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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   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.)   5200 Paramount Parkway
 Morrisville, North Carolina 27560
 (Address and zip code of
    principal executive offices)
  (919) 460-5500
 (Registrants telephone
    number, including area code)
  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 þ
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 þ o o
  Rule 12b-2 o þ




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##### 



TEKELEC
  TABLE OF
    CONTENTS
  ANNUAL
    REPORT ON
    FORM 10-K
 For the
    Fiscal Year Ended December 31, 2005
  PagePART IItem 1.


Business


2Item 1A.


Risk Factors


19Item 1B.


Unresolved Staff
    Comments


36Item 2.


Properties


36Item 3.


Legal
    Proceedings


37Item 4.


Submission of
    Matters to a Vote of Security Holders


39PART IIItem 5.


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


40Item 6.


Selected Financial
    Data


40Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


42Item 7A.


Quantitative and
    Qualitative Disclosures about Market Risk


75Item 8.


Financial
    Statements and Supplementary Data


75Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


75Item 9A.


Controls and
    Procedures


75Item 9B.


Other
    Information


81PART IIIItem 10.


Directors and
    Executive Officers of the Registrant


81Item 11.


Executive
    Compensation


86Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


90Item 13.


Certain
    Relationships and Related Transactions


93Item 14.


Principal
    Accountant Fees and Services


94PART IVItem 15.


Exhibits and
    Financial Statement Schedules


95Signatures


100ExhibitsEx-10.16Ex-21.1Ex-31.1Ex-31.2Ex-32.1Ex-32.2   i




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EXPLANATORY
    NOTE
  Form 10-K (SOP 97-2)
  Forms 10-Q Forms 10-Q Form 10-K Form 10-K Form 10-Q
     ii




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FORWARD-LOOKING
    STATEMENTS
  The statements contained in this Annual Report that are not
    historical are forward-looking statements within the meaning of
    Section 27A of the Securities Act of 1933 and
    Section 21E of the Securities Exchange Act of 1934.
    Forward-looking statements include, without limitation,
    statements regarding the extent and timing of future revenues
    and expenses, restructuring and other expenses and customer
    demand, statements regarding the development, deployment and
    potential benefits of our products, and statements regarding
    relationships with, and reliance on, third parties. Words such
    as expects, anticipates,
    targets, goals, projects,
    intends, plans, believes,
    seeks, estimates, continues,
    may, variations of such words, and similar
    expressions are intended to identify such forward-looking
    statements. In addition, any statements that refer to
    projections of our future financial performance, our anticipated
    growth and trends in our businesses, and other characterizations
    of future events or circumstances are forward-looking
    statements. All forward-looking statements included in this
    Annual Report are based on information available to us as of the
    date of this Annual Report. We assume no obligation to update or
    revise any forward-looking statements, whether as a result of
    new information, future events or otherwise, unless we are
    required to do so by law. We have based these forward-looking
    statements on our current expectations and projections about
    future events. These forward-looking statements are not
    guarantees of future performance and are subject to risks,
    uncertainties and assumptions, including those in Item 1A
    of Part I entitled Risk Factors and elsewhere
    in this Annual Report.
 1




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PART I  Item 1.
    Business.  Overview
              Form 10-K. Form 10-K, Form 10-Q Form 8-K,
  Industry
    Background
   2




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Recent
    Changes in Telecommunications Operating
    Environment
       3




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and/or
     4




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Challenges
    Facing Service Providers
    
    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
    internet protocol, otherwise known as IP, services, and
    contending with the loss of subscriber 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.  Signaling
    and Intelligent Services
      Signal Transfer Point
    (STP)
  Service Switching Point
    (SSP)
  Service Control Point
    (SCP)
 5




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Signaling Links
    Unique
    Signaling Requirements of Wireless Networks
    Supporting
    Voice and Data Convergence
       6




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Signal Transfer Point
  Service Control Point
  Signaling Gateway
  Media Gateway Controller
  Media Gateway
  Application Server IP-based
  SIP Server voice-over-packet
      The
    Tekelec Solution
     7




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8




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rd rd
  Business
    Strategy
    Maintaining Technology Leadership. ,
  Targeting the Transition towards Converged
    Networks.
 9




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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.
 10




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Products
    Network
    Signaling Group Products
    Product

DescriptionEAGLE 5

Our EAGLE 5 product
    (EAGLE 5) 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 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 SS7 based signaling 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 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.Our Number Portability function
    supports a wide range of local number portability applications
    for wireline and wireless networks worldwide with high
    transaction capacity and performance. The Data Acquisition
    function provides an integrated base for Revenue Gateway, Fraud
    Protection and other capabilities within a signaling network.
    The Integrated Applications Function delivers mediation,
    mobility, and Intelligent Network applications. One of our most
    successful Integrated Application Function products is our
    G-Flex HLR Manager, which optimizes the use of subscriber
    identification, numbers and number ranges in a wireless network.   Switching
    Solutions Group Products
    Product

DescriptionTekelec 9000 DSS

Our Tekelec 9000 DSS is an
    integrated voice and data switching solution, 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. 11




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Product

DescriptionTekelec 6000 VoIP Applications
    Server

Our Tekelec 6000 VoIP IMS Enabled
    Application Server provides
    IP-based
    business services, such as (i) hosted PBX functionality
    (i.e., the capability within an enterprise to share a certain
    number of outside lines for making external telephone calls)
    with no
    up-front
    costs, (ii) business trunking, a function that integrates
    legacy telephone customers into the IP network by providing
    connectivity for PBX systems and access to VoIP features, and
    (iii) enhanced residential, a function that enables service
    providers to host telephony services for residential customers,
    from basic dial tone to a complete set of web-enabled features.   Communications
    Software Solutions Group
    Product

DescriptionIntegrated 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 Troubleshooting Roaming management Services management Service level
    agreement management Billing management Market intelligence Fraud management Legal interceptUsing 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 next-generation
    IP-based
    networks such as GPRS, UMTS, and SIP.Service Creation System (SCS)

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 obtained in our acquisition of IEX, and
    installed in a number of locations. 12




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Product

DescriptionSentinel

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.   IEX
    Contact Center Group Products
    Product

DescriptionTotalView 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.   Product
    Development
   13




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IP-based
   14




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Sales and
    Marketing
    Distribution.
    Strategic Relationships.
  
    enhance our presence and strengthen 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 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, whereby Alcatel acts as a reseller of
    our media gateways in the wireless market on an original
    equipment manufacturer basis.   15




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Service,
    Support and Warranty
  24-hour
  24 hour-a-day, day-a-week
      Customers
   16




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Backlog
  (SOP 97-2)
    Competition
  Network Signaling Group Products.
  and/or
    Switching Solutions Group Products.
    Communications Software Solutions Group
    Products.
 17




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IEX Contact Center Products.
  Intellectual
    Property
       18




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Form 10-K.
  Employees
    Available
    Information
  Form 10-Q, Form 8-K
  1-800-SEC-0330.
  Item 1A.
    Risk
    Factors  Form 10-K Form 10-K
  Our
    operating results may fluctuate in future periods, which may
    adversely affect our stock price.
   19




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
    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, which judgments impact
    the amount of product and service revenue recognized;
    fluctuations in demand for our products and services, especially
    with respect to telecommunications service providers, in part
    due to a changing global economic environment;
    price and product competition in the telecommunications industry
    which can change rapidly due to technological innovation;
    the success or failure of our strategic alliances 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 recently issued
    pronouncements regarding stock-based compensation (i.e.,
    requiring the expensing of employee stock option grants) and tax
    accounting pronouncements;
    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;
    sudden or unanticipated shortages of components provided by our
    vendors;
    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 and
    our competitors;
    our ability to achieve targeted cost and expense reductions;
    manufacturing and customer lead times;
    our dependence on wireless carriers for a significant percentage
    of our revenues;
    unanticipated delays or problems in developing or releasing new
    products or services;
    variations in sales channels, product costs, or mix of products
    sold;
    the geographic mix of our revenues and the associated impact on
    margins;
    the mix of our product sales across product lines (i.e., between
    our higher margin NSG products and lower margin SSG products),
    which can have significant impact on our gross margins;
    foreign currency exchange rate fluctuations; 20




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
    actual events, circumstances, outcomes, and amounts differing
    from judgments, assumptions, and estimates used in determining
    the values of certain assets (including the amounts of related
    valuation allowances), liabilities, and other items reflected in
    our consolidated financial statements;
    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.      Our
    operating results may be adversely affected by unfavorable
    economic and market conditions and the uncertain geopolitical
    environment.
    
    reduced demand for our products as a result of continued
    constraints on capital expenditures by our customers;
    increased price competition for our products,
    risk of excess and obsolete inventories; and
    higher overhead costs as a percentage of revenue.   21




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We
    expect our margins to vary over time, and our recent level of
    gross margins and operating margins may not be
    sustainable.
    
    increased price competition, including competitors from Asia,
    especially China;
    changes in customer, geographic, or product mix, including mix
    of configurations within each product group;
    an increase in revenues from sales of our Switching Solutions
    Group products (which typically carry lower margins than sales
    of our Network Signaling Group products) as a percentage of
    total revenues;
    introduction of new products;
    our ability to reduce and control production costs;
    entry into new markets, including markets with different pricing
    and cost structures;
    sales discounts;
    increases in material or labor costs;
    excess inventory and inventory holding costs;
    obsolescence charges;
    changes in shipment volume;
    reductions in cost savings due to changes in component pricing
    or charges incurred due to inventory holding periods if parts
    ordering does not correctly anticipate product demand;
    changes in distribution channels;
    losses on customer contracts;
    increased warranty costs; and
    our ability to execute our strategy and operating plans.    The
    markets in which we compete are intensely competitive, which
    could adversely affect our revenue and net income
    growth.
    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, if we are not able to develop and market additional
    and enhanced product offerings or if we consummate the sale of
    our IEX Contact Center Group.
   22




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If
    wireless carriers do not continue to grow and to buy our Network
    Signaling Group products and services, our network signaling
    related business would be harmed.
    
    a downturn in the domestic or global economy;
    a slowdown in capital spending by wireless network operators;
    adverse changes in the debt and equity markets and in the
    ability of wireless 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
    applications; and
    slowing growth of wireless network subscribers, minutes of use
    or adoption of new services.    Our
    business is subject to 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
    are not currently charged. 23




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The
    restatement of our consolidated financial statements and related
    events could have a material adverse effect on us.
  Form 10-K, (SOP 97-2), Regulation S-X Form 10-Q
  Form 10-K.
    
    We could be subject to civil litigation, including class action
    shareholder actions, which if decided against us, could require
    us to pay substantial judgments, settlements or other penalties.
    Negative publicity relating to the Restatement may adversely
    affect our business and the market price of our publicly traded
    securities. 24




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
    The delayed filing of this Annual Report caused us to be in
    violation of (i) certain covenants under our credit
    facility and (ii) the indenture related to our
    2.25% Senior Subordinated Convertible Notes due 2008. We
    received an extension until June 30, 2006 for the delivery
    of our audited 2005 financial statements and unaudited financial
    information for the first quarter of 2006 required under our
    credit facility from the lender under that facility. With
    respect to our 2.25% Senior Subordinated Convertible Notes due
    2008, had we been unable to file this Annual Report by
    May 31, 2006, an Event of Default would have occurred, and
    either the Trustee or the holders of 25% in aggregate principal
    of the notes could then have declared the notes to be currently
    due and payable. As a result of the delay in filing our
    Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2006 by the close of
    business on May 25, 2006, we were not in compliance with
    our obligation to deliver our Quarterly Report on
    Form 10-Q
    to the Trustee under the indenture governing the notes. As such,
    it is possible that the Trustee or the holders of the notes may
    seek to accelerate the repayment of that debt if they give us a
    notice of default after May 25, 2006, and the default is
    not cured within 60 days thereafter. In addition, it is
    possible that we will not have completed our financial
    statements for the quarter ended March 31, 2006 by
    June 30, 2006, and that the lender under our credit
    facility will not grant us a further extension of the deadline
    for delivering those financial statements.
    We have identified a material weakness related to our internal
    control over financial reporting and concluded that our internal
    control over financial reporting is ineffective as of
    December 31, 2005, which has its own risks as discussed
    below.
    Should we be unable to file our
    Form 10-Q
    for the first quarter of 2006 by July 17, 2006, the
    extended deadline provided by the Nasdaq, the Nasdaq could
    delist Tekelecs common shares.
    If our Common Stock is delisted as a result of any failure to
    file our
    Form 10-Q
    for the first quarter of 2006 by Nasdaqs extended deadline
    of July 17, 2006, then any holder of our 2.25% Senior
    Subordinated Convertible Notes due 2008 may require us to redeem
    the holders notes and we will also be in default under our
    credit facility.
    Due to the negative publicity with respect to the Restatement
    and the associated uncertainty in the equity markets, we may be
    unable to attract or retain the personnel necessary to achieve
    our business objectives.
    Managements focus on achieving our business objectives has
    and may continue to be diverted to addressing (i) the
    Restatement effort, (ii) customers, employees,
    investors and regulators questions and concerns
    regarding the Restatement, (iii) improvements in
    Tekelecs public image, which may have been negatively
    impacted by the Restatement, with its customers and in the
    financial markets, and (iv) any subsequent litigation that
    may result from the Restatement.
    The SEC may review the Restatement and require further amendment
    of our public filings.
    We have incurred and may continue to incur significant expenses
    and costs associated with the Restatement and each of the above
    items.  We
    have identified a material weakness in our disclosure controls
    and procedures and our internal control over financial
    reporting, which, if not remediated effectively, could have an
    adverse effect on the trading price of our Common Stock and
    otherwise seriously harm our business.
  Regulation S-K,
 25




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We may
    not realize the anticipated benefits of past or future
    acquisitions, and integration of acquisitions may disrupt our
    business and management.
        
    problems or delays integrating or assimilating the acquired
    operations, technologies or products;
    difficulty in maintaining controls, procedures and policies
    during the transition and integration;
    unanticipated costs associated with the acquisition;
    disruption of our on-going business and distraction of our
    management and employees due to integration issues;
    inability to retain key customers, distributors, vendors and
    other business partners of the acquired business;
    inability to achieve the financial and strategic goals for the
    acquired and combined businesses;
    acquisition-related costs or amortization costs for acquired
    intangible assets that could impact our operating results;
    our relationships with employees, customers, partners or
    third-party providers of technology or products could be
    impaired; 26




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
    the due diligence processes may fail to identify significant
    issues with product quality, architecture and development, or
    legal and financial contingencies, among other things;
    we may incur significant exit charges if the products acquired
    in business combinations are unsuccessful;
    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
    incur future restructuring charges, which may adversely impact
    our operations.
      If we
    do not successfully manage the size of our operations, our
    profitability may be negatively impacted.
     27




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Decreased
    effectiveness of equity compensation could negatively impact our
    ability to attract and retain employees, and a modification to
    our equity compensation strategy or recent changes in accounting
    for equity compensation could adversely affect our
    earnings.
  and/or
        If our
    products do not satisfy customer demand for performance or
    price, our customers could purchase products from our
    competitors.
   28




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
    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.
  non-U.S. companies.
  If we
    fail to develop or introduce new products in a timely fashion,
    our business will suffer.
   29




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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.
      Our
    business is subject to changing regulation of corporate
    governance and public disclosure that has increased both our
    costs and the risk of noncompliance.
   30




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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.
        Changes
    in telecommunications regulation and tariffs could harm our
    prospects and future sales.
   31




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We
    have significant international sales, and international markets
    have inherent risks.
          Failure
    to retain and recruit key personnel could harm our ability to
    meet key objectives.
   32




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Adverse
    resolution of litigation may harm our operating results or
    financial condition.
    Changes
    in effective tax rates or adverse outcomes resulting from
    examination of our income tax returns could adversely affect our
    results.
    and/or
  Problems
    such as computer viruses or terrorism may disrupt our operations
    and harm our operating results.
   33




---



##### Table of Contents



We are
    exposed to fluctuations in the market values of our portfolio
    investments and in interest rates and, therefore, impairment of
    our investments could harm our earnings.
  available-for-sale other-than-temporary.
  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.
      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.
   34




---



##### Table of Contents



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.
    and/or
    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.
  and/or
  We are
    exposed to the credit risk of some of our customers and to
    credit exposures in certain markets.
   35




---



##### Table of Contents



Our
    business and operations are subject to the risks of earthquakes,
    floods, hurricanes and other natural disasters.
    Our
    stock price may continue to be volatile.
  and/or
  Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties.  month-to-month
     36




---



##### Table of Contents



Item 3.
    Legal
    Proceedings.    Bouygues
    Telecom, S.A., vs. Tekelec
         37




---



##### Table of Contents



IEX
    Corporation vs. Blue Pumpkin Software, Inc.
    Markman Markman-
   38




---



##### Table of Contents



Lemelson
    Medical, Education and Research Foundation, Limited Partnership
    vs. Tekelec
      Item 4.
    Submission
    of Matters to a Vote of Security Holders.   39




---



##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Market
    Information
    High


Low2004First Quarter

$
21.25


$
15.46Second Quarter


18.65



15.30Third Quarter


19.86



15.90Fourth Quarter


25.76



17.172005First Quarter

$
20.85


$
15.14Second Quarter


17.19



11.77Third Quarter


21.15



15.45Fourth Quarter


21.01



12.00       Item 6.
    Selected
    Financial Data.  (SOP 97-2)
 40




---



##### Table of Contents



Form 10-K. Form 10-K
    Year Ended
    December 31,2005


2004


2003


2002


2001(Restated)


(Restated)


(Restated)


(Restated)(Thousands, except per share
    data)Statement of Operations
    Data:Revenues

$
536,909


$
368,855


$
253,451


$
251,486


$
257,566Income (loss) from continuing
    operations before provision for income taxes(1)


(44,122
)


19,343



6,167



17,441



5,297Income (loss) from continuing
    operations(1)


(33,741
)


18,179



14,040



11,855



(3,075
)Income (loss) from discontinued
    operation, net of income taxes














(3,308
)


(289
)Gain on sale of discontinued
    operation, net of income taxes










3,293



28,312



Net income (loss) (1)(2)


(33,741
)


18,179



17,333



36,859



(3,364
)Earnings (loss) per share from
    continuing operations (1):Basic

$
(0.51
)

$
0.29


$
0.23


$
0.20


$
(0.05
)Diluted


(0.51
)


0.27



0.22



0.19



(0.05
)Earnings (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 (loss) per share (1):Basic

$
(0.51
)

$
0.29


$
0.28


$
0.61


$
(0.06
)Diluted


(0.51
)


0.27



0.28



0.60



(0.06
)Statement of Cash Flows
    Data:Net cash provided by operating
    activities

$
66,360


$
20,992


$
27,673


$
46,381


$
89,253  41




---



##### Table of Contents



Year Ended
    December 31,2005


2004


2003


2002


2001(Restated)


(Restated)


(Restated)


(Restated)(Thousands, except per share
    data)Balance Sheet Data (at
    December 31):Cash, cash equivalents and
    investments

$
226,329


$
276,982


$
339,359


$
309,830


$
225,956Working capital


179,074



149,304



106,367



152,026



153,282Total assets


825,187



774,983



628,546



517,681



482,149Total deferred revenues


231,970



178,916



109,788



77,734



82,739Long-term liabilities


131,911



129,145



133,912



133,258



134,290Shareholders equity


353,160



373,753



291,779



266,459



217,333     (1)
    
    In accordance with SFAS No. 144 Accounting for
    the Impairment or Disposal of Long-Lived Assets
    (SFAS 144) and SFAS No. 142
    Goodwill and Other Intangible Assets
    (SFAS 142), we evaluated our intangible assets
    and goodwill for impairment during the fourth quarter of 2005.
    As a result of our evaluation, we determined that certain
    intangible assets and the goodwill associated with our Taqua
    reporting unit were impaired. Accordingly, the operating results
    for 2005 reflect certain significant and unusual charges
    totaling $49.9 million related to the impaired technology
    ($22.7 million) and impaired goodwill ($27.2 million)
    associated with our Taqua reporting unit. Please refer to Note
    11 of the accompanying consolidated financial statements for a
    further discussion of these impairments.(2)
    
    Net income (loss) as previously reported were $40,918,000 and
    $(6,899,000) for the year ended December 31, 2002 and 2001,
    respectively.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  Restatement
    of Previously Issued Financial Statements
  SOP 97-2
  Executive
    Summary
    Overview
    of our Business and Products
   42




---



##### Table of Contents



Network Signaling Group.
  Switching Solutions Group.
  Communications Software Solutions Group.
  IEX Contact Center Group.
  Internal
    Control and Corporate Governance
   43




---



##### Table of Contents



Operating
    Environment and Key Factors Impacting our 2005
    Results
     44




---



##### Table of Contents



Proposed
    Disposition of IEX Contact Center Business Unit
  Form 10-K.
  Summary
    of our Operating Results for 2005 and Certain Key Financial
    Metrics
    Year Ended
    December 31,2005


2004(Restated)Statement of operations statistics:Revenues

$
536,909


$
368,855Operating loss

$
(43,549
)

$
(11,521
)Diluted earnings (loss) per share

$
(0.51
)

$
0.27Cash flows from operations

$
66,360


$
20,992Balance sheet statistics:Cash, cash equivalents and
    investments

$
226,329


$
276,982Accounts receivable, net

$
122,783


$
109,536Days sales outstanding (DSO)


72 days



98 daysDeferred revenue

$
231,970


$
178,916Working capital

$
179,074


$
149,304Shareholders equity

$
353,160


$
373,753   Revenues
  Operating loss diluted earnings per share
  Cash Flow from Operations year-over-year
 45




---



##### Table of Contents



Cash, Cash Equivalents and Investments
  Accounts Receivable Days Sales Outstanding, or
    DSO
  Deferred Revenue
  Working Capital
  Shareholders Equity
  Results
    of Operations
    Revenues
     46




---



##### Table of Contents



SOP 97-2.
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)North America

$
410,136


$
289,540


$
215,629


$
120,596



42%


$
73,911



34%EMEA


61,986



35,712



22,492



26,274



74%



13,220



59%CALA


33,635



23,034



7,193



10,601



46%



15,841



220%Asia Pacific


31,152



20,569



8,137



10,583



51%



12,432



153%Total revenues

$
536,909


$
368,855


$
253,451


$
168,054



46%


$
115,404



46%     year-over-year
  For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)Network Signaling

$
314,605


$
256,313


$
202,236


$
58,292



23%


$
54,077



27%% of total revenues


59
%


70
%


80
%Switching Solutions

$
139,893


$
52,563


$
5,621


$
87,330



166%


$
46,942



835%% of total revenues


26
%


14
%


2
%Communications Software Solutions

$
32,007


$
18,033


$
10,244


$
13,974



77%


$
7,789



76%% of total revenues


6
%


5
%


4
%IEX Contact Center

$
50,404


$
41,946


$
35,350


$
8,458



20%


$
6,596



19%% of total revenues


9
%


11
%


14
%Total revenues

$
536,909


$
368,855


$
253,451



168,054



46%


$
115,404



46%  47




---



##### Table of Contents



Network
    Signaling Group
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)Eagle STP initial systems

$
68,166


$
30,762


$
14,989


$
37,404



122
%

$
15,773



105
%Eagle STP upgrades and extensions


151,643



133,187



93,240



18,456



14
%


39,947



43
%Local number portability products


47,999



47,980



54,742



19




%


(6,762
)


(12)
%Customer extended warranty services


36,289



39,037



36,974



(2,748
)


(7)
%


2,063



6
%Other


10,508



5,347



2,291



5,161



97
%


3,056



133
%Total NSG revenues

$
314,605


$
256,313


$
202,236


$
58,292



23
%

$
54,077



27
%       Switching
    Solutions Group
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)T9000 / T8000

$
122,628


$
47,739


$
5,621


$
74,889



157%


$
42,118



749%T7000


9,838



3,316







6,522



197%



3,316



100%T6000


7,427



1,508







5,919



393%



1,508



100%Total SSG revenues

$
139,893


$
52,563


$
5,621


$
87,330



166%


$
46,942



835%    48




---



##### Table of Contents



For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)SSG sales to Alcatel

$
93,225


$
29,821


$
3,274


$
63,404



213
%

$
26,547



811%   Communications
    Software Solutions Group
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)Integrated Application Solutions

$
22,058


$
2,295


$



$
19,763



861
%

$
2,295



100%Sentinel


9,949



15,738



10,244



(5,789
)


(37
)%


5,494



54%Total CSSG revenues

$
32,007


$
18,033


$
10,244


$
13,974



77
%

$
7,789



76%       IEX
    Contact Center Group
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)TotalView products

$
26,482


$
22,653


$
17,464


$
3,829



17
%

$
5,189



30
%TotalView services


22,943



17,874



15,615



5,069



28
%


2,259



14
%TotalNet and other


979



1,419



2,271



(440
)


(31
)%


(852
)


(38
)%Total IEX revenues

$
50,404


$
41,946


$
35,350


$
8,458



20
%

$
6,596



19
%   Cost
    of Sales
  year-over-year
  Cost
    of Goods Sold
   49




---



##### Table of Contents



For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)Cost of goods sold

$
222,198


$
134,353


$
75,126


$
87,845



65%


$
59,227



79%Revenues


536,909



368,855



253,451


$
168,054



46%


$
115,404



46%Cost of goods sold as a percentage
    of revenues


41
%


36
%


30
%          50




---



##### Table of Contents



Amortization
    of Purchased Technology
    For the Years Ended
    December 31,2005


2004


2003Amortization of purchased
    technology related to:iptelorg GmbH

$
192


$



$
Santera


1,802



1,847



938Taqua


1,375



2,409



VocalData


564



181



Steleus


1,930



541



IEX






3,345



9,578Other


1,487



805



662Total

$
7,350


$
9,128


$
11,178     Impairment
    of Purchased Technology
       51




---



##### Table of Contents



Research
    and Development
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)Research and development

$
125,664


$
99,741


$
74,841


$
25,923



26%


$
24,900



33%Percentage of revenues


23
%


27
%


30
%   year-over-year
  Year-Over-Year Change2004 to 2005


2003 to 2004(Restated)Cost component:Salaries and benefits

$
15,127


$
16,720Consulting and professional
    services


5,906



4,926Supplies


(884
)


2,945Facilities and depreciation


5,571



(99
)Other


203



408Total

$
25,923


$
24,900      52




---



##### Table of Contents



Selling,
    General and Administrative Expenses
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)








(Restated)Selling, general and administrative

$
161,146


$
118,783


$
79,221


$
42,363



36%


$
39,562



50%Percentage of revenues


30
%


32
%


31
%   year-over-year
  Year-Over-Year Change2004 to 2005


2003 to 2004(Restated)Cost component:Salaries and benefits

$
21,118


$
16,141Sales commissions


1,726



4,763Consulting and professional
    services


2,411



4,110Restatement-related costs


3,528



Supplies


2,019



786Facilities


4,968



3,178Travel


3,653



4,339Marketing and advertising


1,259



4,502Other


1,681



1,743Total

$
42,363


$
39,562   year-over-year
   53




---



##### Table of Contents



Amortization
    of Intangible Assets
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004IEX

$



$
559


$
1,595


$
(559
)

$
(1,036
)Santera


92



646



305



(554
)


341Taqua


304



688







(384
)


688VocalData


555



222







333



222Steleus


1,872



390







1,482



390iptelorg


64











64



$
2,887


$
2,505


$
1,900


$
382


$
605       Acquired
    In-Process Research and Development
    For the Years Ended
    December 31,2005


2004


2003iptelorg GmbH

$
1,210


$



$
Santera


2,363







2,900Taqua






8,000



VocalData






2,400



Steleus






3,800



Total

$
3,573


$
14,200


$
2,900   iptelorg GmbH.
 54




---



##### Table of Contents



Santera Systems Inc.
    Taqua, Inc.
  VocalData, Inc.
 55




---



##### Table of Contents



Steleus Group Inc.
  Restructuring
    Charges
     56




---



##### Table of Contents



SeveranceCosts and


Employee


FacilityRetention


Relocation


RelocationBonuses


Costs


Costs


Other(3)


TotalRestructuring obligations,
    January 1, 2004

$



$



$



$



$
Restructuring and related expenses
    recognized in 2004:Manufacturing relocation


972



498



196







1,666Cash Payments


(896
)


(498
)


(196
)






(1,590
)Restructuring obligations,
    December 31, 2004


76















76Restructuring and related expenses
    recognized in 2005:Manufacturing relocation






53



47







100Corporate Headquarters and Taqua
    relocation(1)(2)


4,962



265



1,113



1,295



7,635Cash payments


(2,015
)


(163
)


(869
)


(1,295
)


(4,342
)Non-cash charges










(191
)






(191
)Restructuring obligations,
    December 31, 2005

$
3,023


$
155


$
100


$



$
3,278     (1)
    
    Severance costs and retention bonuses includes approximately
    $1.6 million in severance costs related to the employment
    separation agreement between us and our former Chief Executive
    Officer, who resigned from Tekelec effective January 1,
    2006. All employee retention bonuses are expensed as incurred.(2)
    
    Facility relocation costs include (i) a one-time charge of
    $150,000 related to the termination of our lease in Hyannis and
    (ii) a charge of $319,000 associated with the disputed
    termination of our lease of office space in Westlake Village,
    California, comprised of a $87,000 write-off of certain
    leasehold improvements, $113,000 representing the possible
    forfeiture of our deposits paid to the landlord and $119,000 of
    other costs.(3)
    
    Consists of costs related to the transition of our corporate
    headquarters including recruitment, signing bonuses and training
    costs related to the hiring of finance and administrative
    personnel in Morrisville as well as travel costs during the
    transition period. In addition, other costs include salary costs
    for duplicative employees during the transition of job
    responsibilities from employees located in Calabasas to the
    successor employees in Morrisville. These transition costs are
    expensed as incurred.  Impairment
    of Goodwill
   57




---



##### Table of Contents



Other
    Income and Expense
    For the Years Ended
    December 31,


Year-Over-Year Change2005


2004


2003


2004 to 2005


2003 to 2004(Restated)


(Restated)





(Restated)Interest income

$
6,175


$
4,697


$
6,259


$
1,478


$
(1,562
)Interest expense


(4,078
)


(4,519
)


(8,828
)


441



4,309Gain on sale of Catapult stock






2,186







(2,186
)


2,186Gain on sale of investment in
    privately held company






7,877







(7,877
)


7,877Gain on warrants in privately held
    company






20,321







(20,321
)


20,321Other, net


(2,670
)


302



451



(2,972
)


(149
)Other income (expense), net

$
(573
)

$
30,864


$
(2,118
)

$
(31,437
)

$
32,982   Interest Income and Expense. yield-to-maturity yield-to-maturity
  Gain on Sale of Catapult Stock.
  Gain on Sale of Investment in Privately Held
    Company.
  Gain on Warrants in Privately Held Company.
  Other Income (Expense).
 58




---



##### Table of Contents



Provision
    for Income Taxes
    Minority
    Interest
    For the Years Ended
    December 31,2005(2)


2004


2003(Restated)


(Restated)Santera net loss(1)

$
16,529


$
35,105


$
34,850Percentage of losses attributable
    to the minority interest based on capital structure and
    liquidation preferences


62
%


62
%


62
%Net loss allocated to minority
    interest

$
10,248


$
21,765


$
21,607     (1)
    
    Includes amortization of intangibles of $1,897, $4,291 and
    $4,069 for the period from January 1, 2005 to
    October 3, 2005, and the years ended December 31, 2004
    and 2003, respectively, and the write-off of acquired IPR&D
    of $2,900 in 2003.(2)
    
    Includes Santera net loss for the period from January 1,
    2005 to October 3, 2005.  Gain
    on Sale of Discontinued Operation
    Liquidity
    and Capital Resources
   59




---



##### Table of Contents



Form 10-K, Form 10-K,
  Form 10-Q Form 10-Q) Form 10-Q
  Form 10-Q Form 10-Q.
 60




---



##### Table of Contents



Contractual
    Obligations
    2011Total


2006


2007 to 2008


2009 to 2010


And BeyondLong-term convertible debt

$
125,000


$



$
125,000


$



$
Interest due on long-term
    convertible debt


7,031



2,812



4,219







Capital lease obligations


96



96



Operating lease obligations


52,169



8,578



16,466



13,119



14,006Current liabilities on the balance
    sheet(1)


113,267



113,267











Purchase obligations(2)


4,607



4,607











Total

$
302,170


$
129,360


$
145,685


$
13,119


$
14,006     (1)
    
    Current liabilities in the above table represents current
    liabilities as presented in the consolidated balance sheet,
    reduced by the current portion of capital lease obligations and
    the current portion of deferred revenues as deferred revenues
    will not be settled using cash payments, but rather with the
    provision of goods and services.(2)
    
    From time to time in the normal course of business we may enter
    into purchasing agreements with our suppliers that require us to
    accept delivery of, and remit full payment for, finished
    products that we have ordered, finished products that we
    requested be held as safety stock, and work in process started
    on our behalf in the event we cancel or terminate the purchasing
    agreement. It is not our intent, nor is it reasonably likely,
    that we would cancel a purchase order that we have executed.
    Because these agreements do not specify fixed or minimum
    quantities, do not specify minimum or variable price provisions,
    and do not specify the approximate timing of the transaction, we
    have no basis to estimate any future liability under these
    agreements.    Cash
    Flows
    Cash
    Flows from Operating Activities
  year-over-year year-over-year
 61




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year-over-year
      Cash
    Flows from Investing Activities
  available-for-sale available-for-sale
    Cash
    Flows from Financing Activities
      Litigation
    with Bouygues Telecom
   62




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Financial
    and Market Risks
      Contract Amount


Contract


Fair(Local Currency)


Amount


Value (US$)Australian dollars
    (AUD) (contracts to pay AUD/receive US$)

(AUD)


584,770


$
427,000


$
Euros (EUR) (contracts
    to pay EUR/receive US$)

(EUR)


16,300,000


$
19,221,000


$
Brazilian real (BRL)
    (contracts to pay BRL/receive US$)

(BRL)


15,528,000


$
6,555,000


$
Canadian dollars (CAD)
    (contracts to pay CAD/receive US$)

(CAD)


1,032,000


$
885,000


$
     available-for-sale
     63




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##### Table of Contents



Off-Balance-Sheet
    Arrangements
  Regulation S-K.
    Seasonality
    Application
    of Critical Accounting Policies and Use of
    Estimates
  Use of
    Estimates
   64




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##### Table of Contents



Critical
    Accounting Policies
      Revenue
    Recognition
    and/or
  No. 97-2, SOP 98-9, SOP 97-2).
  SOP 97-2,
 65




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##### Table of Contents



SOP 97-2,
  Determining
    Separate Elements and Allocating Value to Those
    Elements
  SOP 97-2,
  SOP 97-2. SOP 97-2
      SOP 97-2.
  Product
    Revenue
    
    Persuasive evidence of an arrangement
    exists.  We consider a non-cancelable
    agreement (such as an irrevocable customer purchase order,
    contract, etc.) to be evidence of an arrangement. 66




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##### Table of Contents




    Delivery has occurred.  Delivery is
    considered to occur when title to our products has passed to the
    customer, which typically occurs at physical delivery of the
    products to a common carrier. For arrangements with systems
    integrators and OEM customers, we recognize revenue when title
    to the last product in a multiple-element arrangement has
    passed. For arrangements with resellers, we generally recognize
    revenue upon evidence of sell-through to the end customer.
    The fee is fixed and determinable.  We
    assess whether fees are fixed and determinable at the time of
    sale. Our standard payment terms may vary based on the country
    in which the arrangement is executed and the credit standing of
    the individual customer, among other factors. We generally
    consider payments that are due within six months of shipment or
    acceptance to be fixed or determinable based upon our successful
    collection history on such arrangements and evaluate payment
    terms in excess of six months but less than one year on a case
    by case basis as to whether the fee is fixed or determinable. In
    addition, we only consider the fee to be fixed or determinable
    if the fee is not subject to refund or adjustment. If the
    arrangement fee is not fixed or determinable, we recognize the
    revenue as amounts become due and payable.
    Collection is probable.  We conduct a
    credit review for all significant transactions at the time of
    the arrangement to determine the credit-worthiness of the
    customer. Collection is deemed probable if we expect that the
    customer will be able to pay amounts under the arrangement as
    payments become due. If we determine collection is not probable,
    we defer the revenue and recognize the revenue upon cash
    collection.      Warranty/Maintenance
    Revenue
    Professional
    Services Revenue
   67




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Provision
    for Doubtful Accounts
      Inventories
  and/or and/or
    Investments
  available-for-sale
 68




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##### Table of Contents



other-than-temporary. Other-than-temporary other-than-temporary, other-than-temporary
  Intangible
    Assets and Goodwill
        Impairment
    of Long-Lived Assets
   69




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Product
    Warranty Costs
       70




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##### Table of Contents



Stock-Based
    Compensation
      Contingent
    Liabilities
     71




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##### Table of Contents



Restructuring
    and Related Expenses
      Income
    Taxes
     72




---



##### Table of Contents



Recent
    Accounting Pronouncements
  Stock-Based
    Compensation
       73




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##### Table of Contents



Conditional
    Asset Retirement Obligations
  and/or
  Accounting
    Changes
  Accounting Changes Reporting Accounting Changes in Interim Financial
    Statements
  Other-Than-Temporary
    Impairment
  No. 03-1, Other-Than-Temporary (EITF 03-1). EITF 03-1 EITF 03-1 other-than-temporary EITF 03-1-a, No. 03-1, EITF 03-1 No. D-44, Other-Than-Temporary FAS 115-1 FAS 124-1, Other-Than-Temporary FAS 115-1 FAS 124-1), FAS 115-1 FAS 124-1,
  Accounting
    for Uncertain Tax Positions
   74




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Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk.  Form 10-K.
  Item 8.
    Financial
    Statements and Supplementary Data.  Form 10-K.
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures.  Restatement
    and Impact on Internal Control over Financial Reporting as of
    December 31, 2004
  Form 10-K,
  Regulation S-X.
  (SOP 97-2)
   75




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##### Table of Contents



SOP 97-2.
  Remediation
    Efforts to Address Material Weaknesses
    The lack of sufficient personnel with appropriate
    knowledge, experience and training in application of GAAP,
    commensurate with our financial reporting requirements.
    
    Substantially increased the total size of our corporate and
    business unit finance departments from approximately 45
    individuals as of December 31, 2004 to approximately 70
    individuals as of December 31, 2005. We believe the
    addition of these individuals helps to ensure a more timely and
    accurate review of the financial transactions within their scope
    of responsibility, particularly our revenue and revenue-related
    transactions.
    Appointed a new Chief Financial Officer and a new Corporate
    Controller who serves as our principal accounting officer, each
    of whom brings substantial knowledge and practical experience to
    his role, especially concerning revenue recognition and
    financial accounting and disclosure matters.
    Increased the number of financial staff who have specialized
    expertise in revenue recognition and other relevant technical
    accounting expertise. Specifically, we have increased the number
    of staff members who are either certified public accountants or
    the equivalent (e.g., chartered accountants) from approximately
    ten at December 31, 2004 to approximately 20 as of
    December 31, 2005.
    Created a new department within our accounting organization
    specifically dedicated to external reporting and technical
    accounting research. This group currently consists of two
    individuals with substantial accounting expertise and experience
    in financial reporting and disclosure matters, including the
    requisite knowledge to address complex accounting issues that
    arise in our revenue recognition review process.    The lack of effective controls to ensure the proper
    presentation and disclosures of certain customer service costs
    and deferred tax assets and liabilities in our financial
    statements in accordance with GAAP.
 76




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##### Table of Contents




    Appointed a new Chief Financial Officer in April 2005 and a new
    Corporate Controller and principal accounting officer in May
    2005, each of whom brings significant knowledge and practical
    experience to his position, especially concerning financial
    accounting and disclosure matters.
    Created a new department within our accounting organization
    specifically dedicated to external reporting and technical
    accounting research. This group currently consists of two
    individuals with substantial accounting, financial reporting and
    disclosure expertise.
    Established new key controls and strengthened existing controls
    surrounding the review and approval of our financial statements
    and disclosures. Specifically, we have enhanced certain key
    controls around the preparation and financial managements
    review of our financial disclosures, including requiring
    (i) our internal tax professionals to review and approve
    all tax-related disclosures and (ii) each of our business
    unit controllers to certify as to the completeness and accuracy
    of our financial statement presentation and disclosures with
    respect to his or her respective business units.
    Established a new controller position responsible for the
    financial results and disclosures regarding our customer service
    organization. The individual hired into this position has the
    requisite knowledge and expertise to assist us in ensuring
    proper financial statement presentation and disclosure of
    customer service related financial data.
    Enhanced processes and controls within our financial statement
    close process, including the preparation and review of a
    financial statement disclosure and GAAP checklist for all of our
    SEC filings. This checklist is reviewed on a quarterly basis by
    financial management and our Disclosure Committee.
    Strengthened our review of all financial statement filings and
    supporting details, including (i) creating the external
    reporting department discussed above, (ii) expanding our
    Disclosure Committee to include additional members of financial
    management with the requisite accounting expertise, and
    (iii) requiring financial management review and approval of
    all supporting documentation associated with the financial
    statements.    The lack of effective controls over the
    establishment, review and evaluation of the adequacy of our
    accounting policies and procedures related to revenue
    recognition, particularly
    SOP 97-2.
  and/or
  
    Appointed a new Chief Financial Officer in April 2005 and a new
    Corporate Controller and principal accounting officer in May
    2005, each of whom brings significant knowledge and practical
    experience to his position, especially concerning revenue
    recognition under
    SOP 97-2
    and financial accounting and disclosure matters.
    Included the Corporate Controller in the review cycle of all
    significant customer transactions. We believe the additional
    level of review of our significant revenue transactions will
    help ensure that our customer transactions are properly
    accounted for in accordance with
    SOP 97-2.
    In connection with the transition of the financial
    responsibilities from California to North Carolina, the new
    financial management team initiated a comprehensive review of
    our revenue recognition policies and procedures, resulting in
    the Restatement. As our management identified areas of concern
    or errors, we began implementing new policies and procedures to
    ensure that all prospective transactions were accounted for
    appropriately, and we began a review of prior transactions to
    determine if financial results in prior periods had been
    materially misstated.
    Added four additional accounting positions dedicated to the
    review of transactions for proper recognition of revenue in
    accordance with GAAP. In identifying personnel to fill these
    positions, we required 77




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SOP 97-2.
  
    Instituted targeted training classes and education opportunities
    for our finance group, including training classes on
    SOP 97-2
    conducted by a revenue recognition specialist from the national
    office of one of the Big Four accounting firms
    (which was a firm other than our independent auditors) and
    multiple internal training sessions led by our Corporate
    Controller.    SOP 97-2.
  Evaluation
    of Disclosure Controls and Procedures as of December 31,
    2005
    Rules 13a-15(e) 15d-15(e)
 78




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##### Table of Contents




    the need for the Restatement,
    our inability to file our Annual Report on
    Form 10-K
    for the year ended December 31, 2005 by the requisite date
    specified by the SEC,
    the material weakness in our internal control over financial
    reporting identified above that existed as of December 31,
    2005,
    managements assessment of our internal control over
    financial reporting and our conclusion that our internal control
    over financial reporting is not effective as of
    December 31, 2005, and
    the measures we have identified, developed and begun to
    implement, to remedy the material weakness described above.    Form 10-K
  Managements
    Report on Internal Control over Financial Reporting as of
    December 31, 2005
  Rules 13a-15(f) 15d-15(f)
     79




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
    We did not maintain effective controls over the establishment,
    review and evaluation of the adequacy of our accounting policies
    and procedures related to revenue recognition, particularly
    Statement of Position 97-2 Software Revenue
    Recognition and related interpretations thereof
    (SOP 97-2).        Changes
    in Internal Control over Financial Reporting
    
    Established new key controls and strengthened existing controls
    surrounding the review and approval of our financial statements
    and disclosures. Specifically, we have enhanced certain key
    controls around the preparation and financial managements
    review of our financial disclosures, including requiring
    (i) our internal tax professionals to review and approve
    all tax-related disclosures and (ii) each of our business
    unit controllers to certify as to the completeness and accuracy
    of our financial statement presentation and disclosures with
    respect to his or her respective business units.
    Established a new controller position responsible for the
    financial results and disclosures regarding our customer service
    organization. The individual hired into this position has the
    requisite knowledge and expertise to assist us in ensuring
    proper financial statement presentation and disclosure of
    customer service related financial data.
    In connection with the transition of the financial
    responsibilities from California to North Carolina, the new
    financial management team initiated a comprehensive review of
    our revenue recognition policies and procedures, resulting in
    the Restatement. As our management identified areas of concern
    or errors, we began implementing new policies and procedures to
    ensure that all prospective transactions were accounted for
    appropriately, and we began a review of prior transactions to
    determine if financial results in prior periods had been
    materially misstated.
    Instituted targeted training classes and education opportunities
    for our finance group, including training classes on
    SOP 97-2
    conducted by a revenue recognition specialist from the national
    office of one of the Big Four accounting firms
    (which was a firm other than our independent auditors) and
    multiple internal training sessions led by our Corporate
    Controller.  Inherent
    Limitations on Effectiveness of Controls
   80




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Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant.  (a)
    Directors    Name

Age

Position(s) with the
    Company

Director SinceJean-Claude Asscher


77


Chairman of the Board and Director


1972Robert V. Adams


74


Director


1991Daniel L. Brenner


54


Director


1990Mark A. Floyd


50


Vice Chairman of the Board and
    Director


2004Martin A. Kaplan


68


Director


2003Franco Plastina


43


Director, Chief Executive Officer
    and President


2006Jon F. Rager


66


Director


1981          81




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82




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##### Table of Contents



(b)
    Executive
    Officers    Name

Age

TitleFranco Plastina


43


Chief Executive Officer and
    PresidentLori A. Craven


48


Executive Vice President, Global
    Sales and MarketingRichard E. Mace


51


Executive Vice President, Global
    Business Group OperationsWilliam H. Everett


55


Senior Vice President and Chief
    Financial OfficerEric Gehl


41


President and General Manager,
    Communications Software Solutions GroupRonald J. DeLange


47


President and General Manager,
    Network Signaling GroupDebra A. May


50


President and General Manager, IEX
    CorporationJay F. Whitehurst


46


President and General Manager,
    Switching Solutions GroupDanny L. Parker


47


Chief Strategy and Corporate
    Development OfficerRonald W. Buckly


54


Senior Vice President, Corporate
    Affairs and General CounselDavid P. Frankie


60


Senior Vice President, OperationsAlvin G. Ragland


52


Senior Vice President, Human
    ResourcesJ. Scott Weidenfeller


45


Senior Vice President, Global
    Marketing          83




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84




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(c)
    Audit
    Committee    (d)
    Section 16(a)
    Beneficial Ownership Reporting Compliance      (e)
    Code of
    Ethics    Form 10-K
 85




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Item 11.
    Executive
    Compensation.  (a)
    Compensation
    of Executive Officers  Summary
    Compensation Table
    Long-TermCompensation AwardsSecuritiesAnnual Compensation


Restricted


Underlying


All OtherName and Principal
    Position(s)

Year


Salary(1)


Bonus(2)


Stock Awards ($)


Options (#)


Compensation(3)Frederick M. Lax(4)


2005


$
544,231


$
521,351


$
0



0


$
8,044Former Chief Executive


2004



516,154



600,000



0



300,000



8,010Officer and President


2003



414,040



505,280



0



250,000



7,507Lori Craven


2005



349,039



237,485



0



0



8,044Executive Vice President,


2004



310,212



282,709



0



175,000



7,455Global Sales, Marketing and


2003



249,327



225,163



0



75,000



6,803Customer ServiceRonald W. Buckly


2005



316,346



219,186



0



0



8,044Senior Vice President,


2004



306,038



203,609



0



60,000



7,986Corporate Affairs and


2003



290,253



199,082



0



60,000



7,426General CounselRichard E. Mace(5)


2005



287,332



162,852



149,000
(6)


0



1,044Executive Vice President,


2004



229,327



0



599,228
(7)


200,000



1,463Global Business Group SolutionsPatricia W. Hosek(8)


2005



279,808



148,396



0



0



7,973Former President and


2004



31,800



0



0



200,000



804General Manager, Switching
    Solutions Group     (1)
    
    Includes (i) amounts deferred at the election of the named
    officer under the Companys 401(k) Plan, and
    (ii) amounts paid by the Company to certain named officers
    in lieu of accrued vacation. Amounts paid in lieu of accrued
    vacation to named officers during 2005 were:
    Mr. Lax  $20,192;
    Mr. Buckly  $11,731; and
    Mr. Mace  $5,769. Amounts paid in lieu of
    accrued vacation to named officers during 2004 were:
    Mr. Lax  $19,231; and
    Mr. Buckly  $11,346. Amounts paid in lieu
    of accrued vacation to named officers during 2003 were:
    Mr. Lax  $15,385; and
    Mr. Buckly  $5,481.(2)
    
    Except as otherwise set forth herein, bonus amounts shown for
    each of the named officers were paid under the Companys
    Officer Bonus Plans and were based on Company performance and
    the officers achievement of individual objectives. The
    amount shown for Mr. Buckly for 2005 also includes a
    discretionary bonus of $50,000. The amount shown for
    Ms. Craven for 2003 also includes a discretionary bonus in
    the amount of $50,000.(3)
    
    The amounts shown in this column include (i) Company
    matching contributions allocated under the Companys 401(k)
    Plan to the accounts of the named officers who elected to
    participate in the 401(k) Plan and (ii) the dollar value of
    premiums paid by the Company for group term life insurance for
    the benefit of the named officers. During 2005, the Company
    contributed $7,000 to the account of each of the named officers
    under the 401(k) Plan, except Mr. Mace, to whom the Company
    made no contribution. Amounts paid by the Company during 2005 as
    insurance premiums for the benefit of the named officers were:
    Mr. Lax  $1,044;
    Ms. Craven  $1,044;
    Mr. Buckly  $1,044;
    Mr. Mace  $1,044; and
    Ms. Hosek  $973. 86




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(4)
    
    Mr. Lax became Chief Executive Officer and President and a
    director of the Company in February 2003. Prior to that time he
    served as the Companys Executive Vice President and Chief
    Operating Officer. Mr. Lax resigned as the Companys
    Chief Executive Officer and President effective January 1,
    2006.(5)
    
    Mr. Mace joined the Company as President and General
    Manager, Communications Software Solutions Group, in October
    2004.(6)
    
    Represents an award of 10,000 restricted stock units
    (RSUs) granted under the Companys Amended and
    Restated 2003 Stock Option Plan, based on a per share value of
    $14.90 which was the closing sales price per share of the
    Companys Common Stock on the grant date of the RSUs. As of
    December 31, 2005, the RSUs had an aggregate value of
    $139,000 based on a closing sales price per share of $13.90 as
    of such date. The RSUs vested as to 2,500 shares on
    May 1, 2006, and the remaining 7,500 RSUs vest and the
    shares covered thereby will be issued in 12 equal quarterly
    installments over three years following the initial vesting
    date, assuming Mr. Maces continued employment with
    the Company. Mr. Mace does not have any of the benefits of
    ownership of the shares subject to the RSUs, such as the right
    to vote the shares or the right to receive dividends, unless and
    until the RSUs vest and the underlying shares are issued.(7)
    
    Represents an award of 34,478 RSUs granted under the
    Companys 2004 Equity Incentive Plan for New Employees,
    based on a per share value of $17.38, which was the closing
    sales price per share of the Companys Common Stock on the
    grant date of the RSUs. The RSUs vested on October 14, 2005.(8)
    
    Ms. Hosek joined the Company as President and General
    Manager, Switching Solutions Group, in November 2004, and
    resigned from that position in April 2006.  Option
    Grants in 2005
    Aggregated
    Option Exercises in 2005 and Option Values at December 31,
    2005
    Shares


Number of Securities


Value of UnexercisedAcquired


Underlying Unexercised


In-the-Moneyon


Options at
    12/31/2005


Options at
    12/31/2005*Name

Exercise


Exercisable


Unexercisable


Exercisable


UnexercisableFrederick M. Lax


0



721,875



253,125


$
787,250


$
418,750Lori A. Craven


0



315,627



134,373



276,383



125,617Ronald W. Buckly


0



463,778



55,938



154,100



100,500Richard E. Mace


0



50,000



150,000



0



0Patricia W. Hosek


0



50,000



150,000



0



0     *
    
    Represents the difference between the closing sales price of the
    Companys Common Stock on December 30, 2005 as
    reported on The Nasdaq Stock Market (i.e., $13.90) and the
    exercise price of such options.  Employment
    Agreements and Termination of Employment and
    Change-in-Control
    Arrangements
   87




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(b)
    Compensation
    of Directors   88




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(c)
    Compensation
    Committee Interlocks and Insider Participation   89




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##### Table of Contents



Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.  (a)
    Common
    Stock Ownership of Principal Shareholders and
    Management    Name of Beneficial
    Owner(1)

Shares Beneficially
    Owned


Percent of ClassStirling Trustees Limited


8,801,301
(2)


13.1
%The Natinec Trust
    P. O. Box 801
    28-30 The Parade
    St. Helier, Jersey JE4 OSZ
    Channel IslandsDelaware Management Holdings


5,547,571
(3)


8.32005 Market Street
    Philadelphia, PA 19103Goldman, Sachs & Co.


3,540,056
(4)


5.385 Broad Street
    New York, NY 10004Artisan Partners Limited
    Partnership


3,425,800
(5)


5.1875 East Wisconsin
    Avenue, Suite 800Milwaukee, WI 53202Frederick M. Lax


756,161
(6)


1.1Ronald W. Buckly


503,820
(7)


*Lori Craven


346,095
(8)


*Jean-Claude Asscher


134,801
(9)


*Martin A. Kaplan


105,000
(10)


*Daniel L. Brenner


98,401
(11)


*Robert V. Adams


90,801
(12)


*Patricia Hosek


62,500
(13)


*Richard Mace


65,000
(14)


*Jon F. Rager


60,000
(15)


*Mark A. Floyd


35,624
(16)


*Franco Plastina


0



*All current directors and
    executive officers as a group (19 persons)


2,383,158
(17)


3.4     *
    
    Less than one percent(1)
    
    Such persons have sole voting and investment power with respect
    to all shares of Common Stock shown as being beneficially owned
    by them, subject to community property laws, where applicable,
    and the information contained in the footnotes to this table.(2)
    
    These shares are held in the name of Natinco, S.A.
    (Natinco), a Luxembourg investment company which
    holds minority interests in a number of U.S. and Europe-based
    companies, including an interest in Techniques &
    Produits, S.A., a French company of which Mr. Asscher is
    the principal shareholder (Techniques &
    Produits). Stirling Trustees Limited
    (Stirling), as Trustee of the Natinec Trust, has
    advised the Company that the Natinec Trust owns all of the
    equity interest in Natinco and that Natinco 90




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##### Table of Contents



holds the shares in the Company for investment only. Although
    Mr. Asscher from time to time may provide certain advisory
    services to Natinco with respect to its investments, including
    its investment in the Company, Mr. Asscher has advised the
    Company that he does not have or share voting or investment
    power with respect to these shares and he has no beneficial or
    financial interest in Natinco and therefore does not consider
    himself to be a beneficial owner of such shares within the
    meaning of
    Rule 13d-3
    of the Securities Exchange Act of 1934.(3)
    
    Based on a Schedule 13G dated February 8, 2006 wherein
    Delaware Management Holdings reported that as of
    December 31, 2005 it had sole voting power as to
    5,527,292 shares, shared voting power as to
    1,048 shares, sole dispositive power as to
    5,541,771 shares and shared dispositive power as to
    5,800 shares.(4)
    
    Based on a Schedule 13G dated February 3, 2006,
    wherein the Goldman Sachs Group, Inc. and Goldman,
    Sachs & Co. reported that as of December 31, 2005
    they shared voting power as to 3,539,436 shares and shared
    dispositive power as to 3,540,056 shares.(5)
    
    Based on a Schedule 13G dated January 27, 2006,
    wherein Artisan Partners Limited Partnership (Artisan
    Partners), Artisan Investment Corporation, the General
    Partner of Artisan Partners, and Andrew A. Ziegler and Carlene
    Murphy Ziegler, the principal stockholders of Artisan Investment
    Corporation, reported that they share voting and dispositive
    powers with respect to all such 3,425,800 shares.(6)
    
    Includes 721,875 shares subject to exercisable options held
    by Mr. Lax.(7)
    
    Includes 445,966 shares subject to options held by
    Mr. Buckly, which are exercisable or become exercisable
    within 60 days after April 17, 2006.(8)
    
    Includes 343,752 shares subject to options held by
    Ms. Craven, which are exercisable or become exercisable
    within 60 days after April 17, 2006.(9)
    
    Includes 20,000 shares held by Techniques &
    Produits, and 90,401 shares subject to options held by
    Mr. Asscher, which are exercisable or become exercisable
    within 60 days after April 17, 2006. Does not include
    any shares held in the name of Natinco, as to which shares
    Mr. Asscher disclaims any beneficial ownership (see
    footnote 2 above).(10)
    
    Consists of 105,000 shares subject to options held by
    Mr. Kaplan, which are exercisable or become exercisable
    within 60 days after April 17, 2006.(11)
    
    Includes 90,401 shares subject to options held by
    Mr. Brenner, which are exercisable or become exercisable
    within 60 days after April 17, 2006.(12)
    
    Includes 77,801 shares subject to options held by
    Mr. Adams, which are exercisable or become exercisable
    within 60 days after April 17, 2006.(13)
    
    Consists of 62,500 shares subject to exercisable options
    held by Ms. Hosek.(14)
    
    Consists of 62,500 shares subject to options held by
    Mr. Mace, which are exercisable or become exercisable
    within 60 days after April 17, 2006 and
    2,500 shares issuable under restricted stock units held by
    Mr. Mace which vest within 60 days after
    April 17, 2006.(15)
    
    Includes 45,000 shares held by a family trust and
    15,000 shares subject to options held by Mr. Rager,
    which are exercisable or become exercisable within 60 days
    after April 17, 2006.(16)
    
    Consists of 35,624 shares subject to options held by
    Mr. Floyd, which are exercisable or become exercisable
    within 60 days after April 17, 2006.(17)
    
    Includes 2,121,515 shares subject to options held by all
    current directors and executive officers as a group which are
    exercisable or become exercisable within 60 days after
    April 17, 2006 and 23,750 shares issuable under
    restricted stock units held by all current directors and
    executive officers as a group which vest within 60 days
    after April 17, 2006. 91




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##### Table of Contents



(b)
    Equity
    Compensation Plan Information    Number of SharesRemaining Available forNumber of Shares to be


Weighted-Average


Future Issuance UnderIssued Upon Exercise


Exercise Price of


Equity Compensationof Outstanding Options


Outstanding Options


Plans (Excluding Sharesand Warrants


and Warrants


Reflected in Column (a))Plan Category

(a)


(b)


(c)Equity compensation plans approved
    by shareholders:1994 Plan


13,587,190


$
16.94



02003 Plan


2,560,676



18.19



223,414Director Incentive Plan


138,603



10.88



0Director Plan


205,833



13.49



249,1672005 Employee Stock Purchase Plan










1,000,000Total


16,492,302



17.04



1,472,581Equity compensation plans not
    approved by shareholders:2004 Plan(1)


5,297,933
(2)


17.06



1,561,301Taqua Options


115,096
(3)


23.01



0Stock Options


1,257,998
(4)


18.89



0Total


6,671,027



17.51



1,561,301Total Equity Compensation Plans


23,163,329


$
17.17



3,033,882     (1)
    
    Shares available under the 2004 Plan are only available for
    future grant to new employees in connection with their
    commencement of employment with us.(2)
    
    Excludes 17,281 restricted stock units outstanding as of
    December 31, 2005.(3)
    
    These options were originally granted under the stock option
    plans of Taqua prior to the Companys acquisition of Taqua
    in 2004 and were assumed by the Company in connection with the
    acquisition. No additional options may be granted under the
    Taqua stock option plans pursuant to which the options were
    issued.(4)
    
    Consists of (i) nonstatutory stock options to purchase an
    aggregate of 530,000 shares granted to one former officer
    and one current officer of the Company in connection with the
    commencement of their employment with the Company;
    (ii) nonstatutory stock options to purchase an aggregate of
    465,811 shares granted to four employees of Santera in
    connection with the Companys acquisition of its majority
    interest in Santera and such employees acceptance of
    employment with Santera in connection therewith; and
    (iii) nonstatutory stock options to purchase an aggregate
    of 262,187 shares granted to five employees of 92




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##### Table of Contents



Taqua in connection with the Companys acquisition of that
    company. Such options were granted at exercise prices per share
    equal to the closing sales price of the Companys Common
    Stock on the grant date; terminate four years after vesting or
    ten years after grant, subject to earlier termination upon an
    optionees termination of employment; and typically vest
    and become exercisable as to 25% of the shares subject thereto
    one year after the grant date with the remaining shares vesting
    in 12 equal quarterly installments.  2004
    Equity Incentive Plan for New Employees
        Item 13.
    Certain
    Relationships and Related Transactions.   93




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##### Table of Contents



Item 14.
    Principal
    Accountant Fees and Services    2005


2004Audit Fees:Audit and
    Review  Consists of fees billed for audit of
    consolidated financial statements and review of interim
    financial statements

$
2,866,000


$
1,746,000Statutory
    Audits  Consists of fees billed in relation to
    required statutory audits of foreign subsidiaries


51,000



74,000SEC
    Compliance  Consists of fees billed for
    assistance with our SEC filings


(included
    in Audit
    and
    Review
    above)



(included
    in Audit
    and
    Review
    above)Total Audit Fees


2,917,000



1,820,000Audit-Related Fees:Consists of fees billed in
    relation to due diligence related to mergers and acquisitions,
    internal control reviews and consultation concerning financial
    accounting and reporting standards


64,000



1,315,000Tax Fees:Tax
    Compliance  Consists of fees billed in relation
    to preparation and review of income tax returns


102,000



1,000General Tax
    Advice  Consists of fees billed in relation to
    advice on tax matters


55,000



Tax Planning and Business Strategy
    Consulting  Consists of tax planning and
    business strategy consulting services






Total Tax Fees


157,000



1,000All Other Fees:Other Product and Service Fees
    (i.e., subscriptions to professional literature)


2,000



Total All Fees

$
3,140,000


$
3,136,000      94




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##### Table of Contents



case-by-case
   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  (a)
    The
    following documents are filed as part of this Report:  (1)
    Consolidated
    Financial Statements  PageReport of Independent Registered
    Public Accounting Firm


F-1Consolidated Statements of
    Operations for each of the three years in the period ended
    December 31, 2005


F-3Consolidated Statements of
    Comprehensive Income (Loss) for each of the three years in the
    period ended December 31, 2005


F-4Consolidated Balance Sheets as of
    December 31, 2005 and 2004


F-5Consolidated Statements of Cash
    Flows for each of the three years in the period ended
    December 31, 2005


F-6Consolidated Statements of
    Shareholders Equity for each of the three years in the
    period ended December 31, 2005


F-8Notes to Consolidated Financial
    Statements


F-9   (2)
    Consolidated
    Financial Statement Schedules      (3)
    List of
    Exhibits  Number

Exhibit2
.1

Agreement and Plan of Merger dated
    April 30, 2003 by and among the Registrant, 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 2.2, 2.3 and 2.4, and the Registrant agrees to
    furnish supplementally a copy of any such schedule or exhibit to
    the Commission upon request)(1), as amended by First Amendment
    thereto dated as of August 3, 2005(2)2
.2

Escrow Agreement dated as of
    April 30, 2003 by and among the Registrant, Santera Systems
    Inc., the minority 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), as
    amended by First Amendment thereto dated as of August 3,
    2005(2)2
.3

Stockholders Agreement dated as of
    April 30, 2003 between the Registrant and Santera Systems
    Inc., the minority stockholders of Santera Systems Inc. and
    Austin Ventures VI, L.P, as the Representative(1), as amended by
    First Amendment thereto dated as of August 3, 2005(2) 95




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##### Table of Contents



Number

Exhibit2
.4

Registration Rights Agreement
    dated as of April 30, 2003 by and among the Registrant,
    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 the Registrant,
    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.(3), as amended by First Amendment
    thereto dated as of February 26, 2004(4)2
.6

Indemnification Agreement dated as
    of February 25, 2004 by and among the Registrant, Buckaroo,
    Inc., Taqua, Inc. and certain stockholders of Taqua, Inc.(3)2
.7

Escrow Agreement dated as of
    April 8, 2004 by and among the Registrant, Taqua, Inc. and,
    as representatives of the stockholders of Taqua, Inc., Bessemer
    Venture Partners V L. P. and Columbia Capital, L.L.C., and
    U.S. Bank National Association(4)2
.8

Agreement and Plan of Merger dated
    as of September 14, 2004 by and among the Registrant,
    Punkydoo Inc., VocalData, Inc. and Core Capital Partners, L.P.,
    as Representative(5)2
.9

Escrow Agreement dated as of
    September 20, 2004 by and among the Registrant, Core
    Capital Partners, L.P., as Representative, and U.S. Bank
    National Association(5)2
.10

Agreement and Plan of Merger dated
    as of August 19, 2004 by and among the Registrant,
    Buckdanger, Inc., Steleus Group Inc. and certain stockholders of
    Steleus Group Inc.(6), as amended by Amendment thereto dated as
    of October 1, 2004(7)2
.11

Escrow Agreement dated as of
    October 1, 2004 by and among the Registrant, U.S. Bank
    National Association and the former preferred stockholders of
    Steleus Group Inc.(7)3
.1

Amended and Restated Articles of
    Incorporation(8)3
.2

Amended and Restated
    Bylaws (9)4
.1

Rights Agreement dated as of
    August 25, 1997 between the Registrant and U.S. Stock
    Transfer Corporation as Rights Agent(10)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(11)4
.3

Registration Rights Agreement
    dated as of June 17, 2003 between Registrant and Morgan
    Stanley & Co. Incorporated(11)10
.1

Amended and Restated Non-Employee
    Director Equity Incentive Plan(12)(13), as amended by Amendment
    No. 1 thereto dated February 21, 1996(13)(14)10
.2

Form of Indemnification Agreement
    entered into between the Registrant and each of its directors
    and executive officers(2)(13)10
.3

Amended and Restated 1994 Stock
    Option Plan, including form of stock option agreement(13)(15),
    as amended by Amendment No. 1 thereto dated May 8,
    2003(11)(13)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), together with Fourth Amendment thereto effective
    as of May 24, 2005, between the Registrant and Arden Realty
    Limited Partnership, as successor to original landlord(17)10
.5

Officer Severance Plan, including
    form of Employment Separation Agreement(18), as amended
    March 8, 1999(19) and February 4, 2000(13)(20)10
.6

Amended and Restated Employee
    Stock Purchase Plan, including form of subscription
    agreement(13)(21)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(19), as amended by First Amendment
    thereto dated May 27, 1999, Second Amendment thereto dated
    October 1, 1999, Third Amendment thereto dated
    November 30, 1999, and Fourth Amendment thereto dated
    July 19, 2000(22) 96




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##### Table of Contents



Number

Exhibit10
.8

Lease Agreement dated as of
    July 19, 2000 between the Registrant and Duke Construction
    Limited Partnership covering certain of our facilities in
    Morrisville, North Carolina(22)10
.9

Nonstatutory Stock Option
    Agreement dated February 1, 2001 between the Registrant and
    Frederick M. Lax(13)(23)10
.10

Stock Award Agreement dated
    February 1, 2001 between the Registrant and Frederick M.
    Lax(13)(22)10
.11

Amended and Restated Non-Employee
    Director Stock Option Plan, including form of stock option
    agreement(13)(24)10
.12

Nonstatutory Stock Option
    Agreement dated January 18, 2002 between the Registrant and
    Lori A. Craven(13)(25)10
.13

Amended and Restated 2003 Stock
    Option Plan(13)(24)10
.14

2004 Equity Incentive Plan for New
    Employees(13)(27), as amended by Amendment No. 1 thereto
    dated September 13, 2004(13)(28), Amendment No. 2
    thereto dated March 18, 2005(13)(28), Amendment No. 3
    thereto dated May 2, 2005(13)(29), Amendment No. 4
    thereto dated August 1, 2005 (13)(30) and Amendment
    No. 5 thereto dated December 15, 2005(13)(31)10
.15

2004 Executive Officer Bonus
    Plan(13)(32)10
.16

Credit Agreement dated
    December 15, 2004 between the Registrant and Wells Fargo
    Bank, National Association(32), as amended by First Amendment
    thereto dated December 15, 2005(38), letter agreement dated
    March 16, 2006(38) and letter agreement dated May 25,
    2006(38)10
.17

Office Lease dated as of
    December 14, 2004 between Grenhill Development Corporation
    and the Registrant covering premises located in Westlake
    Village, California(32)10
.18

Employment Offer Letter Agreement
    dated April 7, 2005 between the Registrant and William
    Everett, together with employment offer letter agreement
    effective as of October 14, 2004 between the Registrant and
    Mr. Everett(13)(33)10
.19

2005 Employee Stock Purchase
    Plan(13)(34)10
.20

Summary of Compensation for the
    Registrants Named Executive Officers(2)(13)10
.21

Summary of Compensation for the
    Non-Employee Members of the Registrants Board of Directors
    and its Committees(2)(13)10
.22

2005 Executive Officer Bonus
    Plan(13)(35)10
.23

Employment Separation Agreement
    effective as of October 26, 2005 between the Company and
    Frederick M. Lax(13)(36)10
.24

Employment Offer Letter Agreement
    effective January 18, 2006 between the Company and Franco
    Plastina(13)(37)14
.1

Code of Ethics for Chief Executive
    and Senior Financial Officers(26)21
.1

Subsidiaries of the Registrant(38)31
.1

Certification of President and
    Chief Executive Officer of the Registrant pursuant to
    Rule 13a-14(a)
    under the Exchange Act, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002(38)31
.2

Certification of Chief Financial
    Officer of the Registrant pursuant to
    Rule 13a-14(a)
    under the Exchange Act, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002(38)32
.1

Certification of Chief Executive
    Officer of the Registrant pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002(38)32
.2

Certification of Chief Financial
    Officer of the Registrant pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002(38)     (1)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    filed with the Commission on May 7, 2003.(2)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended June 30, 2005. 97




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##### Table of Contents



(3)
    
    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.(4)
    
    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)(5)
    
    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)(6)
    
    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)(7)
    
    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)(8)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended June 30, 1998.(9)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended March 31, 2005.(10)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended September 30, 1997.(11)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended June 30, 2003(12)
    
    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.(13)
    
    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.(14)
    
    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.(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 Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    dated May 31, 2005, as filed with the Commission on
    June 1, 2005.(18)
    
    Incorporated by reference to the Registrants Annual Report
    on
    Form 10-K
    (File
    No. 0-15135)
    for the year ended December 31, 1993.(19)
    
    Incorporated by reference to the Registrants Annual Report
    on
    Form 10-K
    (File
    No. 0-15135)
    for the year ended December 31, 1998.(20)
    
    Incorporated by reference to the Registrants Annual Report
    on
    Form 10-K
    (File
    No. 0-15135)
    for the year ended December 31, 1999.(21)
    
    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.(22)
    
    Incorporated by reference to the Registrants Annual Report
    on
    Form 10-K
    (File
    No. 0-15135)
    for the year ended December 31, 2000.(23)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended March 31, 2001.(24)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended June 30, 2004.(25)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended March 31, 2002. 98




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##### Table of Contents



(26)
    
    Incorporated by reference to the Registrants Annual Report
    on
    Form 10-K
    (File
    No. 0-15135)
    for the year ended December 31, 2003.(27)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended September 30, 2004.(28)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    dated March 18, 2005, as filed with the Commission on
    March 24, 2005.(29)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    dated May 2, 2005, as filed with the Commission on
    May 6, 2005.(30)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    dated August 1, 2005, as filed with the Commission on
    August 3, 2005.(31)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    dated December 15, 2005, as filed with the Commission on
    December 20, 2005.(32)
    
    Incorporated by reference to the Registrants Annual Report
    on
    Form 10-K
    (File
    No. 0-15135)
    for the year ended December 31, 2004.(33)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    dated April 7, 2005, as filed with the Commission on
    April 13, 2005.(34)
    
    Incorporated by reference to the Registrants Registration
    Statement on
    Form S-8
    (Reg.
    No. 333-125160)
    as filed with the Commission on May 23, 2005.(35)
    
    Incorporated by reference to the Registrants Quarterly
    Report on
    Form 10-Q
    (File
    No. 0-15135)
    for the quarter ended September 30, 2005.(36)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    dated October 26, 2005, as filed with the Commission on
    October 27, 2005.(37)
    
    Incorporated by reference to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 0-15135)
    dated January 18, 2006, as filed with the Commission on
    January 24, 2006.(38)
    
    Filed herewith.  (b)
    Exhibits  10-K.
  (c)
    Financial
    Statement Schedules   99




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##### Table of Contents



SIGNATURES      By:
    /s/  FRANCO
    PLASTINA    President and Chief Executive Officer
      Signature

Title

Date/s/  JEAN-CLAUDE
    ASSCHERJean-Claude
    Asscher

Chairman of the Board and Director

May 30, 2006/s/  FRANCO
    PLASTINAFranco
    Plastina

President and Chief Executive
    Officer and Director

May 30, 2006/s/  ROBERT
    V. ADAMSRobert
    V. Adams

Director

May 30, 2006/s/  DANIEL
    L. BRENNERDaniel
    L. Brenner

Director

May 30, 2006/s/  MARTIN
    A. KAPLANMartin
    A. Kaplan

Director

May 30, 2006/s/  MARK
    A. FLOYDMark
    A. Floyd

Vice Chairman of the Board and
    Director

May 30, 2006/s/  JON
    F. RAGERJon
    F. Rager

Director

May 30, 2006/s/  WILLIAM
    H. EVERETTWilliam
    H. Everett

Senior Vice President and Chief
    Financial Officer

May 30, 2006/s/  GREGORY
    S. RUSHGregory
    S. Rush

Vice President, Corporate
    Controller and Chief Accounting Officer
    (Principal Accounting Officer)

May 30, 2006  100




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##### Table of Contents



Index to
    Consolidated Financial Statements
  PageReport of
    Independent Registered Public Accounting Firm


F-1Consolidated
    Statements of Operations for each of the three years in the
    period ended December 31, 2005


F-3Consolidated
    Statements of Comprehensive Income (Loss) for each of the three
    years in the period ended December 31, 2005


F-4Consolidated
    Balance Sheets as of December 31, 2005 and 2004


F-5Consolidated
    Statements of Cash Flows for each of the three years in the
    period ended December 31, 2005


F-6Consolidated
    Statements of Shareholders Equity for each of the three
    years in the period ended December 31, 2005


F-8Notes to
    Consolidated Financial Statements


F-9




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm      Consolidated
    financial statements
      Internal
    control over financial reporting
       F-1




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##### Table of Contents



Internal
    Control  Integrated Framework Internal Control  Integrated Framework .
  
     F-2




---



##### Table of Contents



TEKELEC
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)(Thousands, except per share
    data)Revenues

$
536,909


$
368,855


$
253,451Costs of sales:Cost of goods sold


222,198



134,353



75,126Amortization of purchased
    technology


7,350



9,128



11,178Impairment of purchased technology


22,660







Total cost of sales


252,208



143,481



86,304Gross profit


284,701



225,374



167,147Operating expenses:Research and development


125,664



99,741



74,841Selling, general and administrative


161,146



118,783



79,221Amortization of intangible assets


2,887



2,505



1,900Acquired in-process research and
    development


3,573



14,200



2,900Restructuring


7,735



1,666



Impairment of goodwill


27,245







Total operating expenses


328,250



236,895



158,862Income (loss) from operations


(43,549
)


(11,521
)


8,285Interest and other income
    (expense):Interest income


6,175



4,697



6,259Interest expense


(4,078
)


(4,519
)


(8,828
)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


(2,670
)


302



451Total other income (expense)


(573
)


30,864



(2,118
)Income (loss) from continuing
    operations before provision for income taxes


(44,122
)


19,343



6,167Provision for income taxes


(133
)


22,929



13,734Income (loss) before minority
    interest


(43,989
)


(3,586
)


(7,567
)Minority interest


10,248



21,765



21,607Income (loss) from continuing
    operations


(33,741
)


18,179



14,040Gain on sale of discontinued
    operation, net of income taxes










3,293Net income (loss)

$
(33,741
)

$
18,179


$
17,333Earnings (loss) per share from
    continuing operations:Basic

$
(0.51
)

$
0.29


$
0.23Diluted


(0.51
)


0.27



0.22Earnings per share from gain on
    sale of discontinued operation:Basic

$



$



$
0.05Diluted










0.05Earnings (loss) per
    share:Basic

$
(0.51
)

$
0.29


$
0.28Diluted


(0.51
)


0.27



0.28Weighted average number of
    shares outstanding:Basic


66,001



63,131



61,163Diluted


66,001



66,322



62,911    F-3




---



##### Table of Contents



TEKELEC
  CONSOLIDATED
    STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
  For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)(Thousands)Net income (loss)

$
(33,741
)

$
18,179


$
17,333Other comprehensive income (loss):Foreign currency translation
    adjustments


(246
)


(1
)


Realized loss (gain) on
    available-for-sale
    securities, net of taxes, previously recognized in other
    comprehensive income


894



(120
)


Unrealized gain (loss) on
    available-for-sale
    securities, net of taxes


(2,057
)


(352
)


356Comprehensive income (loss)

$
(35,150
)

$
17,706


$
17,689    F-4




---



##### Table of Contents



TEKELEC



CONSOLIDATED
    BALANCE SHEETS  December 31,2005


2004(Restated)(Thousands, except share
    data)ASSETSCurrent assets:Cash and cash equivalents

$
52,069


$
48,925Short-term investments, at fair
    value


174,260



134,435Total cash, cash equivalents and
    short-term investments


226,329



183,360Accounts receivable, net


122,783



109,536Inventories


48,347



33,654Deferred income taxes


27,802



15,058Deferred costs and prepaid
    commissions


78,190



46,206Prepaid expenses and other current
    assets


15,739



15,947Total current assets


519,190



403,761Long-term investments, at fair
    value






93,622Property and equipment, net


40,794



30,617Investments in privately-held
    companies


7,322



7,322Deferred income taxes, net


68,598



26,547Other assets


6,047



6,757Goodwill


126,022



126,442Intangible assets, net


57,214



79,915Total assets

$
825,187


$
774,983LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Trade accounts payable

$
33,227


$
35,316Accrued expenses


50,649



17,536Accrued payroll and related
    expenses


29,391



23,490Short-term notes and current
    portion of notes payable


96



3,266Current portion of deferred
    revenues


226,753



174,849Total current liabilities


340,116



254,457Notes payable






78Long-term convertible debt


125,000



125,000Deferred income taxes


1,694



Long-term portion of deferred
    revenues


5,217



4,067Total liabilities


472,027



383,602Minority interest






17,628Commitments and Contingencies
    (Note 14)Shareholders
    equity:Common stock, without par value,
    200,000,000 shares authorized; 66,838,310 and
    65,568,145 shares issued and outstanding, respectively


274,413



258,656Deferred stock-based compensation


(5,680
)


(4,480
)Retained earnings


85,666



119,407Accumulated other comprehensive
    income (loss)


(1,239
)


170Total shareholders equity


353,160



373,753Total liabilities and
    shareholders equity

$
825,187


$
774,983    F-5




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##### Table of Contents



TEKELEC
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)(Thousands)Cash flows from operating
    activities:Net income (loss)

$
(33,741
)

$
18,179


$
17,333Adjustments to reconcile net
    income (loss) to net cash provided by operating activities:Loss (gain) on investments


1,375



(30,569
)


Minority interest


(10,248
)


(21,765
)


(21,607
)Impairment of purchased technology


22,660







Impairment of goodwill


27,245







Net gain on sale of discontinued
    operation










(3,293
)Provision for doubtful accounts
    and returns


2,724



820



415Inventory write downs


12,071



4,680



1,558Write-off of leasehold
    improvements and other assets


166







Depreciation


19,966



14,986



14,493Amortization of intangibles


10,112



10,827



12,425Amortization, other


5,946



1,633



1,722Amortization of deferred financing
    costs


763



1,112



2,121Acquired in-process research and
    development


3,573



14,200



2,900Convertible debt and note payable
    accretion






279



2,335Deferred income taxes


(17,493
)


3,667



(1,328
)Stock-based compensation, net of
    forfeitures


3,377



2,143



459Tax benefit related to stock
    options


1,383



9,750



1,213Changes in operating assets and
    liabilities (net of business disposal and acquisitions):Accounts receivable


(16,227
)


(44,207
)


(7,342
)Inventories


(26,914
)


(13,941
)


(7,027
)Deferred costs


(31,984
)


(18,688
)


(13,630
)Prepaid expenses and other current
    assets


2,146



(1,247
)


(3,681
)Trade accounts payable


(2,063
)


20,676



(957
)Accrued expenses


33,218



(15,141
)


(5,325
)Accrued payroll and related
    expenses


5,411



4,151



6,600Deferred revenues


53,487



65,076



26,441Income taxes payable


(593
)


(5,629
)


1,848Total adjustments


100,101



2,813



10,340Net cash provided by operating
    activities


66,360



20,992



27,673Cash flows from investing
    activities:Proceeds from sales and maturities
    of investments


417,767



498,209



302,036Purchases of investments


(370,934
)


(406,712
)


(407,297
)Purchase of property and equipment


(30,238
)


(18,278
)


(6,509
)Net cash acquired from acquisition
    of majority interest in Santera










12,335Cash paid for Taqua, net of cash
    acquired






(86,994
)


 F-6




---



##### Table of Contents



TEKELEC
  CONSOLIDATED STATEMENTS OF CASH
    FLOWS  (Continued)
  For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)(Thousands)Cash paid for VocalData, net of
    cash acquired






(13,222
)


Cash paid for Steleus, net of cash
    acquired






(52,484
)


Cash paid for iptelorg, net of
    cash acquired


(7,105
)






Cash paid for minority interest in
    Santera


(75,750
)






Investments in privately-held
    companies










(797
)Proceeds from sale of Catapult
    stock






19,486



Proceeds from sale of warrants in
    privately held companies






17,877



Proceeds from sale of discontinued
    operation










3,293Other non-operating assets


(4,186
)


(2,540
)


(3,768
)Net cash used in investing
    activities


(70,446
)


(44,658
)


(100,707
)Cash flows from financing
    activities:Payments on retirement of
    convertible debt










(129,307
)Proceeds from issuance of
    convertible debt










125,000Debt issuance costs










(3,816
)Payments on notes payable


(3,243
)


(8,894
)


(1,224
)Proceeds from issuance of Common
    Stock


10,382



35,851



5,959Net cash provided by (used in)
    financing activities


7,139



26,957



(3,388
)Effect of exchange rate changes on
    cash


91



373



47Net increase (decrease) in cash
    and cash equivalents


3,144



3,664



(76,375
)Cash and cash equivalents at
    beginning of the year


48,925



45,261



121,636Cash and cash equivalents at
    end of the year

$
52,069


$
48,925


$
45,261Supplemental disclosure of cash
    flow information:Cash paid during the year
    for:Interest

$
3,195


$
3,115


$
17,417Income taxes


16,093



22,294



11,034    F-7




---



##### Table of Contents



TEKELEC
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY (RESTATED)
  AccumulatedCommon Stock


Deferred





Other


TotalNumber





Stock-Based


Retained


Comprehensive


Shareholdersof Shares


Amount


Compensation


Earnings


Income (Loss)


Equity(Thousands, except share
    data)Balance, December 31, 2002
    (Restated)


60,917


$
182,277


$



$
83,895


$
287


$
266,459Exercise of stock options and
    warrants and issuance of shares under employee stock purchase
    plan


733



5,959















5,959Amortization of stock-based
    compensation, net






459















459Stock option tax benefits






1,213















1,213Net unrealized gain on
    available-for-sale
    securities, net of tax benefit


















356



356Translation adjustment






















Net income (Restated)














17,333







17,333Balance, December 31, 2003
    (Restated)


61,650



189,908







101,228



643



291,779Exercise of stock options and
    warrants and issuance of shares under employee stock purchase
    plan


3,131



35,851















35,851Deferred stock-based compensation
    on stock options assumed in acquisitions and issuance of
    restricted stock






6,244



(6,244
)










Amortization of stock-based
    compensation, net






286



1,764











2,050Stock option tax benefits






9,750















9,750Vested stock options assumed in the
    Taqua acquisition






3,524















3,524Stock options granted to Santera
    advisory board


7



93















93Shares issued related to VocalData
    acquisition


780



13,000















13,000Net unrealized loss on
    available-for-sale
    securities, net of tax benefit


















(472
)


(472
)Translation adjustment


















(1
)


(1
)Net income (Restated)














18,179







18,179Balance, December 31, 2004
    (Restated)


65,568



258,656



(4,480
)


119,407



170



373,753Exercise of stock options and
    issuance of shares under employee stock purchase plan


961



10,382















10,382Issuance of stock-based
    compensation, net


237



5,880



(5,880
)










Issuance of common stock upon
    vesting of restricted stock units


106



















Common stock withheld upon vesting
    of restricted stock units for payroll taxes


(34
)


(585
)














(585
)Amortization of stock-based
    compensation, net










3,494











3,494Stock option tax benefits






1,383















1,383Forfeiture of unvested stock-based
    compensation






(1,186
)


1,186











Forfeiture of previously expensed
    stock-based compensation






(117
)














(117
)Net unrealized loss on
    available-for-sale
    securities, net of tax benefit


















(1,163
)


(1,163
)Translation adjustment


















(246
)


(246
)Net loss














(33,741
)






(33,741
)Balance, December 31,
    2005


66,838


$
274,413


$
(5,680
)

$
85,666


$
(1,239
)

$
353,160    F-8




---



##### Table of Contents



TEKELEC



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS  Note 1  Business,
    Basis of Presentation and Summary of Significant Accounting
    Policies
  Business
      Principles
    of Consolidation
    Use of
    Estimates
    Foreign
    Currency Translation
  Foreign Currency Translation
 F-9




---



##### Table of Contents



non-U.S. subsidiaries.
    Fair
    Value of Financial Instruments
      Cash
    and Cash Equivalents
    Accounts
    Receivable
    Investments
  available-for-sale other-than-temporary. other-than-temporary
   F-10




---



##### Table of Contents



Concentrations
    of Credit Risk
          Inventories
  first-in,
  Deferred
    Costs and Prepaid Commissions
   F-11




---



##### Table of Contents



Property
    and Equipment
    Manufacturing and development
    equipment

3 to 5 yearsFurniture and office equipment

3 to 5 yearsDemonstration equipment

3 yearsLeasehold improvements

Shorter of the estimated useful
    life or lease term, generally 5 years     Software
    Developed for Internal Use
    Software
    Development Costs
    Intangible
    Assets and Goodwill
       F-12




---



##### Table of Contents



Impairment
    of Long-Lived Assets
        Contingent
    Liabilities
     F-13




---



##### Table of Contents



Product
    Warranty Costs
            For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)Balance at beginning of period

$



$



$
Current year provision


9,269



457



Expenditures






(457
)


Balance at end of period

$
9,269


$



$
  F-14




---



##### Table of Contents



Derivative
    Instruments and Hedging Activities
        Revenue
    Recognition
    No. 97-2, SOP 98-9, SOP 97-2).
      Determining
    Separate Elements and Allocating Value to Those
    Elements
  SOP 97-2,
  SOP 97-2. SOP 97-2
 F-15




---



##### Table of Contents



Product
    Revenue
    
    Persuasive evidence of an arrangement
    exists.  We consider a non-cancelable
    agreement (such as an irrevocable customer purchase order,
    contract, etc.) to be evidence of an arrangement.
    Delivery has occurred.  Delivery is
    considered to occur when title to our products has passed to the
    customer, which typically occurs at physical delivery of the
    products to a common carrier. For arrangements with systems
    integrators and OEM customers, we recognize revenue when title
    to the last product in a multiple-element arrangement has
    passed. For arrangements with resellers, we generally recognize
    revenue upon evidence of sell-through to the end customer.
    The fee is fixed and determinable.  We
    assess whether fees are fixed and determinable at the time of
    sale. If the arrangement fee is not fixed or determinable, we
    recognize the revenue as amounts become due and payable.
    Collection is probable.  Collection is
    deemed probable if we expect that the customer will be able to
    pay amounts under the arrangement as payments become due. If we
    determine collection is not probable, we defer the revenue and
    recognize the revenue upon cash collection.     F-16




---



##### Table of Contents



Warranty/Maintenance
    Revenue
    Professional
    Services Revenue
    Cost
    of Sales
    Shipping
    and Handling Costs
    Advertising
    Provision
    for Doubtful Accounts
    Lease
    Obligations
  Bulletin 85-3
 F-17




---



##### Table of Contents



Income
    Taxes
    Stock-Based
    Compensation
    
    Stock options.  We record and measure deferred
    compensation for stock options granted to our employees and
    members of our Board of Directors when the market price of the
    underlying stock on the date of the grant exceeds the exercise
    price of the stock option on the date of the grant. We record
    and measure deferred compensation for stock options granted to
    non-employees based on the fair value of the stock options.
    Restricted stock and restricted stock units
    (RSUs).  We record and measure
    deferred compensation for restricted stock and RSUs based on the
    market price of our Common Stock on the date of grant.       F-18




---



##### Table of Contents



For the Years Ended
    December 31,2005


2004


2003(Thousands, except per share
    data)Stock-based compensation, net
    of tax:As reported

$
2,195


$
1,404


$
303Additional stock-based
    compensation expense determined under the fair value method, net
    of tax


20,006



18,181



16,810Pro forma

$
22,201


$
19,585


$
17,113Net income (loss)
    (Restated):As reported

$
(33,741
)

$
18,179


$
17,333Less: additional stock-based
    compensation expense determined under the fair value method, net
    of tax


(20,006
)


(18,181
)


(16,810
)Pro forma

$
(53,747
)

$
(2
)

$
523Earnings (loss) per share-basic
    (Restated):As reported

$
(0.51
)

$
0.29


$
0.28Less: per share effect of
    additional stock-based compensation expense determined under the
    fair value method, net of tax


(0.30
)


(0.29
)


(0.27
)Pro forma

$
(0.81
)

$
0.00


$
0.01Earnings (loss) per
    share-diluted (Restated):As reported

$
(0.51
)

$
0.27


$
0.28Less: per share effect of
    additional stock-based compensation expense determined under the
    fair value method, net of tax


(0.30
)


(0.27
)


(0.27
)Pro forma

$
(0.81
)

$
0.00


$
0.01       Expected
    Life.
    Expected
    Volatility.
   F-19




---



##### Table of Contents



Risk-Free
    Interest Rate.
    Expected
    Dividend Yield.
      For the Years Ended
    December 31,2005


2004


2003Expected life (in years)


3.6



3.3



4.1Expected volatility


55
%


60
%


82
%Risk-free interest rate


4.0
%


2.8
%


2.2
%Expected dividend yield


0
%


0
%


0
%   Earnings
    Per Share
    Restructuring
    and Related Expenses
    Research
    and Development Costs
   F-20




---



##### Table of Contents



Segment
    Information
    Reclassifications
    Recent
    Accounting Pronouncements
  Stock-Based
    Compensation
       F-21




---



##### Table of Contents



Conditional
    Asset Retirement Obligations
  and/or
  Accounting
    Changes
  Accounting Changes Reporting
    Accounting Changes in Interim Financial Statements
  Other-than-Temporary
    Impairment
  No. 03-1, Other-Than-Temporary (EITF 03-1). EITF 03-1 EITF 03-1 other-than-temporary EITF 03-1-a, No. 03-1, EITF 03-1 No. D-44, Other-Than-Temporary FAS 115-1 FAS 124-1, Other-Than-Temporary FAS 115-1 FAS 124-1), FAS 115-1 FAS 124-1,
  Accounting
    for Uncertain Tax Positions
   F-22




---



##### Table of Contents



Note 2  Restatement
    of Previously Issued Financial Statements
  SOP 97-2, Regulation S-X,
    Misclassification
    of Certain Customer Service Costs
        Research andIncrease (Decrease)
    in:

Cost of Sales


Development


SG&A


TotalYear Ended December 31,
    2004:Network Signaling Group

$
20,033


$
1,217


$
(21,250
)

$
Switching Solutions Group


9,395



332



(9,727
)


Communications Software Solutions
    Group














IEX Contact Center Group


674







(674
)


Corporate


437







(437
)


Consolidated impact

$
30,539


$
1,549


$
(32,088
)

$
   Research andIncrease (Decrease)
    in:

Cost of Sales


Development


SG&A


TotalYear Ended December 31,
    2003:Network Signaling Group

$
19,311


$
1,427


$
(20,738
)

$
Switching Solutions Group


2,619



86



(2,705
)


Communications Software Solutions
    Group














IEX Contact Center Group


913







(913
)


Corporate


406







(406
)


Consolidated impact

$
23,249


$
1,513


$
(24,762
)

$
  F-23




---



##### Table of Contents



Revenue
    Recognition
  SOP 97-2 SOP 97-2
  2004


2003(Thousands)Increase (Decrease) in
    revenues:Network Signaling Group

$
(28,600
)

$
(1,103
)Switching Solutions Group


(2,326
)


(5,829
)Communications Software Solutions
    Group


2,310



(2,847
)IEX Contact Center Group


399



(470
)Total

$
(28,217
)

$
(10,249
)     Establishment
    of VSOE in Multiple Element Sales Arrangements and Application
    of the Residual Method
  SOP 97-2, SOP 97-2
  SOP 97-2 SOP 97-2,
  SOP 97-2,
 F-24




---



##### Table of Contents



2004


2003(Thousands)Increase (Decrease) in
    revenues:Network Signaling Group

$
(23,837
)

$
(642
)Switching Solutions Group


(1,901
)


(5,472
)Communications Software Solutions
    Group


3,177



(3,743
)IEX Contact Center Group


399



(470
)Total

$
(22,162
)

$
(10,327
)     2004


2003(Thousands)Increase (Decrease) in cost of
    sales:Network Signaling Group

$
(1,678
)

$
(3,162
)Switching Solutions Group


(495
)


(2,654
)Communications Software Solutions
    Group


2,198



(1,655
)IEX Contact Center Group






Total

$
25


$
(7,471
)   2004


2003(Thousands)Increase (Decrease) in SG&A
    expenses:Network Signaling Group

$
(729
)

$
(76
)Switching Solutions Group


(39
)


(120
)Communications Software Solutions
    Group


(1
)


IEX Contact Center Group






Total

$
(769
)

$
(196
)   Accounting
    for Product Warranty
  SOP 97-2
 F-25




---



##### Table of Contents



2004


2003(Thousands)Increase (Decrease) in
    revenues:Network Signaling Group

$
(2,862
)

$
442Switching Solutions Group


(441
)


(299
)Communications Software Solutions
    Group


(677
)


956IEX Contact Center Group






Total

$
(3,980
)

$
1,099     2004


2003(Thousands)Increase (Decrease) in cost of
    sales:Network Signaling Group

$
1,472


$
777Switching Solutions Group


866



(126
)Communications Software Solutions
    Group






IEX Contact Center Group






Total

$
2,338


$
651   Accounting
    for Contract Penalty Provisions
  SOP 97-2,
    2004


2003(Thousands)Increase (Decrease) in
    revenues:Network Signaling Group

$
(1,901
)

$
(903
)Switching Solutions Group


16



(58
)Communications Software Solutions
    Group


(190
)


(60
)IEX Contact Center Group






Total

$
(2,075
)

$
(1,021
)  F-26




---



##### Table of Contents



Other
    Miscellaneous Accounting, Financial Statement Presentation and
    Disclosure Errors
    Summary
    of Restatement Adjustments
    As of December 31,
    2004As Previously


RestatementReported


Adjustments


RestatedConsolidated Balance
    Sheet:

(Thousands)ASSETSCurrent assets:Cash and cash equivalents

$
48,925


$



$
48,925Short-term investments, at fair
    value


134,435







134,435Accounts receivable, net


107,850



1,686
(1)


109,536Inventories


33,654







33,654Deferred income taxes, net


15,804



(746
)(10)


15,058Deferred costs and prepaid
    commissions






13,342
(2)


46,20632,864
(3)Prepaid expense and other current
    assets


44,639



(32,864
)(3)


15,947621
(10)(72
)(4)3,623
(5)Total current assets


385,307



18,454



403,761Long-term investments, at fair
    value


93,622







93,622Property and equipment, net


30,617







30,617Investment in privately-held
    company


7,322







7,322Deferred income taxes


45,748



(19,586
)(6)


26,547385
(10)Other assets


6,757







6,757Goodwill


128,732



(2,290
)(1)


126,442Intangible assets, net


83,538



(3,623
)(5)


79,915Total assets

$
781,643


$
(6,660
)

$
774,983 F-27




---



##### Table of Contents



As of December 31,
    2004As Previously


RestatementReported


Adjustments


RestatedConsolidated Balance
    Sheet:

(Thousands)LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Trade accounts payable

$
35,316


$



$
35,316Accrued expenses


30,417



(937
)(1)


17,536(2,876
)(2)(501
)(4)(8,567
)(10)Accrued payroll and related
    expenses


23,478



12
(4)


23,490Short-term notes and current
    portion of notes payable


3,266







3,266Current portion of deferred
    revenues


92,182



333
(1)


174,84982,334
(2)Income taxes payable


646



(646
)(10)


Total current liabilities


185,305



69,152



254,457Notes payable


78







78Long-term convertible debt


125,000







125,000Deferred income taxes


19,586



(19,586
)(6)


Long-term portion of deferred
    revenues


2,187



1,880
(2)


4,067Total liabilities


332,156



51,446



383,602Minority interest


20,489



(2,861
)(7)


17,628Total shareholders equity


428,998



(35,548
)(8)


373,753(19,697
)(9)Total liabilities and
    shareholders equity

$
781,643


$
(6,660
)

$
774,983     (1)
    
    To correct certain clerical errors in the purchase accounting
    entries relating to our Steleus acquisition and the reversal of
    $937 of accrued liabilities that were improperly recorded upon
    acquisition.(2)
    
    To record cumulative adjustments relating to errors in revenue
    recognition discussed in the section entitled Revenue
    Recognition above.(3)
    
    To present deferred costs and prepaid commissions as a separate
    line item on our consolidated balance sheets.(4)
    
    To correct certain other accounting and disclosure items
    primarily associated with the over or under deferral/accrual of
    certain assets and liabilities.(5)
    
    To reclassify certain prepaid royalties from Intangible
    assets, net to Prepaid expense and other current
    assets.(6)
    
    To combine certain deferred tax liabilities and deferred tax
    assets that were previously reported separately.(7)
    
    To correct minority interest for the effects of
    restatement adjustments (1), (2) and (4) above which
    are related to our then majority-owed subsidiary, Santera
    Systems Inc.(8)
    
    To reflect the cumulative effects on shareholders equity
    of the restatement adjustments as of December 31, 2002. The
    principal adjustment resulted from additional deferred revenues
    of $45.7 million, offset by related deferred costs and
    income tax effects.(9)
    
    To reflect the effects on shareholders equity of the
    adjustments detailed in items (1), (2), (4), (7) and
    (10) for 2003 and 2004.(10)
    
    To reflect the income tax effects of the adjustments detailed in
    items (1), (2), (4) and (7) above.  F-28




---



##### Table of Contents



For the Year Ended
    December 31, 2004As Previously


RestatementReported


Adjustments


Restated(Thousands, except per-share
    data)Consolidated Statement of
    Operations:Revenues

$
397,072


$
(28,217
)(1)

$
368,855Costs of Sales:Cost of goods sold


101,451



2,363
(1)


134,35330,539
(2)Amortization of purchased
    technology


9,128







9,128Total cost of sales


110,579



32,902



143,481Gross profit


286,493



(61,119
)


225,374Operating expenses:Research and development


98,192



1,549
(2)


99,741Selling, general and administrative


151,796



(769
)(1)


118,783(32,088
)(2)(156
)(3)Amortization of intangible assets


2,505







2,505Acquired in-process research and
    development


14,200







14,200Restructuring


1,666







1,666Total operating expenses


268,359



(31,464
)


236,895Income from operations


18,134



(29,655
)


(11,521
)Other income, net


30,845



19
(4)


30,864Income (loss) from before
    provision for income taxes


48,979



(29,636
)


19,343Provision for income taxes


33,325



(10,396
)(6)


22,929Income (loss) before minority
    interest


15,654



(19,240
)


(3,586
)Minority interest


20,719



1,046
(5)


21,765Net income (loss)

$
36,373


$
(18,194
)

$
18,179Earnings (loss) per
    share:Basic

$
0.58






$
0.29Diluted


0.53







0.27     (1)
    
    To record adjustments relating to errors in revenue recognition
    discussed in the section entitled Revenue
    Recognition above.(2)
    
    To correct the classification of customer service costs as
    discussed above under Misclassification of Certain
    Customer Service Costs.(3)
    
    To correct certain other accounting and disclosure items
    primarily associated with the over or under deferral/accrual of
    certain assets and liabilities.(4)
    
    To correct for errors relating to foreign currency translation.(5)
    
    To correct minority interest for the effects of
    restatement adjustments (1) and (3) above which are
    related to our then majority-owed subsidiary, Santera Systems
    Inc.(6)
    
    To record the income tax adjustments related to the adjustments
    detailed in items (1), (3), (4) and (5) above.  F-29




---



##### Table of Contents



For the Year Ended
    December 31, 2003As Previously


RestatementReported


Adjustments


Restated(Thousands, except per-share
    data)Consolidated Statement of
    Operations:Revenues

$
263,700


$
(10,249
)(1)

$
253,451Costs of Sales:Cost of goods sold


58,697



(6,820
)(1)


75,12623,249
(2)Amortization of purchased
    technology


11,178







11,178Total cost of sales


69,875



16,429



86,304Gross profit


193,825



(26,678
)


167,147Operating expenses:Research and development


73,328



1,513
(2)


74,841Selling, general and administrative


104,247



(196
)(1)


79,221(24,762
)(2)(68
)(3)Amortization of intangible assets


1,900







1,900Acquired in-process research and
    development


2,900







2,900Total operating expenses


182,375



(23,513
)


158,862Income (loss) from operations


11,450



(3,165
)


8,285Other income (expense), net


(2,483
)


365
(4)


(2,118
)Income (loss) from continuing
    operations before provision for income taxes


8,967



(2,800
)


6,167Provision for income taxes


13,600



134
(6)


13,734Income (loss) before minority
    interest


(4,633
)


(2,934
)


(7,567
)Minority interest


19,792



1,815
(5)


21,607Income from continuing operations


15,159



(1,119
)


14,040Gain on sale of discontinued
    operations, net of income taxes


3,293







3,293Net income (loss)

$
18,452


$
(1,119
)

$
17,333Earnings (loss) per
    share:Basic

$
0.30






$
0.28Diluted


0.29







0.28     (1)
    
    To record adjustments relating to errors in revenue recognition
    discussed in the section entitled Revenue
    Recognition above.(2)
    
    To correct the classification of customer service costs as
    discussed above under Misclassification of Certain
    Customer Service Costs.(3)
    
    To correct certain other accounting and disclosure items
    primarily associated with the over or under deferral/accrual of
    certain assets and liabilities.(4)
    
    To correct for errors relating to foreign currency translation.(5)
    
    To correct minority interest for the effects of restatement
    adjustments (1) and (3) above which are related to our
    then majority-owed subsidiary, Santera Systems Inc.(6)
    
    To record the income tax adjustments related to the adjustments
    detailed in items (1), (3), (4) and (5) above. F-30




---



##### Table of Contents



For the Year Ended
    December 31, 2004As Previously


RestatementReported


Adjustments


Restated(Thousands)Net cash provided by operating
    activities

$
21,158


$
(166
)

$
20,992Net cash used in investing
    activities


(44,843
)


185



(44,658
)Net cash provided by financing
    activities


26,957







26,957Effect of exchange rate changes on
    cash


392



(19
)


373Net increase (decrease) in cash
    and cash equivalents


3,664







3,664Cash and cash equivalents at
    beginning of the year


45,261







45,261Cash and cash equivalents at
    end of the year

$
48,925


$



$
48,925   For the Year Ended
    December 31, 2003As Previously


RestatementReported


Adjustments


Restated(Thousands)Net cash provided by operating
    activities

$
27,308


$
365


$
27,673Net cash used in investing
    activities


(100,707
)






(100,707
)Net cash used in financing
    activities


(3,388
)






(3,388
)Effect of exchange rate changes on
    cash


412



(365
)


47Net increase (decrease) in cash
    and cash equivalents


(76,375
)






(76,375
)Cash and cash equivalents at
    beginning of the year


121,636







121,636Cash and cash equivalents at
    end of the year

$
45,261


$



$
45,261   Note 3  Acquisitions
       F-31




---



##### Table of Contents



Santera
    Systems Inc.
      step-up
  (Thousands)(Restated)Fair value of Santera

$
61,000Direct acquisition costs


3,700Less: Santera tangible net assets
    acquired


(8,205
)Fair value
    step-up

$
56,495    F-32




---



##### Table of Contents



(Thousands)(Restated)In-process research and development

$
2,900Goodwill


25,397Identifiable intangible assets


27,200Acquired backlog


500Inventory fair value
    step-up


498$
56,495         2005(2)


2004


2003(Restated)


(Restated)Santera net losses(1)

$
16,529


$
35,105


$
34,850Percentage of losses attributable
    to the minority interest based on capital structure and
    liquidation preferences


62
%


62
%


62
%Minority interest losses

$
10,248


$
21,765


$
21,607     (1)
    
    The Santera net losses include amortization of intangibles of
    $1,897 for the year ended December 31, 2005, amortization
    of intangibles of $4,291 for the year ended December 31,
    2004 and amortization of intangibles of $4,069 and IPR&D
    charges of $2,900 for the year ended December 31, 2003. F-33




---



##### Table of Contents



(2)
    
    The losses of Santera for 2005 only include losses that were
    incurred prior to October 3, 2005, the date of our
    acquisition of the shares of Santera held by the minority
    shareholders, as discussed below.      Tangible assets:Deferred tax asset, net

$
42,576Total tangible assets


42,576Intangible assets:Acquired technology


2,840In-process research and development


2,363Customer relationships


1,128Contracted backlog


1,613Goodwill


19,803Total intangible assets


27,747Liabilities assumed:Deferred tax liability


1,953Total liabilities assumed


1,953Net assets acquired

$
68,370      F-34




---



##### Table of Contents



Asset


Estimated LifeAmount


in Years(Thousands)Acquired technology

$
2,840



10Customer relationships


1,128



6Contracted backlog


1,613



1.5$
5,581     December 31,2005


2004(Restated)Total revenues

$
536,909


$
368,855Net income (loss)

$
(31,653
)

$
5,566Diluted net income (loss) per share

$
(0.48
)

$
0.08     iptelorg
    GmbH
     F-35




---



##### Table of Contents



Tangible assets:Cash and cash equivalents

$
183Accounts receivable and other
    current assets


486Property and equipment


101Total tangible assets


770Intangible assets:Acquired technology


4,190Customer relationships


60Non-compete agreements


240In-process research and development


1,210Goodwill


3,361Total intangible assets


9,061Liabilities assumed:Accounts payable and accrued
    liabilities


747Deferred tax liability


1,796Total liabilities assumed


2,543Net assets acquired

$
7,288          F-36




---



##### Table of Contents



Steleus
    Group Inc.
        step-up
  (Thousands)(Restated)Total cash paid or held in escrow

$
53,600Direct transaction costs


5,003Total fair value of consideration
    paid and direct transaction costs


58,603Less: Steleus tangible net
    assets acquired


(2,894
)Add: Estimated deferred tax
    liability


8,599Less: Estimated deferred tax assets


(15,641
)Total fair value
    step-up in
    Steleus

$
48,667     step-up
  (Thousands)(Restated)In-process research and development

$
3,800Goodwill


20,297Identifiable intangible assets


24,570Total purchase price allocation

$
48,667    F-37




---



##### Table of Contents



Asset


Estimated LifeAmount


in Years(Thousands)Acquired technology

$
19,300



10Acquired backlog


800



1.2Trade names and marks


150



1.2Existing customer relationships


1,030



10Service contracts


2,890



2Non-compete agreements


400



2$
24,570   VocalData,
    Inc.
        step-up
  (Thousands)(Restated)Total cash paid

$
14,500Fair value of stock issued


13,000Direct transaction costs


354Total fair value of consideration
    paid and direct transaction costs


27,854Less: VocalDatas tangible
    net assets acquired


(2,636
)Add: Estimated deferred tax
    liability


2,278Less: Estimated deferred tax assets


(12,253
)Total fair value
    step-up in
    VocalData

$
15,243    F-38




---



##### Table of Contents



step-up
  (Thousands)(Restated)In-process research and development

$
2,400Goodwill


6,333Identifiable intangible assets


6,510Total purchase price allocation

$
15,243     Asset


Estimated LifeAmount


in Years(Thousands)Acquired technology

$
5,200



10Acquired backlog


100



1Trade names and marks


10



1Existing customer relationships


500



10Service contracts


500



1Non-compete agreements


200



1$
6,510   Taqua,
    Inc.
     F-39




---



##### Table of Contents



step-up
  (Thousands)(Restated)Total cash paid

$
85,966Fair value of stock options assumed


7,755Deferred compensation adjustment
    for unvested stock options


(4,231
)Direct transaction costs


2,751Total fair value of consideration
    paid and direct transaction costs


92,241Less: Taquas tangible net
    assets acquired


(2,086
)Add: Estimated deferred tax
    liability


10,724Less: Estimated deferred tax assets


(31,204
)Less: Other adjustments to
    tangible assets and liabilities


(387
)Total fair value
    step-up in
    Taqua

$
69,288     step-up
  (Thousands)(Restated)In-process research and development

$
8,000Goodwill


31,978Identifiable intangible assets


29,310Total purchase price allocation

$
69,288    F-40




---



##### Table of Contents



Asset


Estimated LifeAmount


in Years(Thousands)Acquired technology

$
26,400



15Acquired backlog


1,500



1Trade names and marks


60



1Existing customer relationships


10



12Service contracts


630



5Non-compete agreements


710



1$
29,310     Note 4  Disposition
    of Network Diagnostics Business
        Note 5  Restructuring
    Costs
    Manufacturing
    Relocation
   F-41




---



##### Table of Contents



CumulativeCosts IncurredTotal Costs


throughExpected to be


December 31,Incurred


2005Severance costs and retention
    bonuses

$
972


$
972Employee relocation costs


550



550Facility relocation costs


244



244Total

$
1,766


$
1,766     Corporate
    Headquarters and Taqua Relocations
      CumulativeCosts IncurredTotal Costs


throughExpected to be


December 31,Incurred


2005Severance costs and retention
    bonuses

$
5,092


$
4,962Employee relocation costs


265



265Facility relocation costs


1,113



1,113Other(1)


1,374



1,295Total

$
7,844


$
7,635     (1)
    
    Consists of costs related to the transition of our corporate
    headquarters including recruitment, signing bonuses and training
    costs related to the hiring of finance and administrative
    personnel in Morrisville as well as travel costs during the
    transition period. In addition, other costs include salary costs
    for duplicative employees during the transition of job
    responsibilities from employees located in Calabasas to the
    successor employees in Morrisville. These transition costs are
    expensed as incurred. F-42




---



##### Table of Contents



SeveranceCosts and


Employee


FacilityRetention


Relocation


RelocationBonuses


Costs


Costs


Other(3)


TotalRestructuring obligations,
    January 1, 2004

$



$



$



$



$
Restructuring and related expenses


972



498



196







1,666Cash payments


(896
)


(498
)


(196
)






(1,590
)Restructuring obligations,
    December 31, 2004


76















76Restructuring and related expenses:Manufacturing relocation






53



47







100Corporate Headquarters and Taqua
    relocation(1)(2)


4,962



265



1,113



1,295



7,635Cash payments


(2,015
)


(163
)


(869
)


(1,295
)


(4,342
)Non-cash charges










(191
)






(191
)Restructuring obligations,
    December 31, 2005

$
3,023


$
155


$
100


$



$
3,278     (1)
    
    Severance costs and retention bonuses include approximately
    $1.6 million in severance costs related to the employment
    separation agreement with our Chief Executive Officer, who
    resigned from Tekelec effective January 1, 2006. All
    employee retention bonuses are expensed as incurred.(2)
    
    Facility relocation costs include (i) a one-time charge of
    $150,000 related to the termination of our lease in Hyannis and
    (ii) a charge of $319,000 associated with the disputed
    termination of our lease of office space in Westlake Village,
    California, comprised of a $87,000 write-off of certain
    leasehold improvements, $113,000 representing the possible
    forfeiture of our deposits paid to the landlord and $119,000 of
    other costs.(3)
    
    Consists of costs related to the transition of our corporate
    headquarters including recruitment, signing bonuses and training
    costs related to the hiring of finance and administrative
    personnel in Morrisville as well as travel costs during the
    transition period. In addition, other costs include salary costs
    for duplicative employees during the transition of job
    responsibilities from employees located in Calabasas to the
    successor employees in Morrisville. These transition costs are
    expensed as incurred.    Note 6  Sale
    of Investment in Privately Held Company and Gain on Warrants in
    Privately Held Company
   F-43




---



##### Table of Contents



Note 7  Financial
    Statement Details
  Other
    Income and Expense
    For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)(Thousands)Foreign currency transaction gain
    (loss), net

$
(3,519
)

$
2,665


$
885Net gain (loss) on derivative
    instruments


2,489



(2,568
)


(624
)Realized gain (loss) on
    investments, net


(1,375
)


185



Other, net


(265
)


20



190Total other income (expense), net

$
(2,670
)

$
302


$
451   Cash,
    Cash Equivalents and Investments
    UnrealizedCost


Loss


Gain


Market(Thousands)Cash and cash
    equivalents:Cash

$
49,269


$



$



$
49,269Certificates of deposit


2,800











2,800Total cash and cash equivalents

$
52,069


$



$



$
52,069Short-term
    investments:U.S. treasury and agency
    securities

$
25,170


$
(384
)

$



$
24,786Municipal securities


112,339



(457
)






111,882Corporate notes


33,750



(439
)






33,311Certificates of deposit


2,968











2,968Common shares in Alcatel


1,491



(251
)






1,240Other


73











73Total short-term investments

$
175,791


$
(1,531
)

$



$
174,260  F-44




---



##### Table of Contents



Less than 12 Months


Greater than 12 Months


TotalUnrealized





Unrealized





UnrealizedFair Value


Loss


Fair Value


Loss


Fair Value


LossU.S. treasury and agency
    securities

$



$



$
24,786


$
(384
)

$
24,786


$
(384
)Municipal securities


26,380



(142
)


1,340



(315
)


27,720



(457
)Corporate notes










33,311



(439
)


33,311



(439
)Common shares in Alcatel


1,240



(251
)










1,240



(251
)Total

$
27,620


$
(393
)

$
59,437


$
(1,138
)

$
87,057


$
(1,531
)Number of securities with an
    unrealized loss






14







58







72     UnrealizedCost


Loss


Gain


Market(Thousands)Cash and cash
    equivalents:Cash

$
48,480


$



$



$
48,480Certificates of deposit


445











445Total cash and cash equivalents

$
48,925


$



$



$
48,925Short-term
    investments:Municipal securities

$
91,506


$
(195
)

$
2


$
91,313Corporate notes


20,263



(28
)


32



20,267Certificates of deposit


1,433











1,433Common shares in Alcatel


20,328







982



21,310Other


112











112Total short-term investments

$
133,642


$
(223
)

$
1,016


$
134,435     UnrealizedCost


Loss


Gain


MarketLong-term
    investments:U.S. treasury and agency
    securities

$
26,920


$
(330
)

$



$
26,590Municipal securities


32,826



(109
)






32,717Corporate notes


34,792



(477
)






34,315Total short-term investments

$
94,538


$
(916
)

$



$
93,622  F-45




---



##### Table of Contents



Less than 12 Months


Greater than 12 Months


TotalUnrealized





Unrealized





UnrealizedFair Value


Loss


Fair Value


Loss


Fair Value


LossU.S. treasury and agency
    securities

$
26,589


$
(330
)

$



$



$
26,589


$
(330
)Municipal securities


77,802



(290
)


1,987



(14
)


79,789



(304
)Corporate notes


41,074



(505
)










41,074



(505
)Total

$
145,465


$
(1,125
)

$
1,987


$
(14
)

$
147,452


$
(1,139
)Number of securities with an
    unrealized loss






86







2







88       Expected Maturity Date2006


2007


2008


2009


2010


Thereafter


TotalU.S. treasury and agency
    securities

$
19,920


$
4,866


$



$



$



$



$
24,786Municipal securities


33,115



29,037



4,880











44,850



111,882Corporate notes


27,680



5,631



















33,311Certificates of deposit and other


3,041























3,041Total

$
83,756


$
39,534


$
4,880


$



$



$
44,850


$
173,020Common shares of Alcatel


























1,240Total short-term investments

























$
174,260   Accounts
    Receivable, net
    December 31,2005


2004(Restated)(Thousands)Trade accounts receivable

$
129,648


$
114,383Less: Allowance for doubtful
    accounts and sales returns


6,865



4,847$
122,783


$
109,536  F-46




---



##### Table of Contents



For the Years Ended
    December 31,2005


2004


2003(Thousands)Balance at beginning of period

$
4,847


$
2,619


$
4,860Current year provision


2,724



820



415Write-offs net of recoveries(1)


(706
)


1,408



(2,656
)Balance at end of period

$
6,865


$
4,847


$
2,619     (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.  Inventories
    December 31,2005


2004(Restated)(Thousands)Raw materials

$
32,729


$
20,972Work in process


4,879



4,147Finished goods


10,739



8,535$
48,347


$
33,654   Property
    and Equipment, net
    December 31,2005


2004(Restated)(Thousands)Manufacturing and development
    equipment

$
94,447


$
82,120Furniture and office equipment


51,133



44,599Demonstration equipment


3,744



4,016Leasehold improvements


15,219



10,992164,543



141,727Less, accumulated depreciation and
    amortization


(123,749
)


(111,110
)$
40,794


$
30,617  F-47




---



##### Table of Contents



Accrued
    expenses
    December 31,2005


2004(Restated)(Thousands)Accrued expenses and other

$
19,065


$
8,792Warranty reserve


9,269



Sales and other taxes payable


5,256



2,822Accrued commissions


4,180



3,399Accrued losses on customer
    contracts


6,701



Accrued professional fees


6,178



2,523Total

$
50,649


$
17,536   Accrued
    payroll and related expenses
    December 31,2005


2004(Restated)(Thousands)Accrued payroll

$
16,092


$
11,821Accrued vacation


11,097



9,613Payroll taxes


2,202



2,056Total

$
29,391


$
23,490   Accumulated
    Other Comprehensive (Loss) Income
    December 31,2005


2004(Restated)(Thousands)Foreign currency translation
    adjustments

$
(247
)

$
(1
)Unrealized (losses) gains on
    securities, net of taxes of $539,000 and $387,000, respectively


(992
)


171Total

$
(1,239
)

$
170   Note 8  Related
    Party Transactions
    Note 9  Derivative
    Instruments and Hedging Activities
   F-48




---



##### Table of Contents



Note 10  Income
    Taxes
    For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)(Thousands)Current:Federal

$
10,370


$
15,035


$
11,793State


5,867



3,188



2,053Foreign


1,123



1,039



1,216Deferred:Federal


(16,635
)


3,981



(1,366
)State


(858
)


(314
)


38Total provision for income
    taxes

$
(133
)

$
22,929


$
13,734    F-49




---



##### Table of Contents



For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)(Thousands)Federal statutory provision

$
(15,443
)





$
6,769






$
2,159State taxes, net of federal benefit


4,275







1,675







1,267Research and development credits


(4,659
)






(2,286
)






(406
)Nontaxable foreign source income


(1,180
)






(1,583
)






(441
)Acquisition-related intangible
    assets, net of related deferred income tax liability


9,717







5,297







2,231Foreign taxes and other


2,209







1,839







(359
)Domestic production activities
    deduction


(391
)














Tax exempt interest


(1,262
)














Increase in valuation allowance


6,601







11,218







9,283Total income tax provision for
    continuing operations

$
(133
)


(0.3
)%

$
22,929



118.5
%

$
13,734



222.7
%    F-50




---



##### Table of Contents



December 31,2005


2004(Restated)(Thousands)Deferred tax assets:Allowance for doubtful accounts

$
984


$
1,876Inventory write downs


3,344



2,158Capitalized organization charges


4,011



4,134Depreciation and amortization


4,661



5,122Research and development credit
    carry forward


6,480



4,512Accrued liabilities


12,060



2,034Deferred revenue


11,560



5,585Retirement stock


1,956



2,003Other


1,018



3,189Net operating loss carry forward


76,077



120,236Total deferred tax assets


122,151



150,849Valuation allowance for deferred
    tax assets


(3,969
)


(73,895
)Total net deferred tax asset

$
118,182


$
76,954Deferred tax assets of continuing
    operations:Current portion

$
28,814


$
19,284Long-term portion


89,368



57,670Total deferred tax assets of
    continuing operations


118,182



76,954Total net deferred tax assets

$
118,182


$
76,954Deferred tax
    liabilities:Acquisition-related intangible
    assets

$
23,476


$
27,970Deferred gain






7,379Acquisition-related intangible
    assets:

$
23,476


$
35,349Current portion

$



$
7,379Long term portion


23,476



27,970Total deferred tax liability

$
23,476


$
35,349    F-51




---



##### Table of Contents



Note 11  Intangible
    Assets and Goodwill
  Intangible
    Assets
    December 31,2005


2004(Restated)(Thousands)Purchased technology

$
58,630


$
76,900Customer relationships


3,428



2,240Acquired backlog


1,613



2,400Non-compete contracts


640



1,310Service contracts


3,520



4,020Trade names and marks






22067,831



87,090Less: accumulated amortization


(10,617
)


(7,175
)Total intangible assets

$
57,214


$
79,915     WeightedAverageLifePurchased technology


12.1Customer relationships


9.6Acquired backlog


1.5Non-compete contracts


2.4Service contracts


2.5  F-52




---



##### Table of Contents



For the Years Ending
    December 31,

(Thousands)2006

$
8,1242007


5,9792008


5,6722009


5,5342010


5,446Thereafter


26,459Total

$
57,214       Goodwill
   F-53




---



##### Table of Contents



Network


Switching


CommunicationsSignaling


Solutions


Software


ContactGroup


Group


Solutions Group


Center


Total(Restated) (Thousands)Balance at December 31, 2003

$



$
58,767


$



$
9,698


$
68,465Addition due to the acquisition of
    Taqua






31,978











31,978Addition due to the acquisition of
    VocalData






6,333











6,333Addition due to the acquisition of
    Steleus










20,297







20,297Adjustments to goodwill based on
    actual transaction related costs






(631
)










(631
)Balance at December 31, 2004






96,447



20,297



9,698



126,442Addition due to the acquisition of
    iptelorg


3,361















3,361Addition due to the acquisition of
    Santera






19,803











19,803Impairment of Taqua goodwill






(27,245
)










(27,245
)Adjustment to goodwill to record a
    valuation allowance related to certain deferred tax assets
    acquired as a result of the acquisition of Steleus










3,044







3,044Adjustments to goodwill,
    principally related to deferred tax assets acquired






443



174







617Balance at December 31, 2005

$
3,361


$
89,448


$
23,515


$
9,698


$
126,022   Note 12  Lines
    of Credit and Borrowings
      Note 13  Long-Term
    Convertible Debt
  yield-to-maturity
 F-54




---



##### Table of Contents



60-day 15-day 60-day
  Form 10-Q Form 10-Q) Form 10-Q
  Form 10-Q Form 10-Q.
  Note 14  Commitments
    and Contingencies
     F-55




---



##### Table of Contents



For the Years Ending
    December 31,

(Thousands)2006

$
8,5782007


8,4492008


8,0172009


7,5932010


5,526Thereafter


14,006$
52,169     Indemnities,
    Commitments and Guarantees
    Litigation
    Bouygues
    Telecom, S.A., vs. Tekelec
     F-56




---



##### Table of Contents



F-57




---



##### Table of Contents



IEX
    Corporation vs. Blue Pumpkin Software, Inc.
    Markman Markman-
      Lemelson
    Medical, Education and Research Foundation, Limited Partnership
    vs. Tekelec
     F-58




---



##### Table of Contents



Note 15  Stock-Based
    Compensation and Employee Benefit Plans
  Overview
    of our Stock-Based Employee Compensation Plans
    24-month 24-month
  Common
    Stock Warrants
    CEO
    Stock Option Modifications
    Assumed
    In-The-Money
    Stock Options
  in-the-money
 F-59




---



##### Table of Contents



Restricted
    Stock and Restricted Stock Units
    (RSUs)
        Stock
    Options Issued to Non-Employees
    Stock
    Options Outstanding
    2005


2004


2003Wgtd. Avg.





Wgtd. Avg.





Wgtd. Avg.Shares


Exer. Price


Shares


Exer. Price


Shares


Exer. PriceOutstanding at beginning of year


23,047


$
17.20



18,054


$
15.91



14,551


$
20.18Granted  price
    equals fair value


2,823



16.37



8,870



18.14



7,221



11.20Granted  price
    less than fair value










492



9.42







Exercised


(861
)


10.40



(2,776
)


11.30



(644
)


7.92Cancelled


(1,846
)


19.38



(1,593
)


16.04



(3,074
)


26.76Outstanding at year-end


23,163


$
17.17



23,047


$
17.20



18,054


$
15.91Options exercisable at year-end


14,205


$
17.83



11,004


$
18.64



9,411


$
17.74Options available for future
    grant(1)


2,034







2,434







5,406Weighted average fair value of
    options granted during the year:Exercise price equals fair value
    at grant date

$
7.20






$
8.38






$
7.48  F-60




---



##### Table of Contents



(1)
    
    As of December 31, 2005, approximately 1,561 of the
    2,034 shares available for future grant are associated with
    our 2004 Plan. Options granted under our 2004 Plan are
    restricted to grants to new employees as an inducement to their
    commencement of employment.    Options Outstanding


Options ExercisableWgtd. Avg.Remaining


Wgtd. Avg.





Wgtd. Avg.Contractual


Exercise





ExerciseRange of Exercise
    Price

Number


Life


Price


Number


Price$ 0.01 to $ 2.50


39



0.60


$
2.38



39


$
2.382.51 to  5.00


347



2.82



3.79



302



3.885.01 to  7.50


113



3.81



7.00



108



7.007.51 to 10.00


2,357



4.05



8.73



1,584



8.7810.01 to 12.50


893



4.10



11.04



817



11.0212.51 to 15.00


3,703



4.08



13.23



2,029



13.3615.01 to 17.50


3,611



4.87



16.94



1,181



16.8017.51 to 20.00


7,743



5.00



18.62



4,002



18.8620.01 to 22.50


834



2.47



20.86



808



20.8822.51 to 2,739


3,523



4.72



26.50



3,335



26.69Total


23,163



4.52


$
17.17



14,205


$
17.83   Employee
    Stock Purchase Plan
      Employee
    401(k) Plan
   F-61




---



##### Table of Contents



Note 16  Earnings
    Per Share
    Net Income(Loss)


Shares


Per-Share(Numerator)


(Denominator)


Amount(Thousands except per-share
    amounts)For the Year Ended
    December 31, 2005:Basic earnings per share

$
(33,741
)


66,001


$
(0.51
)Effect of Dilutive Securities






Diluted loss per share

$
(33,741
)


66,001


$
(0.51
)For the Year Ended
    December 31, 2004 (Restated):Basic earnings per share

$
18,179



63,131


$
0.29Effect of Dilutive Securities






3,191Diluted earnings per share

$
18,179



66,322


$
0.27For the Year Ended
    December 31, 2003 (Restated):Basic earnings per share

$
17,333



61,163


$
0.28Effect of Dilutive Securities






1,748Diluted earnings per share

$
17,333



62,911


$
0.28     For the Years Ended
    December 31,2005


2004


2003(Restated)


(Restated)(Thousands)Weighted average number of stock
    options excluded due to the exercise price exceeding the average
    fair value of our Common Stock during the period


13,325



9,182



10,669Weighted average number of stock
    options and restricted stock, calculated using the treasury
    stock method, that were excluded due to the reporting of a net
    loss for the period


2,072







Shares issuable upon conversion of
    our long-term convertible debt


6,361



6,361



6,361Total common stock equivalents
    excluded from diluted net (loss) income per share computation


21,758



15,543



17,030     Note 17  Operating
    Segment Information
    Network Signaling Group.
 F-62




---



##### Table of Contents



e.g.,
  Switching Solutions Group.
  Communications Software Solutions Group.
  IEX Contact Center Group.
      Net Revenues2005


2004


2003(Restated)


(Restated)Network Signaling Group

$
314,605


$
256,313


$
202,236Switching Solutions Group


139,893



52,563



5,621Communications Software Solutions
    Group


33,838



21,649



10,244IEX Contact Center Group


50,404



41,946



35,350Intercompany Eliminations


(1,831
)


(3,616
)


Total net revenues

$
536,909


$
368,855


$
253,451   F-63




---



##### Table of Contents



Income (Loss) from
    Operations2005


2004


2003(Restated)


(Restated)Network Signaling Group

$
127,611


$
106,706


$
73,785Switching Solutions Group


(46,209
)


(66,999
)


(25,760
)Communications Software Solutions
    Group


(18,139
)


(1,645
)


(3,107
)IEX Contact Center Group


19,601



16,451



11,523General Corporate(1)


(126,413
)


(66,034
)


(48,156
)Total income (loss) from operations

$
(43,549
)

$
(11,521
)

$
8,285     (1)
    
    General Corporate includes acquisition-related charges and
    amortization of $13,685, $25,027 and $15,325 for 2005, 2004 and
    2003, 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. For the year ended December 31, 2005, General
    Corporate also includes non-cash impairment charges for
    purchased technology and goodwill of $22,660 and $27,245,
    respectively.  Enterprise
    Wide Disclosures
    Revenues from External
    Customers2005


2004


2003(Restated)


(Restated)(Thousands)Network Signaling Products

$
314,605


$
256,313


$
202,236Switching Solutions Products


139,893



52,563



5,621Communications Software Solutions
    Products


32,007



18,033



10,244IEX Contact Center Products


50,404



41,946



35,350Total net revenues

$
536,909


$
368,855


$
253,451     Revenues by Type2005


2004


2003(Restated)


(Restated)(Thousands)Products and services

$
463,233


$
307,607


$
199,136Extended warranty contracts


73,676



61,248



54,315Total net revenues

$
536,909


$
368,855


$
253,451  F-64




---



##### Table of Contents



Revenues from External Customers
    by Geographic Territory2005


2004


2003(Restated)


(Restated)(Thousands)North America(1)

$
410,136


$
289,540


$
215,629Europe, Middle East and Africa


61,986



35,712



22,492Caribbean and Latin America


33,635



23,034



7,193Asia Pacific


31,152



20,569



8,137Total revenues from external
    customers

$
536,909


$
368,855


$
253,451     (1)
    
    North America represents the United States and Canada, excluding
    Mexico (included in Latin America). Included in North America
    are revenues derived in the United States of $390,082, $272,668
    and $208,632, for 2005, 2004 and 2003, respectively.    2005


2004(Restated)(Thousands)United States

$
50,511


$
42,187Other


3,652



2,509Total long-lived assets

$
54,163


$
44,696  F-65




---



##### Table of Contents



Note 18  Quarterly
    Financial Summary (Unaudited) (in thousands, except per share
    amounts)
  Form 10-Q
  SOP 97-2
  Three Months Ended
    March 31, 2005


Three Months Ended June 30,
    2005Previously








PreviouslyReported


Adjustments


Restated


Reported


Adjustments


RestatedRevenues

$
119,375


$
19,488


$
138,863


$
133,044


$
(10,316
)

$
122,728Gross profit


86,018



8,623



94,641



91,355



(17,635
)


73,720Impairment of purchased technology






















Impairment of goodwill






















Income (loss) from continuing
    operations before provision for income taxes(1)


5,970



17,711



23,681



6,668



(7,379
)


(711
)Minority interest


6,375



(1,593
)


4,782



2,850



14



2,864Net income (loss)


6,656



10,819



17,475



5,576



(4,791
)


785Earnings (loss) per share:Basic

$
0.10






$
0.27


$
0.08






$
0.01Diluted


0.10







0.24



0.08







0.01Weighted average number of shares
    outstanding:Basic


65,598







65,598



65,723







65,723Diluted


74,407







74,407



67,258







67,258   Three MonthsThree Months Ended
    September 30, 2005


EndedPreviously








December 31,Reported


Adjustments


Restated


2005Revenues

$
148,103


$
(27,123
)

$
120,980


$
154,338Gross profit


96,974



(31,357
)


65,617



50,723Impairment of purchased technology














22,660Impairment of goodwill














27,245Income (loss) from continuing
    operations before provision for income taxes(1)


12,743



(20,108
)


(7,365
)


(59,727
)Minority interest


2,014



588



2,602



Net income (loss)


8,736



(12,814
)


(4,078
)


(47,923
)Earnings (loss) per share:Basic

$
0.13






$
(0.06
)

$
(0.72
)Diluted


0.12







(0.06
)


(0.72
)Weighted average number of shares
    outstanding:Basic


66,113







66,113



66,571Diluted


75,183







66,113



66,571   F-66




---



##### Table of Contents



Three Months Ended
    March 31, 2004


Three Months Ended June 30,
    2004Previously








PreviouslyReported


Adjustments


Restated


Reported


Adjustments


RestatedRevenues

$
78,870


$
(2,896
)

$
75,974


$
95,618


$
(422
)

$
95,196Gross profit


56,421



(7,984
)


48,437



69,273



(9,030
)


60,243Income (loss) from continuing
    operations before provision for income taxes(2)


2,525



(1,407
)


1,118



(1,933
)


(1,430
)


(3,363
)Minority interest


9,577



958



10,535



8,581



(439
)


8,142Net income (loss)


5,849



(535
)


5,314



(304
)


(1,136
)


(1,440
)Earnings (loss) per share:Basic

$
0.09


$



$
0.09


$
(0.00
)

$



$
(0.02
)Diluted


0.09







0.08



(0.00
)






(0.02
)Weighted average number of shares
    outstanding:Basic


62,034







62,034



62,458







62,458Diluted


65,194







65,194



62,458







62,458   Three Months Ended
    September 30, 2004


Three Months Ended
    December 31, 2004Previously








PreviouslyReported


Adjustments


Restated


Reported


Adjustments


RestatedRevenues

$
106,636


$
(9,742
)

$
96,894


$
115,948


$
(15,157
)

$
100,791Gross profit


79,455



(20,586
)


58,869



81,344



(23,519
)


57,825Income (loss) from continuing
    operations before provision for income taxes(2)


25,045



(14,103
)


10,942



23,342



(12,696
)


10,646Minority interest


7,565



(110
)


7,455



(5,004
)


637



(4,367
)Net income (loss)


18,737



(9,218
)


9,519



12,091



(7,305
)


4,786Earnings per share:Basic

$
0.30


$



$
0.15


$
0.19


$



$
0.07Diluted


0.27







0.14



0.17







0.07Weighted average number of shares
    outstanding:Basic


63,172







63,172



64,861







64,861Diluted


72,332







72,332



75,331







68,970     (1)
    
    Restructuring charges for each of the three months ended
    March 31, 2005, June 30, 2005, September 30, 2005
    and December 31, 2005, both as previously reported and as
    restated (where applicable), were $257,000, $2,503,000,
    $1,589,000 and $3,386,000, respectively. One-time IPR&D
    charges resulting from acquisitions (see
    Note 3  Acquisitions) , both as previously
    reported and as restated (where applicable), were
    $1.2 million and $2.4 million for the three months
    ended September 30, 2005 and December 31, 2005,
    respectively. Also, during the three months ended
    December 31, 2005, we incurred (i) certain warranty
    expenses aggregating $8.7 million, (ii) expected
    losses on customer contracts of approximately $9.9 million,
    and (iii) impairment charges of $22.7 million and
    $27.2 relating to the purchased technology and goodwill,
    respectively, associated with our T7000 product line within our
    Taqua reporting unit.(2)
    
    Restructuring charges for each of the three months ended
    March 31, 2004, June 30, 2004, September 30, 2004
    and December 31, 2004, both as previously reported and as
    restated, were $942,000, $110,000, $275,000 and $339,000,
    respectively. One-time IPR&D charges resulting from
    acquisitions (see Note 3  Acquisitions),
    both as previously reported and as restated, were
    $8.0 million, $2.4 million, and $3.8 million for
    each of the three months ended June 30, 2004,
    September 30, 2004, and December 31, 2004, F-67




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##### Table of Contents



respectively. Other income for the three months ended
    September 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. Other income for the
    three months ended December 31, 2004, includes
    $20.3 million from our exercise of warrants in a privately
    held company.      Note 19  Subsequent
    Events
  Appointment
    of Franco Plastina as CEO
    Definitive
    Agreement to Sell IEX and Resulting Discontinued
    Operations
     F-68




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##### Table of Contents



EXHIBIT INDEX  SequentiallyExhibit



NumberedNumber

Description

Page10.16

First Amendment to Credit
    Agreement dated December 15, 2005 between the Registrant
    and Wells Fargo Bank, National Association, letter agreement
    dated March 16, 2006 and letter agreement dated
    May 25, 200621.1

Subsidiaries of the Registrant31.1

Certification of Chief Executive
    Officer of the Registrant pursuant to
    Rule 13a-14(a)
    under the Exchange Act, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial
    Officer of the Registrant pursuant to
    Rule 13a-14(a)
    under the Exchange Act, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 200232.1

Certification of Chief Executive
    Officer of the Registrant pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes- Oxley Act of 200232.2

Certification of Chief Financial
    Officer of the Registrant pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes- Oxley Act of 2002