Tekelec (TKLC) 8-K Results of Operations and Financial Condition

Tekelec Files Restated Financial Statements;
Announces 2005 Full Year and Q4 Results;
Call Scheduled for June 1, 2006

Morrisville, N.C.,May 30, 2006 — Tekelec (NASDAQ: TKLC) today will file with the Securities and Exchange Commission (the “Commission”) its Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) in which it restates its previously issued consolidated financial statements for (i) the year ended December 31, 2003, (ii) the year ended December 31, 2004 and each of the quarters therein, and (iii) each of the quarters during the nine months ended September 30, 2005 (the “Restated Financial Statements”). The 2005 Form 10-K will also include the Company’s consolidated financial statements for the year and quarter ended December 31, 2005.

Impact of Restatement

The Restated Financial Statements include adjustments to the Consolidated Statements of Operations, Comprehensive Income (Loss), Balance Sheets and Cash Flows for each of the periods restated. The restated results for the years ended December 31, 2003 and December 31, 2004 are disclosed in Note 2 to the Consolidated Financial Statements in the 2005 Form 10-K, and the restated unaudited results for each of the four quarters in the year ended December 31, 2004 and each of the three quarters in the nine months ended September 30, 2005 are disclosed in Note 18 to the Consolidated Financial Statements in the 2005 Form 10-K. In addition, the results for the years ended December 31, 2001 and 2002 as summarized in Item 6 (Selected Financial Data) in the 2005 Form 10-K have been restated. All financial results for the periods prior to the fourth quarter of 2005 are presented on an as restated basis.

The following table summarizes the impact of the restatement on previously reported GAAP revenue and diluted earnings per share for the periods indicated below (in millions, except per-share data):

	Y/E 2003		Y/E 2004		Q1 2005		Q2 2005		Q3 2005
Revenue (as Reported)	$	263.7	$	397.1	$	119.4	$	133.0	$	148.1
Revenue (as Restated)		253.5		368.9		138.9		122.7		121.0
Diluted EPS (as Reported)	$	0.29	$	0.53	$	0.10	$	0.08	$	0.12
Diluted E(L)PS (as Restated)		0.28		0.27		0.24		0.01		(0.06	)

Q4 2005 Results

Revenue for the fourth quarter of 2005 was $154.3 million, up 53% compared to $100.8 million for the fourth quarter of 2004. For the fourth quarter of 2005, the Company had record orders of $203.4 million, up 28% compared to $158.9 million for the fourth quarter of 2004, and a book-to-bill ratio of 1.32.

Corporate Office: 5200 Paramount Parkway, Morrisville, N.C. 27560• Tel 919.460.5500• Fax 919.460.0877

Backlog as of December 31, 2005 was approximately $573.3 million, up 19% compared to backlog of approximately $480.8 million as of December 31, 2004.

On a GAAP basis, the Company reported a net loss for the fourth quarter of 2005 of $47.9 million, or $0.72 loss per diluted share, compared to net income of $4.8 million, or $0.07 per diluted share, for the fourth quarter of 2004.

The Company’s net loss for the fourth quarter of 2005 included certain significant and unusual charges, including (i) a $49.9 million non-cash charge related to the impairment of goodwill and acquired technology assets of Taqua, (ii) $9.9 million of accrued losses on two customer contracts, (iii) $8.7 million of accrued warranty costs, (iv) a non-cash charge of $2.4 million for the write-off of in-process research and development expenses associated with our acquisition of the remaining interest in Santera Systems in October 2005, (v) $3.4 million of restructuring and other charges related to the relocations of our corporate headquarters, Taqua facilities and manufacturing operations and (vi) $3.5 million of estimated costs for audit and legal fees and expenses incurred in connection with the Company’s restatement activities.

The Company’s net income for the fourth quarter of 2004 included certain significant and unusual items which had the effect of increasing operating income by a total of $16.2 million. These items included (i) a gain on the sale of investments of $20.3 million, (ii) a non-cash charge of $3.8 million for the write-off of in-process research and development and (iii) $0.3 million of restructuring charges.

At December 31, 2005, Tekelec’s consolidated cash, cash equivalents and investments totaled $226.3 million, down from $277.0 million at December 31, 2004. At March 31, 2006 the Company had approximately $245 million in cash, cash equivalents and investments. The current portion of deferred revenues was $226.8 million at December 31, 2005, up from $174.8 million at December 31, 2004.

2005 Full Year Results

Revenue for the full year 2005 was $536.9 million, up 46% compared to $368.9 million for 2004. Orders received in 2005 were a record $629.3 million, up 22% compared to $514.0 million in 2004. The book-to-bill ratio for 2005 was 1.17.

On a GAAP basis, the Company reported a net loss of $33.7 million, or $0.51 loss per diluted share, for 2005, compared to net income of $18.2 million, or $0.27 per diluted share, for 2004.

The Company’s net loss for 2005 included the significant and unusual charges incurred in the 2005 fourth quarter described above plus (i) a non-cash charge of $1.2 million for the write-off of acquired in-process research and development related to the Company’s acquisition of iptelorg GmbH in July 2005 and (ii) additional restructuring and other charges of $4.3 million related to the relocations of our corporate headquarters, Taqua facilities and manufacturing operations.

The Company’s net income for 2004 included certain significant and unusual charges which had the effect of increasing operating income by $14.5 million. These included, in addition to the items incurred in the 2004 fourth quarter described above, (i) a $10.1 million gain on the sale of investments, (ii) a non-cash charge of $10.4 million for in-process research and development write-offs and (iii) a $1.4 million restructuring charge.

Conference Call

Tekelec has scheduled a conference call for Thursday, June 1, 2006, for senior management to discuss the restatement of its previously issued financial statements and the financial results for the year and quarter ended December 31, 2005. The Company will discuss the restatement adjustments and their impact on the results for 2005 and prior restated periods. However, the Company will defer any discussion of the impact of the restatement process on its future business operations, historical non-GAAP numbers and financial results for 2006 until after the Company’s financial results for the first quarter of 2006 have been released.

“Live” Webcast and Replay

Tekelec will host a live webcast of its conference call on Thursday, June 1, 2006, at 4:00 p.m. EDT. To access the webcast, visit Tekelec’s web site located at www.tekelec.com, enter the Investor Relations section and click on the webcast icon. A webcast replay will be available at approximately 7:30 p.m. on June 1^st and for 90 days thereafter.

Telephone Replay

A telephone replay of the call will also be available for one week after the live webcast by calling either (800) 642-1687 or (706) 645-9291 and entering the conference ID # 9869912.

FORWARD-LOOKING STATEMENTS

Certain statements made in this press release are forward looking, reflect the Company’s current intent, belief or expectations and involve certain risks and uncertainties. The Company’s actual future performance may not meet the Company’s expectations. As discussed in the Company’s 2005 Form 10-K to be filed today and other filings with the Commission, the Company’s future operating results are difficult to predict and subject to significant fluctuations. Factors that may cause future results to differ materially from the Company’s current expectations, in addition to those identified in its 2005 Form 10-K and other Commission filings, include, among others, the impact on future operating results of changes in revenue recognition described in the 2005 Form 10-K and in prior reports filed with the Commission; the Company’s failure to timely file with the Commission its Quarterly Report on Form 10-Q for the first quarter of 2006 (the “First Quarter 2006 Form 10-Q”) and the resulting default by the Company with respect to its outstanding 2.25% Senior Subordinated Convertible Notes due 2008; and the Company’s failure to comply with the Nasdaq’s listing requirements as a result of the Company’s failure to timely file with the Commission its First Quarter 2006 Form 10-Q. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

About Tekelec

Tekelec is a high-performance network applications company that is accelerating the transition to IP Multimedia Subsystem (IMS) networks for service providers around the globe. With its experience at the intersection of network applications and session control, Tekelec creates highly efficient platforms for managing media and delivering network solutions. Corporate headquarters are near Research Triangle Park in Morrisville, N.C., with research and development facilities and sales offices throughout the world. For more information, please visit www.tekelec.com.

###

Investor Contacts:
Jim Chiafery
Director of Investor Relations
919-461-6825 office
James.chiafery@tekelec.com

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		$	253,451
Costs of sales:
Cost of goods sold		222,198			134,353			75,126
Amortization of purchased technology		7,350			9,128			11,178
Impairment of purchased technology		22,660			—			—
Total cost of sales		252,208			143,481			86,304
Gross profit		284,701			225,374			167,147
Operating expenses:
Research and development		125,664			99,741			74,841
Selling, general and administrative		161,146			118,783			79,221
Amortization of intangible assets		2,887			2,505			1,900
Acquired in-process research and development		3,573			14,200			2,900
Restructuring		7,735			1,666			—
Impairment of goodwill		27,245			—			—
Total operating expenses		328,250			236,895			158,862
Income (loss) from operations		(43,549	)		(11,521	)		8,285
Interest and other income (expense):
Interest income		6,175			4,697			6,259
Interest 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			451
Total other income (expense)		(573	)		30,864			(2,118	)
Income (loss) from continuing operations before provision for income taxes		(44,122	)		19,343			6,167
Provision for income taxes		(133	)		22,929			13,734
Income (loss) before minority interest		(43,989	)		(3,586	)		(7,567	)
Minority interest		10,248			21,765			21,607
Income (loss) from continuing operations		(33,741	)		18,179			14,040
Gain on sale of discontinued operation, net of income taxes		—			—			3,293
Net income (loss)	$	(33,741	)	$	18,179		$	17,333
Earnings (loss) per share from continuing operations:
Basic	$	(0.51	)	$	0.29		$	0.23
Diluted		(0.51	)		0.27			0.22
Earnings per share from gain on sale of discontinued operation:
Basic	$	—		$	—		$	0.05
Diluted		—			—			0.05
Earnings (loss) per share:
Basic	$	(0.51	)	$	0.29		$	0.28
Diluted		(0.51	)		0.27			0.28
Weighted average number of shares outstanding:
Basic		66,001			63,131			61,163
Diluted		66,001			66,322			62,911

TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended December 31,
	2005			2004
				(Restated)
	(Thousands, except per share data)
Revenues	$	154,338		$	100,791
Costs of sales:
Cost of goods sold		79,320			40,791
Amortization of purchased technology		1,635			2,175
Impairment of purchased technology		22,660			—
Total cost of sales		103,615			42,966
Gross profit		50,723			57,825
Operating expenses:
Research and development		32,118			28,343
Selling, general and administrative		44,694			34,531
Amortization of intangible assets		605			801
Acquired in-process research and development		2,363			3,800
Restructuring		3,386			339
Impairment of goodwill		27,245			—
Total operating expenses		110,411			67,814
Income (loss) from operations		(59,688	)		(9,989	)
Interest and other income (expense):
Interest income		1,425			1,017
Interest expense		(1,143	)		(1,250	)
Gain on warrants in privately held company		—			20,321
Other, net		(321	)		547
Total other income (expense)		(39	)		20,635
Income (loss) from continuing operations before provision for income taxes		(59,727	)		10,646
Provision for income taxes		(11,804	)		1,493
Income (loss) before minority interest		(47,923	)		9,153
Minority interest		—			(4,367	)
Net income (loss)	$	(47,923	)	$	4,786
Earnings (loss) per share:
Basic	$	(0.72	)	$	0.07
Diluted		(0.72	)		0.07
Weighted average number of shares outstanding:
Basic		66,571			64,861
Diluted		66,571			68,970

TEKELEC
CONSOLIDATED BALANCE SHEETS

	December 31,
	2005			2004
				(Restated)
	(Thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	52,069		$	48,925
Short-term investments, at fair value		174,260			134,435
Total cash, cash equivalents and short-term investments		226,329			183,360
Accounts receivable, net		122,783			109,536
Inventories		48,347			33,654
Deferred income taxes		27,802			15,058
Deferred costs and prepaid commissions		78,190			46,206
Prepaid expenses and other current assets		15,739			15,947
Total current assets		519,190			403,761
Long-term investments, at fair value		—			93,622
Property and equipment, net		40,794			30,617
Investments in privately-held companies		7,322			7,322
Deferred income taxes, net		68,598			26,547
Other assets		6,047			6,757
Goodwill		126,022			126,442
Intangible assets, net		57,214			79,915
Total assets	$	825,187		$	774,983
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	33,227		$	35,316
Accrued expenses		50,649			17,536
Accrued payroll and related expenses		29,391			23,490
Short-term notes and current portion of notes payable		96			3,266
Current portion of deferred revenues		226,753			174,849
Total current liabilities		340,116			254,457
Notes payable		—			78
Long-term convertible debt		125,000			125,000
Deferred income taxes		1,694			—
Long-term portion of deferred revenues		5,217			4,067
Total liabilities		472,027			383,602
Minority interest		—			17,628
Commitments 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			258,656
Deferred stock-based compensation		(5,680	)		(4,480	)
Retained earnings		85,666			119,407
Accumulated other comprehensive income (loss)		(1,239	)		170
Total shareholders’ equity		353,160			373,753
Total liabilities and shareholders’ equity	$	825,187		$	774,983

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		$	17,333
Adjustments 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			415
Inventory write downs		12,071			4,680			1,558
Write-off of leasehold improvements and other assets		166			—			—
Depreciation		19,966			14,986			14,493
Amortization of intangibles		10,112			10,827			12,425
Amortization, other		5,946			1,633			1,722
Amortization of deferred financing costs		763			1,112			2,121
Acquired in-process research and development		3,573			14,200			2,900
Convertible debt and note payable accretion		—			279			2,335
Deferred income taxes		(17,493	)		3,667			(1,328	)
Stock-based compensation, net of forfeitures		3,377			2,143			459
Tax benefit related to stock options		1,383			9,750			1,213
Changes 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			6,600
Deferred revenues		53,487			65,076			26,441
Income taxes payable		(593	)		(5,629	)		1,848
Total adjustments		100,101			2,813			10,340
Net cash provided by operating activities		66,360			20,992			27,673
Cash flows from investing activities:
Proceeds from sales and maturities of investments		417,767			498,209			302,036
Purchases 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		—			—			12,335
Cash paid for Taqua, net of cash acquired		—			(86,994	)		—
Cash paid for VocalData, net of cash acquired		—			(13,222	)		—
Cash paid for Steleus, net of cash acquired		—			(52,484	)		—
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		—			—			3,293
Other non-operating assets		(4,186	)		(2,540	)		(3,768	)
Net cash used in investing activities		(70,446	)		(44,658	)		(100,707	)

TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

	For the Years Ended December 31,
	2005			2004			2003
				(Restated)			(Restated)
	(Thousands)
Cash flows from financing activities:
Payments on retirement of convertible debt		—			—			(129,307	)
Proceeds from issuance of convertible debt		—			—			125,000
Debt issuance costs		—			—			(3,816	)
Payments on notes payable		(3,243	)		(8,894	)		(1,224	)
Proceeds from issuance of Common Stock		10,382			35,851			5,959
Net cash provided by (used in) financing activities		7,139			26,957			(3,388	)
Effect of exchange rate changes on cash		91			373			47
Net 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			121,636
Cash and cash equivalents at end of the year	$	52,069		$	48,925		$	45,261
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	3,195		$	3,115		$	17,417
Income taxes		16,093			22,294			11,034