumulative |                  
|                                      |       | Total Costs    |     |                | for the            |   |            | Costs Incurred    | 
|                                      |       | Expected to be |     |                | Three Months Ended |   |            | through           | 
|                                      |       | Incurred       |     |                | December 31, 2004  |   |            | December 31, 2004 | 
|                                      |       |                |     |                |                    |   |            |                   | 
|                                      |       | (Thousands)    |    
|Severance costs and retention bonuses |       | $              | 972 |                |                    | $ | 24         |                   |  | $ | 972 |      
|Employee relocation costs             |       |                | 550 |                |                    |   | 265        |                   |  |   | 498 |      
|Facility relocation costs             |       |                | 320 |                |                    |   | 50         |                   |  |   | 196 |      
|                                      |       |                |     |                |                    |   |            |                   | 
|                                      | Total |                | $   | 1,842          |                    |   | $          | 339               |  |   | $   | 1,666 | 
|                                      |       |                |     |                |                    |   |            |                   | 

F-26



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                      |       |                      |     |       |                   |   |      |                   |   |   |    |    | 
|------------------------------------- | ----- | -------------------- | --- | ----- | ----------------- | - | ---- | ----------------- | - | - | -- | -- | 
|                                      |       | Total Restructuring  |     |       | Payments as of    |   |      | Balance at        |  
|                                      |       | Charges Accrued, Net |     |       | December 31, 2004 |   |      | December 31, 2004 |  
|                                      |       |                      |     |       |                   |   |      |                   |  
|                                      |       | (Thousands)          |    
|Severance costs and retention bonuses |       | $                    | 972 |       |                   | $ | (896 | )                 |   | $ | 76 |   
|Employee relocation costs             |       |                      | 43  |       |                   |   | (43  | )                 |   |   |   |   
|                                      |       |                      |     |       |                   |   |      |                   |  
|                                      | Total |                      | $   | 1,015 |                   |   | $    | (939              | ) |   | $  | 76 | 
|                                      |       |                      |     |       |                   |   |      |                   |  





Note E  Sale of Investment in Privately Held
Company and Gain on Warrants in Privately Held Company








F-27



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note F  Fair Value of Investments






|                                                                              |                              |              |         |         |      |   |         |         | 
|----------------------------------------------------------------------------- | ---------------------------- | ------------ | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                              |                              | December 31, |        
|                                                                              |                              |              |        
|                                                                              |                              | 2004         |         |         | 2003 |  
|                                                                              |                              |              |         |         |      |  
|                                                                              |                              | (Thousands)  |        
|Type of Security:                                                             |                              |              |         |         |      |   |         |        
|Corporate debt securities with maturities of less than one year               |                              | $            | 40,967  |         |      | $ | 15,050  |        
|State securities with maturities of less than one year                        |                              |              | 93,468  |         |      |   | 68,750  |        
|                                                                              |                              |              |         |         |      |  
|                                                                              | Total short-term investments |              |         | 134,435 |      |   |         | 83,800  | 
|Corporate debt securities with maturities of between one and
    three years  |                              |              | 34,138  |         |      |   | 57,887  |        
|State securities with maturity between one and three years                    |                              |              | 32,717  |         |      |   | 8,094   |        
|U.S. government securities with maturities of between one
    and three years |                              |              | 26,767  |         |      |   | 144,317 |        
|                                                                              |                              |              |         |         |      |  
|                                                                              | Total long-term investments  |              |         | 93,622  |      |   |         | 210,298 | 
|                                                                              |                              |              |         |         |      |  
|                                                                              |                              | $            | 228,057 |         |      | $ | 294,098 |        
|                                                                              |                              |              |         |         |      |  



Note G  Business and Credit Risk






F-28



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














Note H  Related Party Transactions








Note I  Financial Instruments




F-29



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










F-30



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note J  Income Taxes




|                                    |                       |                                  |                                          |   |        |        |  |      |        |        |  |        |        |        |  
|----------------------------------- | --------------------- | -------------------------------- | ---------------------------------------- | - | ------ | ------ |  | ---- | ------ | ------ |  | ------ | ------ | ------ | -
|                                    |                       | For the Years Ended December 31, |                                         
|                                    |                       |                                  |                                         
|                                    |                       | 2004                             |                                          |   | 2003   |        |  | 2002 |       
|                                    |                       |                                  |                                          |   |        |        |  |      |       
|                                    |                       | (Thousands)                      |                                         
|Continuing Operations:              |                       |                                  |                                          |   |        |        |  |      |        |        |  |       
|                                    | Current               |                                  |                                          |   |        |        |  |      |        |        |  |        |       
|                                    |                       | Federal                          |                                          | $ | 26,062 |        |  | $    | 10,112 |        |  | $      | 8,124  |       
|                                    |                       | State                            |                                          |   | 3,062  |        |  |      | 1,771  |        |  |        | 3,100  |       
|                                    |                       | Foreign                          |                                          |   | 1,039  |        |  |      | 1,216  |        |  |        | 824    |       
|Deferred:                           |                       |                                  |                                          |   |        |        |  |      |        |        |  |       
|                                    |                       | Federal                          |                                          |   | 3,505  |        |  |      | 278    |        |  |        | (4,410 | )     
|                                    |                       | State                            |                                          |   | (343   | )      |  |      | 223    |        |  |        | 502    |       
|                                    |                       | Foreign                          |                                          |   |       |        |  |      |       |        |  |        |       |       
|                                    |                       |                                  |                                          |   |        |        |  |      |       
|                                    |                       |                                  | Total Continuing Operations              |   |        | 33,325 |  |      |        | 13,600 |  |        |        | 8,140  |  
|                                    |                       |                                  |                                          |   |        |        |  |      |       
|Discontinued Operation:             |                       |                                  |                                          |   |        |        |  |      |        |        |  |       
|                                    | Current income taxes  |                                  |                                          |  |        |        |  |     |        |        |  | (2,920 | )     
|                                    | Deferred income taxes |                                  |                                          |  |        |        |  |     |        |        |  | 213    |       
|                                    |                       |                                  |                                          |   |        |        |  |      |       
|                                    |                       |                                  | Total Discontinued Operation             |   |        |       |  |      |        |       |  |        |        | (2,707 | )
|                                    |                       |                                  |                                          |   |        |        |  |      |       
|Disposal of Discontinued Operation: |                       |                                  |                                          |   |        |        |  |      |        |        |  |       
|                                    | Current income taxes  |                                  |                                          |  |        |        |  |     |        |        |  | 11,043 |       
|                                    | Deferred income taxes |                                  |                                          |  |        |        |  |     |        |        |  | 2,302  |       
|                                    |                       |                                  |                                          |   |        |        |  |      |       
|                                    |                       |                                  | Total Disposal of Discontinued Operation |   |        |       |  |      |        |       |  |        |        | 13,345 |  
|                                    |                       |                                  |                                          |   |        |        |  |      |       
|                                    |                       |                                  | Total                                    |   | $      | 33,325 |  |      | $      | 13,600 |  |        | $      | 18,778 |  
|                                    |                       |                                  |                                          |   |        |        |  |      |       



F-31



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                              |                                               |                                                    |   |         |         |  |   |         |        | 
|--------------------------------------------- | --------------------------------------------- | -------------------------------------------------- | - | ------- | ------- |  | - | ------- | ------ | 
|                                              |                                               | December 31,                                       |  
|                                              |                                               |                                                    |  
|                                              |                                               | 2004                                               |   |         | 2003    | 
|                                              |                                               |                                                    |   |         |         | 
|                                              |                                               | (Thousands)                                        |  
|Deferred tax assets:                          |                                               |                                                    |   |         |         |  |   |        
|                                              | Allowance for doubtful accounts               |                                                    | $ | 1,876   |         |  | $ | 994     |       
|                                              | Inventory write downs                         |                                                    |   | 2,158   |         |  |   | 3,885   |       
|                                              | Capitalized organization charges              |                                                    |   | 4,134   |         |  |   | 3,492   |       
|                                              | Depreciation and amortization                 |                                                    |   | 5,122   |         |  |   | (1,558  | )     
|                                              | Research and development credit carry forward |                                                    |   | 4,512   |         |  |   | 1,231   |       
|                                              | Foreign tax credit carry forward              |                                                    |   |        |         |  |   | 5,693   |       
|                                              | Accrued liabilities                           |                                                    |   | 2,029   |         |  |   | 10,442  |       
|                                              | Warranty accrual                              |                                                    |   | 1,571   |         |  |   | 1,948   |       
|                                              | Installment sale                              |                                                    |   |        |         |  |   | (7,569  | )     
|                                              | Other                                         |                                                    |   | 1,581   |         |  |   | 2,594   |       
|                                              | Net operating loss carry forward              |                                                    |   | 120,885 |         |  |   | 63,413  |       
|                                              |                                               |                                                    |   |         |         | 
|                                              |                                               | Total deferred tax assets                          |   |         | 143,868 |  |   |         | 84,565 | 
|                                              |                                               |                                                    |   |         |         | 
|                                              | Valuation allowance for deferred tax assets   |                                                    |   | (82,316 | )       |  |   | (71,731 | )     
|                                              |                                               |                                                    |   |         |         | 
|                                              | Total net deferred tax asset                  |                                                    | $ | 61,552  |         |  | $ | 12,834  |       
|                                              |                                               |                                                    |   |         |         | 
|Deferred tax assets of continuing operations: |                                               |                                                    |   |         |         |  |   |        
|                                              | Current portion                               |                                                    | $ | 15,804  |         |  | $ | 4,958   |       
|                                              | Long-term portion                             |                                                    |   | 45,748  |         |  |   | 7,876   |       
|                                              |                                               |                                                    |   |         |         | 
|                                              |                                               | Total deferred tax assets of continuing operations |   |         | 61,552  |  |   |         | 12,834 | 
|                                              |                                               |                                                    |   |         |         | 
|                                              |                                               | Total net deferred tax assets                      |   | $       | 61,552  |  |   | $       | 12,834 | 
|                                              |                                               |                                                    |   |         |         | 
|Deferred tax liabilities:                     |                                               |                                                    |   |         |         |  |   |        
|                                              | Acquisition-related intangible assets         |                                                    | $ | 19,586  |         |  | $ | 790     |       
|                                              | Current portion                               |                                                    |   |        |         |  |   |        |       
|                                              | Long term portion                             |                                                    |   | 19,586  |         |  |   | 790     |       
|                                              |                                               |                                                    |   |         |         | 
|                                              |                                               | Total deferred tax liability                       |   | $       | 19,586  |  |   | $       | 790    | 
|                                              |                                               |                                                    |   |         |         | 



F-32



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                                        |                                                      |                                  |        |        |        |  |  |      |      |   |       |        |        |  |  |       |       |   |        |       |        |  |  |      |      |  
|--------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------- | ------ | ------ | ------ |  |  | ---- | ---- | - | ----- | ------ | ------ |  |  | ----- | ----- | - | ------ | ----- | ------ |  |  | ---- | ---- | -
|                                                                                        |                                                      | For the Years Ended December 31, |       
|                                                                                        |                                                      |                                  |       
|                                                                                        |                                                      | 2004                             |        |        | 2003   |  |  | 2002 |     
|                                                                                        |                                                      |                                  |        |        |        |  |  |      |     
|                                                                                        |                                                      | (Thousands)                      |       
|Federal statutory provision                                                             |                                                      | $                                | 17,142 |        |        |  |  |      |      | $ | 3,139 |        |        |  |  |       |       | $ | 8,418  |       |        |  |  |     
|State taxes, net of federal benefit                                                     |                                                      |                                  | 2,848  |        |        |  |  |      |      |   | 1,372 |        |        |  |  |       |       |   | 1,259  |       |        |  |  |     
|Research and development credits                                                        |                                                      |                                  | (2,286 | )      |        |  |  |      |      |   | (406  | )      |        |  |  |       |       |   | (999   | )     |        |  |  |     
|Nontaxable foreign source income                                                        |                                                      |                                  | (1,583 | )      |        |  |  |      |      |   | (441  | )      |        |  |  |       |       |   | (231   | )     |        |  |  |     
|Acquisition-related intangible assets, net of related deferred
    income tax liability |                                                      |                                  | 5,297  |        |        |  |  |      |      |   | 2,231 |        |        |  |  |       |       |   | (280   | )     |        |  |  |     
|Foreign taxes and other                                                                 |                                                      |                                  | 1,322  |        |        |  |  |      |      |   | (646  | )      |        |  |  |       |       |   | (27    | )     |        |  |  |     
|Increase in valuation allowance for Santera                                             |                                                      |                                  | 10,585 |        |        |  |  |      |      |   | 8,351 |        |        |  |  |       |       |   |       |       |        |  |  |     
|                                                                                        |                                                      |                                  |        |        |        |  |  |      |      |   |       |        |        |  |  |       |       |  
|                                                                                        | Total income tax provision for continuing operations |                                  |        | 33,325 |        |  |  | 68.0 | %    |   |       | 13,600 |        |  |  | 151.7 | %     |   |        | 8,140 |        |  |  | 33.8 | %   
|Income tax benefit (expense) for discontinued operation                                 |                                                      |                                  |       |        |        |  |  |      |      |   |      |        |        |  |  |       |       |   | (2,707 | )     |        |  |  |     
|Income tax provision for disposal of discontinued operation                             |                                                      |                                  |       |        |        |  |  |      |      |   |      |        |        |  |  |       |       |   | 13,345 |       |        |  |  |     
|                                                                                        |                                                      |                                  |        |        |        |  |  |      |      |   |       |        |        |  |  |       |       |  
|                                                                                        |                                                      | Total income tax provision       |        | $      | 33,325 |  |  |      | 68.0 | % |       | $      | 13,600 |  |  |       | 151.7 | % |        | $     | 18,778 |  |  |      | 31.5 | %
|                                                                                        |                                                      |                                  |        |        |        |  |  |      |      |   |       |        |        |  |  |       |       |  





Note K  Inventories




|                |  |              |        |  |      |   |        | 
|--------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                |  | December 31, |       
|                |  |              |       
|                |  | 2004         |        |  | 2003 |  
|                |  |              |        |  |      |  
|                |  | (Thousands)  |       
|Raw materials   |  | $            | 20,972 |  |      | $ | 15,810 | 
|Work in process |  |              | 4,147  |  |      |   | 128    | 
|Finished goods  |  |              | 8,535  |  |      |   | 5,496  | 
|                |  |              |        |  |      |  
|                |  | $            | 33,654 |  |      | $ | 21,434 | 
|                |  |              |        |  |      |  

F-33



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note L  Property and Equipment




|                                        |                                                 |              |         |          |      |   |         |         |  
|--------------------------------------- | ----------------------------------------------- | ------------ | ------- | -------- | ---- | - | ------- | ------- | -
|                                        |                                                 | December 31, |        
|                                        |                                                 |              |        
|                                        |                                                 | 2004         |         |          | 2003 |  
|                                        |                                                 |              |         |          |      |  
|                                        |                                                 | (Thousands)  |        
|Manufacturing and development equipment |                                                 | $            | 82,120  |          |      | $ | 61,400  |        
|Furniture and office equipment          |                                                 |              | 44,599  |          |      |   | 29,464  |        
|Demonstration equipment                 |                                                 |              | 4,016   |          |      |   | 2,465   |        
|Leasehold improvements                  |                                                 |              | 10,992  |          |      |   | 8,989   |        
|                                        |                                                 |              |         |          |      |  
|                                        |                                                 |              | 141,727 |          |      |   | 102,318 |        
|                                        | Less, accumulated depreciation and amortization |              |         | (111,110 | )    |   |         | (80,146 | )
|                                        |                                                 |              |         |          |      |  
|                                        |                                                 | $            | 30,617  |          |      | $ | 22,172  |        
|                                        |                                                 |              |         |          |      |  

Note M  Goodwill




|                                                                  |  |             |        |   |                 |   |        |         |  |   |       |  |  |   |         |  
|----------------------------------------------------------------- |  | ----------- | ------ | - | --------------- | - | ------ | ------- |  | - | ----- |  |  | - | ------- | -
|                                                                  |  | Switching   |        |   | Communications  |   |        |         |  |  
|                                                                  |  | Solutions   |        |   | Software        |   |        | Contact |  |   |      
|                                                                  |  | Group       |        |   | Solutions Group |   |        | Center  |  |   | Total | 
|                                                                  |  |             |        |   |                 |   |        |         |  |   |       | 
|                                                                  |  | (Thousands) |       
|Balance at December 31, 2003                                      |  | $           | 59,205 |   |                 | $ |       |         |  | $ | 9,698 |  |  | $ | 68,903  |  
|Addition due to the acquisition of Taqua                          |  |             | 32,642 |   |                 |   |       |         |  |   |      |  |  |   | 32,642  |  
|Addition due to the acquisition of VocalData                      |  |             | 6,384  |   |                 |   |       |         |  |   |      |  |  |   | 6,384   |  
|Addition due to the acquisition of Steleus                        |  |             |       |   |                 |   | 21,434 |         |  |   |      |  |  |   | 21,434  |  
|Revaluation of goodwill based on actual transaction related costs |  |             | (631   | ) |                 |   |       |         |  |   |      |  |  |   | (631    | )
|                                                                  |  |             |        |   |                 |   |        |         |  |   |       | 
|Balance at December 31, 2004                                      |  | $           | 97,600 |   |                 | $ | 21,434 |         |  | $ | 9,698 |  |  | $ | 128,732 |  
|                                                                  |  |             |        |   |                 |   |        |         |  |   |       | 

Note N  Intangible Assets




|                     |                                |              |         |         |      |   |        |         |  
|-------------------- | ------------------------------ | ------------ | ------- | ------- | ---- | - | ------ | ------- | -
|                     |                                | December 31, |        
|                     |                                |              |        
|                     |                                | 2004         |         |         | 2003 |  
|                     |                                |              |         |         |      |  
|                     |                                | (Thousands)  |        
|Purchased technology |                                | $            | 133,124 |         |      | $ | 79,162 |        
|Other                |                                |              | 18,790  |         |      |   | 11,700 |        
|                     |                                |              |         |         |      |  
|                     |                                |              | 151,914 |         |      |   | 90,862 |        
|                     | Less, accumulated amortization |              |         | (68,376 | )    |   |        | (56,744 | )
|                     |                                |              |         |         |      |  
|                     |                                | $            | 83,538  |         |      | $ | 34,118 |        
|                     |                                |              |         |         |      |  

F-34



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                  |  |             |        | 
|--------------------------------- |  | ----------- | ------ | 
|For the Years Ending December 31, |  | (Thousands) |       
|                                  |  |             |       
|2005                              |  | $           | 10,929 | 
|2006                              |  |             | 8,301  | 
|2007                              |  |             | 6,999  | 
|2008                              |  |             | 6,670  | 
|2009                              |  |             | 6,575  | 
|Thereafter                        |  |             | 44,064 | 
|                                  |  |             |       
|Total                             |  | $           | 83,538 | 
|                                  |  |             |       

Note O  Lines of Credit and Borrowings








Note P  Long-Term Convertible Debt




F-35



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












Note Q  Commitments and Contingencies










|                                  |  |             |        | 
|--------------------------------- |  | ----------- | ------ | 
|For the Years Ending December 31, |  | (Thousands) |       
|                                  |  |             |       
|2005                              |  | $           | 9,529  | 
|2006                              |  |             | 8,295  | 
|2007                              |  |             | 8,215  | 
|2008                              |  |             | 7,908  | 
|2009                              |  |             | 6,313  | 
|Thereafter                        |  |             | 18,742 | 
|                                  |  |             |       
|                                  |  | $           | 59,002 | 
|                                  |  |             |       

F-36



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                        
| | ---------------------------------------
| | Indemnities, Commitments and Guarantees





| |           
| | ----------
| | Litigation



Bouygues Telecom, S.A. vs. Tekelec






Lemelson Medical, Education and Research Foundation, Limited
Partnership vs. Tekelec




F-37



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Syndia Corporation




Note R  Stock Options, Restricted Stock Units
and Employee Benefit Plans










F-38



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|                                                                |                                                      |        |        |            |             |   |       |        |            |  |             |      |  |            |       |  |             |  |        |       |  |   |       |  | 
|--------------------------------------------------------------- | ---------------------------------------------------- | ------ | ------ | ---------- | ----------- | - | ----- | ------ | ---------- |  | ----------- | ---- |  | ---------- | ----- |  | ----------- |  | ------ | ----- |  | - | ----- |  | 
|                                                                |                                                      | 2004   |        |            | 2003        |   |       | 2002   |           
|                                                                |                                                      |        |        |            |             |   |       |        |           
|                                                                |                                                      |        |        | Wgtd. Avg. |             |   |       |        | Wgtd. Avg. |  |             |      |  | Wgtd. Avg. |      
|                                                                |                                                      | Shares |        |            | Exer. Price |   |       | Shares |            |  | Exer. Price |      |  | Shares     |       |  | Exer. Price | 
|                                                                |                                                      |        |        |            |             |   |       |        |            |  |             |      |  |            |       |  |             | 
|Outstanding at beginning of year                                |                                                      |        | 18,054 |            |             | $ | 15.91 |        |            |  | 14,551      |      |  | $          | 20.18 |  |             |  | 14,355 |       |  | $ | 21.17 | 
|Granted  price equals fair value                               |                                                      |        | 8,870  |            |             |   | 18.14 |        |            |  | 7,221       |      |  |            | 11.20 |  |             |  | 4,046  |       |  |   | 17.15 | 
|Granted  price greater than fair value                         |                                                      |        |       |            |             |   |      |        |            |  |            |      |  |            |      |  |             |  | 120    |       |  |   | 19.21 | 
|Granted  price less than fair value                            |                                                      |        | 492    |            |             |   | 9.42  |        |            |  |            |      |  |            |      |  |             |  |       |       |  |   |      | 
|Exercised                                                       |                                                      |        | (2,776 | )          |             |   | 11.30 |        |            |  | (644        | )    |  |            | 7.92  |  |             |  | (635   | )     |  |   | 4.51  | 
|Cancelled                                                       |                                                      |        | (1,593 | )          |             |   | 16.04 |        |            |  | (3,074      | )    |  |            | 26.76 |  |             |  | (3,335 | )     |  |   | 23.61 | 
|                                                                |                                                      |        |        |            |             |   |       |        |            |  |             |      |  |            |       |  |             | 
|Outstanding at year-end                                         |                                                      |        | 23,047 |            |             |   | 17.20 |        |            |  | 18,054      |      |  |            | 15.91 |  |             |  | 14,551 |       |  |   | 20.18 | 
|                                                                |                                                      |        |        |            |             |   |       |        |            |  |             |      |  |            |       |  |             | 
|Options exercisable at year-end                                 |                                                      |        | 11,004 |            |             |   |       |        |            |  | 9,411       |      |  |            |       |  |             |  | 7,830  |       |  |   |       | 
|Options available for future grant                              |                                                      |        | 2,434  |            |             |   |       |        |            |  | 5,406       |      |  |            |       |  |             |  | 6,539  |       |  |   |       | 
|Weighted average fair value of options granted during the year: |                                                      |        |        |            |             |   |       |        |            |  |             |      |  |            |       |  |             |  |        |       |  |   |       | 
|                                                                | Exercise price equals fair value at grant date       |        | $      | 8.38       |             |   |       |        |            |  | $           | 7.48 |  |            |       |  |             |  | $      | 12.16 |  |   |       |  | 
|                                                                | Exercise price greater than fair value at grant date |        |        |           |             |   |       |        |            |  |             |     |  |            |       |  |             |  |        | 10.07 |  |   |       |  | 

F-39



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |       |                     |       |        |                     |  |      |            |  |        |                   |  |  |            |       |        |  |   |       |  | 
|----------------------- | ----- | ------------------- | ----- | ------ | ------------------- |  | ---- | ---------- |  | ------ | ----------------- |  |  | ---------- | ----- | ------ |  | - | ----- |  | 
|                        |       | Options Outstanding |       |        | Options Exercisable | 
|                        |       |                     |       |        |                     | 
|                        |       | Number              |       |        | Wgtd. Avg.          |  |      |            |  | Number |                   |  | 
|                        |       | Outstanding as of   |       |        | Remaining           |  |      | Wgtd. Avg. |  |        | Exercisable as of |  |  | Wgtd. Avg. |      
|                        |       | December 31,        |       |        | Contractual         |  |      | Exercise   |  |        | December 31,      |  |  | Exercise   |      
|Range of Exercise Price |       | 2004                |       |        | Life                |  |      | Price      |  |        | 2004              |  |  | Price      |      
|                        |       |                     |       |        |                     |  |      |            |  |        |                   |  |  |            |      
|$  2.32 to $  4.66      |       |                     | 624   |        |                     |  | 3.36 |            |  | $      | 3.61              |  |  |            | 505   |        |  | $ | 3.73  | 
|4.94 to    9.35         |       |                     | 2,458 |        |                     |  | 4.91 |            |  |        | 8.48              |  |  |            | 931   |        |  |   | 8.35  | 
|9.56 to   12.70         |       |                     | 3,759 |        |                     |  | 5.01 |            |  |        | 11.97             |  |  |            | 1,745 |        |  |   | 11.43 | 
|12.94 to   17.94        |       |                     | 4,108 |        |                     |  | 5.41 |            |  |        | 16.40             |  |  |            | 1,101 |        |  |   | 15.54 | 
|18.08 to   18.80        |       |                     | 5,288 |        |                     |  | 5.46 |            |  |        | 18.59             |  |  |            | 975   |        |  |   | 18.62 | 
|19.21 to   25.19        |       |                     | 4,267 |        |                     |  | 5.70 |            |  |        | 21.08             |  |  |            | 3,322 |        |  |   | 21.31 | 
|25.31 to  2,739         |       |                     | 2,543 |        |                     |  | 5.97 |            |  |        | 28.56             |  |  |            | 2,425 |        |  |   | 28.64 | 
|                        |       |                     |       |        |                     |  |      |            |  |        |                   |  |  |            |      
|                        | Total |                     |       | 23,047 |                     |  |      |            |  |        |                   |  |  |            |       | 11,004 |  |   |       |  | 
|                        |       |                     |       |        |                     |  |      |            |  |        |                   |  |  |            |      







F-40



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








Note S  Earnings Per Share




|                                                                                  |  |                                      |        |  |               |  |        |           |  |   |      | 
|--------------------------------------------------------------------------------- |  | ------------------------------------ | ------ |  | ------------- |  | ------ | --------- |  | - | ---- | 
|                                                                                  |  | Net Income                           |        |  | Shares        |  |        | Per-Share | 
|                                                                                  |  | (Numerator)                          |        |  | (Denominator) |  |        | Amount    | 
|                                                                                  |  |                                      |        |  |               |  |        |           | 
|                                                                                  |  | (Thousands except per-share amounts) |       
|For the Year Ended December 31, 2004:                                             |  |                                      |        |  |               |  |        |           |  |   |      | 
|Basic earnings per share                                                          |  | $                                    | 36,373 |  |               |  | 63,131 |           |  | $ | 0.58 | 
|Effect of Dilutive Securities  Stock Options,
    Warrants and Convertible notes |  |                                      | 2,324  |  |               |  | 9,552  |           |  |   |      | 
|                                                                                  |  |                                      |        |  |               |  |        |           | 
|Diluted earnings per share                                                        |  | $                                    | 38,697 |  |               |  | 72,683 |           |  | $ | 0.53 | 
|                                                                                  |  |                                      |        |  |               |  |        |           | 
|For the Year Ended December 31, 2003:                                             |  |                                      |        |  |               |  |        |           |  |   |      | 
|Basic earnings per share                                                          |  | $                                    | 18,452 |  |               |  | 61,163 |           |  | $ | 0.30 | 
|Effect of Dilutive Securities  Stock Options and
    Warrants                    |  |                                      |       |  |               |  | 1,748  |           |  |   |      | 
|                                                                                  |  |                                      |        |  |               |  |        |           | 
|Diluted earnings per share                                                        |  | $                                    | 18,452 |  |               |  | 62,911 |           |  | $ | 0.29 | 
|                                                                                  |  |                                      |        |  |               |  |        |           | 
|For the Year Ended December 31, 2002:                                             |  |                                      |        |  |               |  |        |           |  |   |      | 
|Basic earnings per share                                                          |  | $                                    | 40,918 |  |               |  | 60,358 |           |  | $ | 0.68 | 
|Effect of Dilutive Securities  Stock Options and
    Warrants                    |  |                                      |       |  |               |  | 1,028  |           |  |   |      | 
|                                                                                  |  |                                      |        |  |               |  |        |           | 
|Diluted earnings per share                                                        |  | $                                    | 40,918 |  |               |  | 61,386 |           |  | $ | 0.67 | 
|                                                                                  |  |                                      |        |  |               |  |        |           | 



F-41



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Note T  Operating Segment Information


Network Signaling Group (formerly Network Signaling).


Switching Solutions Group (formerly Next-Generation
Switching).


Communications Software Solutions Group.


IEX Contact Center Group (formerly Contact Center).






F-42



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Operating Segments


|                                        |                    |              |         |         |      |   |         |         |  |   |         |         | 
|--------------------------------------- | ------------------ | ------------ | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                        |                    | Net Revenues |        
|                                        |                    |              |        
|                                        |                    | 2004         |         |         | 2003 |   |         | 2002    | 
|                                        |                    |              |         |         |      |   |         |         | 
|                                        |                    | Thousands    |        
|Network Signaling Group                 |                    | $            | 285,447 |         |      | $ | 203,339 |         |  | $ | 205,511 |        
|Switching Solutions Group               |                    |              | 54,889  |         |      |   | 11,450  |         |  |   |        |        
|Communications Software Solutions Group |                    |              | 18,805  |         |      |   | 13,091  |         |  |   | 15,981  |        
|IEX Contact Center Group                |                    |              | 41,547  |         |      |   | 35,820  |         |  |   | 38,849  |        
|Intercompany Eliminations               |                    |              | (3,616  | )       |      |   |        |         |  |   |        |        
|                                        |                    |              |         |         |      |   |         |         | 
|                                        | Total net revenues |              | $       | 397,072 |      |   | $       | 263,700 |  |   | $       | 260,341 | 
|                                        |                    |              |         |         |      |   |         |         | 

|                                        |                                     |                               |         |        |      |   |         |        |  |   |         |        | 
|--------------------------------------- | ----------------------------------- | ----------------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                        |                                     | Income (Loss) from Operations |        
|                                        |                                     |                               |        
|                                        |                                     | 2004                          |         |        | 2003 |   |         | 2002   | 
|                                        |                                     |                               |         |        |      |   |         |        | 
|                                        |                                     | Thousands                     |        
|Network Signaling Group                 |                                     | $                             | 132,597 |        |      | $ | 72,569  |        |  | $ | 57,508  |       
|Switching Solutions Group               |                                     |                               | (66,899 | )      |      |   | (22,831 | )      |  |   |        |       
|Communications Software Solutions Group |                                     |                               | 133     |        |      |   | (1,915  | )      |  |   | 1,595   |       
|IEX Contact Center Group                |                                     |                               | 16,040  |        |      |   | 11,959  |        |  |   | 15,213  |       
|General Corporate(1)                    |                                     |                               | (63,737 | )      |      |   | (48,332 | )      |  |   | (47,999 | )     
|                                        |                                     |                               |         |        |      |   |         |        | 
|                                        | Total income (loss) from operations |                               | $       | 18,134 |      |   | $       | 11,450 |  |   | $       | 26,317 | 
|                                        |                                     |                               |         |        |      |   |         |        | 






|    |                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | General Corporate includes acquisition-related charges and
    amortization of $25,027, $15,325, and $11,200 for 2004, 2003 and
    2002, respectively, and other corporate expenses that are not
    specifically allocated to the operating segments or used by
    operating segment management to evaluate their segment
    performance.

Enterprise Wide Disclosures




|                                        |                    |                                  |         |         |      |   |         |         |  |   |         |         | 
|--------------------------------------- | ------------------ | -------------------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                        |                    | Revenues from External Customers |        
|                                        |                    |                                  |        
|                                        |                    | 2004                             |         |         | 2003 |   |         | 2002    | 
|                                        |                    |                                  |         |         |      |   |         |         | 
|                                        |                    | Thousands                        |        
|Network Signaling Group                 |                    | $                                | 285,447 |         |      | $ | 203,339 |         |  | $ | 205,511 |        
|Switching Solutions Group               |                    |                                  | 54,889  |         |      |   | 11,450  |         |  |   |        |        
|Communications Software Solutions Group |                    |                                  | 15,189  |         |      |   | 13,091  |         |  |   | 15,981  |        
|IEX Contact Center Group                |                    |                                  | 41,547  |         |      |   | 35,820  |         |  |   | 38,849  |        
|                                        |                    |                                  |         |         |      |   |         |         | 
|                                        | Total net revenues |                                  | $       | 397,072 |      |   | $       | 263,700 |  |   | $       | 260,341 | 
|                                        |                    |                                  |         |         |      |   |         |         | 

F-43



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |                                        |           |         |         |      |   |         |         |  |   |         |         | 
|------------------------------ | -------------------------------------- | --------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                               |                                        | 2004      |         |         | 2003 |   |         | 2002    | 
|                               |                                        |           |         |         |      |   |         |         | 
|                               |                                        | Thousands |        
|North America(1)               |                                        | $         | 306,999 |         |      | $ | 218,540 |         |  | $ | 214,493 |        
|Europe, Middle East and Africa |                                        |           | 40,154  |         |      |   | 23,091  |         |  |   | 30,244  |        
|Caribbean and Latin America    |                                        |           | 28,552  |         |      |   | 10,831  |         |  |   | 5,565   |        
|Asia Pacific                   |                                        |           | 21,367  |         |      |   | 11,238  |         |  |   | 10,039  |        
|                               |                                        |           |         |         |      |   |         |         | 
|                               | Total revenues from external customers |           | $       | 397,072 |      |   | $       | 263,700 |  |   | $       | 260,341 | 
|                               |                                        |           |         |         |      |   |         |         | 






|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | North America includes revenues in the United States of
    $290,918, $209,251 and $199,369, for the years ended
    December 31, 2004, 2003 and 2002, respectively.



|              |                         |           |        |        |      |   |        |        | 
|------------- | ----------------------- | --------- | ------ | ------ | ---- | - | ------ | ------ | 
|              |                         | 2004      |        |        | 2003 |  
|              |                         |           |        |        |      |  
|              |                         | Thousands |       
|United States |                         | $         | 45,810 |        |      | $ | 48,441 |       
|Other         |                         |           | 2,509  |        |      |   | 1,161  |       
|              |                         |           |        |        |      |  
|              | Total long-lived assets |           | $      | 48,319 |      |   | $      | 49,602 | 
|              |                         |           |        |        |      |  



Note U  Common Stock


Warrants:


Restricted Stock:






F-44



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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note V  Quarterly Financial Summary
(Unaudited)


|                                                                                  |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |        |    
|--------------------------------------------------------------------------------- | ------- | ---------------------------------- | ------ | ------ | ------ | - | ------ | ------ |  | - | ------- | ------ |  | - | ------- | ------ | ---
|                                                                                  |         | Quarters                           |       
|                                                                                  |         |                                    |       
|For the Years Ended December 31,                                                  |         | First                              |        |        | Second |   |        | Third  |  |   | Fourth  |       
|                                                                                  |         |                                    |        |        |        |   |        |        |  |   |         |       
|                                                                                  |         | (Thousands, except per-share data) |       
|2004                                                                              |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |       
|Revenues                                                                          |         | $                                  | 78,870 |        |        | $ | 95,618 |        |  | $ | 106,636 |        |  | $ | 115,948 |       
|Gross profit                                                                      |         |                                    | 56,421 |        |        |   | 69,273 |        |  |   | 79,455  |        |  |   | 81,344  |       
|Income (Loss) from continuing operations before provision for
    income taxes(1) |         |                                    | 2,525  |        |        |   | (1,933 | )      |  |   | 25,045  |        |  |   | 23,342  |       
|Minority interest                                                                 |         |                                    | 9,577  |        |        |   | 8,581  |        |  |   | 7,565   |        |  |   | (5,004  | )(2)  
|Net income (loss)                                                                 |         |                                    | 5,849  |        |        |   | (304   | )      |  |   | 18,737  |        |  |   | 12,091  | (2)   
|Earnings per share:                                                               |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |       
|                                                                                  | Basic   |                                    | $      | 0.09   |        |   | $      | 0.00   |  |   | $       | 0.30   |  |   | $       | 0.19   | (2)
|                                                                                  | Diluted |                                    |        | 0.09   |        |   |        | 0.00   |  |   |         | 0.27   |  |   |         | 0.17   | (2)
|Weighted average number of shares outstanding:                                    |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |       
|                                                                                  | Basic   |                                    |        | 62,034 |        |   |        | 62,458 |  |   |         | 63,172 |  |   |         | 64,861 |    
|                                                                                  | Diluted |                                    |        | 65,194 |        |   |        | 62,458 |  |   |         | 72,332 |  |   |         | 75,331 |    
|2003                                                                              |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |       
|Revenues                                                                          |         | $                                  | 55,006 |        |        | $ | 62,922 |        |  | $ | 70,747  |        |  | $ | 75,025  |       
|Gross profit                                                                      |         |                                    | 39,394 |        |        |   | 43,875 |        |  |   | 53,295  |        |  |   | 57,261  |       
|Income (Loss) from continuing operations before provision for
    income taxes    |         |                                    | 2,146  |        |        |   | (1,280 | )      |  |   | 2,129   |        |  |   | 5,972   |       
|Minority interest                                                                 |         |                                    |       |        |        |   | 4,505  |        |  |   | 8,015   |        |  |   | 7,272   |       
|Income (Loss) from continuing operations                                          |         |                                    | 1,514  |        |        |   | 1,210  |        |  |   | 5,157   |        |  |   | 7,278   |       
|Gain on sale of discontinued operation, net of income taxes                       |         |                                    |       |        |        |   |       |        |  |   | 3,293   |        |  |   |        |       
|Net income                                                                        |         |                                    | 1,514  |        |        |   | 1,210  |        |  |   | 8,450   |        |  |   | 7,278   |       
|Earnings per share from continuing operations:                                    |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |       
|                                                                                  | Basic   |                                    | $      | 0.02   |        |   | $      | 0.02   |  |   | $       | 0.09   |  |   | $       | 0.12   |    
|                                                                                  | Diluted |                                    |        | 0.02   |        |   |        | 0.02   |  |   |         | 0.08   |  |   |         | 0.11   |    
|Earnings per share from gain on sale of discontinued operation:                   |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |       
|                                                                                  | Basic   |                                    | $      |       |        |   | $      |       |  |   | $       | 0.05   |  |   | $       |       |    
|                                                                                  | Diluted |                                    |        |       |        |   |        |       |  |   |         | 0.05   |  |   |         |       |    
|Earnings per share:                                                               |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |       
|                                                                                  | Basic   |                                    | $      | 0.02   |        |   | $      | 0.02   |  |   | $       | 0.14   |  |   | $       | 0.12   |    
|                                                                                  | Diluted |                                    |        | 0.02   |        |   |        | 0.02   |  |   |         | 0.13   |  |   |         | 0.11   |    
|Weighted average number of shares outstanding:                                    |         |                                    |        |        |        |   |        |        |  |   |         |        |  |   |         |       
|                                                                                  | Basic   |                                    |        | 60,934 |        |   |        | 61,032 |  |   |         | 61,206 |  |   |         | 61,481 |    
|                                                                                  | Diluted |                                    |        | 61,632 |        |   |        | 62,276 |  |   |         | 69,915 |  |   |         | 70,544 |    






|    |                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Restructuring charges for each of the three months ended
    March 31, 2004, June 30, 2004, September 30, 2004
    and December 31, 2004 were $942,000, $110,000, $275,000 and
    $339,000, respectively. One-time IPRD charges resulting from
    acquisitions (see Note B  Acquistions) were
    $8.0 million, $2.4 million,

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##### Table of Contents



TEKELEC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | and $3.8 million for each of the three months ended
    June 30, 2004, September 30, 2004, and
    December 31, 2004, respectively compared to
    $2.9 million for the three months ended June 30, 2003.
    Other income for the three months ended June 30, 2004,
    included $2.2 million from our gain on sale of Catapult
    stock and $7.9 million from our sale of an investment in a
    privately held company (see note 2 below). Other income for
    the three months ended December 31, 2004, includes
    $20.3 million from our exercise of warrants in a privately
    held company.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The financial results indicated reflect an adjustment made in
    the fourth quarter ended December 31, 2004, to reduce the
    gain on sale of investment in privately held company previously
    recorded in the third quarter ended September 30, 2004, by
    $1.3 million, net of tax. The adjustment relates to
    643,000 shares held in escrow as part of the acquisition of
    Telica by Lucent as described in Note E  Sale of
    Investment in Privately Held Company and Gain on Warrants in
    Privately Held Company. The shares held in escrow related to
    this transaction were incorrectly marked to fair value, included
    in short-term investments, and included as part of the gain that
    was recognized in the quarter ended September 30, 2004. As
    these shares are considered contingently issuable, they should
    not have been so recognized, and we have recorded a reduction in
    the gain of $2.0 million, a reduction in short term
    investments of $2.0 million, and the elimination of the
    related tax effects of $697,000 in the quarter ended
    December 31, 2004. These adjustments are reflected in the
    2004 financial statements.







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##### Table of Contents






Schedule II.


TEKELEC


VALUATION AND QUALIFYING ACCOUNTS AND RESERVES


|                                 |  |             |        |           |            |   |        |             |  |   |            |      |  |   |        | 
|-------------------------------- |  | ----------- | ------ | --------- | ---------- | - | ------ | ----------- |  | - | ---------- | ---- |  | - | ------ | 
|Column A                         |  | Column B    |        |           | Column C   |   |        | Column D    |  |   | Column E   |     
|                                 |  |             |        |           |            |   |        |             |  |   |            |     
|                                 |  |             |        | Additions |            |   |        |             | 
|                                 |  | Balance at  |        |           | Charged to |   |        | Deductions  |  |   | Balance at |     
|                                 |  | Beginning   |        |           | Costs and  |   |        | and Other   |  |   | End of     |     
|Description                      |  | of Period   |        |           | Expenses   |   |        | Adjustments |  |   | Period     |     
|                                 |  |             |        |           |            |   |        |             |  |   |            |     
|                                 |  | (Thousands) |       
|Year ended December 31, 2002:    |  |             |        |           |            |   |        |             |  |   |            |      |  |   |        | 
|Allowance for doubtful accounts  |  | $           | 5,349  |           |            | $ | 950    |             |  | $ | (1,439     | )(1) |  | $ | 4,860  | 
|Product warranty                 |  |             | 5,462  |           |            |   | 3,617  |             |  |   | (3,808     | )(2) |  |   | 5,271  | 
|Deferred tax valuation allowance |  |             |       |           |            |   |       |             |  |   |           |      |  |   |       | 
|Year ended December 31, 2003:    |  |             |        |           |            |   |        |             |  |   |            |      |  |   |        | 
|Allowance for doubtful accounts  |  | $           | 4,860  |           |            | $ | 415    |             |  | $ | (2,656     | )(3) |  | $ | 2,619  | 
|Product warranty                 |  |             | 5,271  |           |            |   | 1,396  |             |  |   | (1,608     | )(4) |  |   | 5,059  | 
|Deferred tax valuation allowance |  |             |       |           |            |   | 71,731 |             |  |   |           |      |  |   | 71,731 | 
|Year ended December 31, 2004:    |  |             |        |           |            |   |        |             |  |   |            |      |  |   |        | 
|Allowance for doubtful accounts  |  | $           | 2,619  |           |            | $ | 820    |             |  | $ | 1,408      | (5)  |  | $ | 4,847  | 
|Product warranty                 |  |             | 5,059  |           |            |   | 618    |             |  |   | (1,648     | )(6) |  |   | 4,029  | 
|Deferred tax valuation allowance |  |             | 71,731 |           |            |   | 10,585 |             |  |   |           |      |  |   | 82,316 | 






|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Includes $782 as a result of the disposition of NDD.                                                             
|   
|(2) | Includes $442 as a result of the disposition of NDD.                                                             
|   
|(3) | Includes $527 as a result of the acquisition of a majority
    interest in Santera.                              
|   
|(4) | Includes $438 as a result of the acquisition of a majority
    interest in Santera.                              
|   
|(5) | Includes $1,389, $430 and $607 as a result of the acquisitions
    of Taqua, VocalData and Steleus, respectively.
|   
|(6) | Includes $1,121 and $50 as a result of the acquisitions of Taqua
    and VocalData, respectively.                

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##### Table of Contents



EXHIBIT INDEX


|        |    |     |             |                                                                                                                                                                                                                                          |          |  |  | 
|------- | -- | --- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- |  |  | 
|        |    |     |             | Sequentially                                                                                                                                                                                                                             |         
|Exhibit |    |     |             |                                                                                                                                                                                                                                          | Numbered | 
|Number  |    |     | Description |                                                                                                                                                                                                                                          | Page     | 
|        |    |     |             |                                                                                                                                                                                                                                          |          | 
|        | 10 | .17 |             | 2004 Executive Officer Bonus Plan                                                                                                                                                                                                        |          |  |  | 
|        | 10 | .18 |             | Credit Agreement dated December 15, 2004 between the
    Registrant and Wells Fargo Bank, National Association                                                                                                                           |          |  |  | 
|       
|        | 10 | .19 |             | Office Lease dated as of December 14, 2004 between Grenhill
    Development Corporation and the Registrant covering our proposed
    new facility in Westlake Village, California.                                                       |          |  |  | 
|       
|        | 21 | .1  |             | Subsidiaries of the Registrant                                                                                                                                                                                                           |          |  |  | 
|       
|        | 23 | .1  |             | Consent of PricewaterhouseCoopers LLP, independent registered
    public accounting firm                                                                                                                                                 |          |  |  | 
|       
|        | 31 | .1  |             | Certification of President, Chief Executive Officer and Acting
    Chief Financial Officer of 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 | .1  |             | Certification of Chief Executive Officer and Acting Chief
    Financial Officer of Tekelec pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes- Oxley Act of 2002.                            |          |  |  |