FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

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

For the quarterly period ended March 31, 2001

|_| 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 95-2746131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

26580 W. Agoura Road, Calabasas, California 91302
(Address and zip code of principal executive offices)

(818) 880-5656
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes |X| No |_|

As of May 1, 2001, there were 59,281,626 shares of the registrant's common
stock, without par value, outstanding.

TEKELEC
FORM 10-Q
INDEX

Part I -- Financial Information Page
----

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets at March 31, 3
2001 and December 31, 2000

Consolidated Statements of Operations 4
for the three months ended March 31,
2001 and 2000

Consolidated Statements of Comprehensive 5
Income for the three months ended
March 31, 2001 and 2000

Consolidated Statements of Cash Flow for 6
the three months ended March 31, 2001
and 2000

Notes to Consolidated Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations

Part II -- Other Information

Item 6. Exhibits and Reports on Form 8-K 21

Signatures

PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements

Tekelec
Consolidated Balance Sheets

March 31, December 31,
2001 2000
---- ----
(thousands, except share data)

Assets (unaudited) (audited)
Current assets:
Cash and cash equivalents ............................. $ 193,442 $ 65,690
Short-term investments, at fair value ................. 15,000 81,723
Accounts and notes receivable, less
allowances of $5,947 and $4,287, respectively ....... 75,708 104,506
Inventories ........................................... 26,268 25,868
Deferred income taxes, net ............................ 14,092 14,429
Prepaid expenses and other current assets ............. 11,563 11,596
--------- ---------
Total current assets .............................. 336,073 303,812
Long-term investments, at fair value ....................... 6,000 12,000
Property and equipment, net ................................ 35,602 31,700
Intangible assets, net ..................................... 96,335 104,223
Deferred income taxes, net ................................. 3,162 2,964
Other assets ............................................... 4,154 3,825
--------- ---------
Total assets ...................................... $ 481,326 $ 458,524
========= =========

Liabilities And Shareholders' Equity

Current liabilities:
Trade accounts payable ................................ $ 15,997 $ 16,750
Accrued expenses ...................................... 23,062 22,784
Accrued payroll and related expenses .................. 11,729 12,063
Current portion of deferred revenues .................. 52,585 31,832
Income taxes payable .................................. 1,988 1,448
--------- ---------
Total current liabilities ......................... 105,361 84,877
Long-term convertible debt ................................. 120,176 119,269
Deferred income taxes ...................................... 13,415 14,558
Deferred revenues, net of current portion .................. 1,920 2,223
--------- ---------
Total liabilities ................................. 240,872 220,927
--------- ---------
Commitments and contingencies

Shareholders' equity:
Common stock, without par value, 200,000,000 shares
authorized; issued and outstanding 59,111,297
and 58,896,708, respectively ........................ 154,547 151,830
Retained earnings ..................................... 86,793 85,424
Accumulated other comprehensive income (loss) ...... (886) 343
--------- ---------
Total shareholders' equity ........................ 240,454 237,597
--------- ---------
Total liabilities and shareholders' equity ........ $ 481,326 $ 458,524
========= =========

See notes to consolidated financial statements.

Tekelec
Consolidated Statements of Operations
(unaudited)

Three Months Ended
March 31,
----------------------------------
2001 2000
---- ----
(thousands, except per share data)

Revenues ................................................... $ 84,315 $ 60,062

Cost of sales:
Cost of goods sold .................................... 26,684 19,752
Amortization of purchased technology .................. 2,589 2,541
-------- --------
Total cost of sales ......................... 29,237 22,293
-------- --------
Gross profit ................................ 55,042 37,769
-------- --------
Operating expenses:
Research and development .............................. 18,674 12,239
Selling, general and administrative ................... 26,918 19,362
Amortization of goodwill and other intangible assets .. 5,416 5,672
-------- --------
Total operating expenses .......................... 51,008 37,273
-------- --------

Income from operations ..................................... 4,034 496
Other income (expense):
Interest income ....................................... 2,586 1,512
Interest expense ...................................... (2,223) (2,193)
Other, net ............................................ 158 (28)
-------- --------
Total other income (expense) ...................... 521 (709)
-------- --------

Income (Loss) before provision for income taxes ............ 4,555 (213)
Provision for income taxes ............................ 3,186 1,589
-------- --------
Net income (loss) ................................ $ 1,369 $ (1,802)
======== ========

Earnings (Loss) per share:
Basic ................................................. $ 0.02 $ (0.03)
Diluted ............................................... 0.02 (0.03)

Weighted average number of shares outstanding:
Basic ................................................. 59,037 56,537
Diluted ............................................... 62,426 56,537

See notes to consolidated financial statements.

Tekelec
Consolidated Statements of Comprehensive Income
(unaudited)

Three Months Ended
March 31,
------------------
2001 2000
---- ----
(thousands)

Net income (loss) ................................ $ 1,369 $(1,802)
Other comprehensive expense:
Foreign currency translation adjustments .... (1,229) (562)
------- -------
Comprehensive income (loss) ...................... $ 140 $(2,364)
======= =======

See notes to consolidated financial statements.

Tekelec
Consolidated Statements of Cash Flow
(unaudited)

Three Months Ended
March 31,
2001 2000
------------------
(thousands)

Cash flow from operating activities:
Net income (loss) ............................................... $ 1,369 $ (1,802)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Allowance for doubtful accounts ............................ 1,800 --
Depreciation ............................................... 3,753 2,753
Amortization ............................................... 7,957 8,213
Amortization of deferred financing costs ................... 205 198
Convertible debt accretion ................................. 908 849
Deferred income taxes ...................................... (1,070) (2,634)
Stock based compensation ................................... 65 30
Tax benefit related to stock options exercised ............. 1,053 14,112
Changes in operating assets and liabilities:
Accounts and notes receivable ............................ 25,483 12,607
Inventories .............................................. (751) (2,049)
Income taxes receivable .................................. (11) (5,523)
Prepaid expenses and other current assets ................ -- (7,106)
Trade accounts payable ................................... 13 (704)
Accrued expenses ......................................... 991 (2,951)
Accrued payroll and related expenses ..................... (293) (679)
Deferred revenues ........................................ 20,471 2,695
Income taxes payable ..................................... 545 (5,004)
--------- --------
Total adjustments ...................................... 61,119 14,807
--------- --------
Net cash provided by operating activities .............. 62,488 13,005
--------- --------
Cash flow from investing activities:
Proceeds from maturity of available-for-sale securities .... 122,615 34,505
Purchase of available-for-sale securities .................. (49,892) (19,293)
Purchase of property and equipment ......................... (7,721) (3,204)
Purchase of technology ..................................... (69) --
Increase in other assets ................................. (585) (240)
--------- --------
Net cash provided by investing activities .............. 64,348 11,768
--------- --------
Cash flow from financing activities:
Proceeds from issuance of common stock ..................... 1,599 14,086
--------- --------
Net cash provided by financing activities .............. 1,599 14,086
--------- --------
Effect of exchange rate changes on cash ......................... (683) (473)
--------- --------
Net change in cash and cash equivalents .................... 127,752 38,386
Cash and cash equivalents at beginning of period ................ 65,690 46,671
--------- --------
Cash and cash equivalents at end of period ...................... $ 193,442 $ 85,057
========= ========

See notes to consolidated financial statements.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

A. Basis of Presentation

The consolidated financial statements are unaudited, other than the
consolidated balance sheet at December 31, 2000, and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
condition, operating results and cash flows for the interim periods.

The results of operations for the current interim periods are not
necessarily indicative of results to be expected for the current year. Certain
items shown in the prior financial statements have been reclassified to conform
with the presentation of the current period.

The Company operates under a thirteen-week calendar quarter. For financial
statement presentation purposes, however, the reporting periods are referred to
as ended on the last calendar day of the quarter. The accompanying consolidated
financial statements for the three months ended March 31, 2001 and 2000 are for
the thirteen weeks ended March 30, 2001 and March 31, 2000, respectively.

These consolidated financial statements should be read in conjunction with
the consolidated financial statements for the year ended December 31, 2000, and
the notes thereto in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The statement requires the recognition of
all derivatives as either assets or liabilities on the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. The Company implemented SFAS No. 133 in the first
quarter of 2001 and the adoption of SFAS No. 133 did not have a material impact
on the Company's financial position, results of operations or cash flows.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

B. Certain Balance Sheet Items

March 31, December 31,
2001 2000
--------- ---------
The components of inventories are: (thousands)

Raw materials .................................. $ 11,712 $ 10,701
Work in process ................................ 2,589 2,497
Finished goods ................................. 11,967 12,670
--------- ---------
$ 26,268 $ 25,868
========= =========

Property and equipment consist of the following:

Manufacturing and development equipment ........ $ 47,721 $ 43,507
Furniture and office equipment ................. 23,778 21,084
Demonstration equipment ........................ 3,148 3,213
Leasehold improvements ......................... 7,591 7,026
--------- ---------
82,238 74,830
Less, accumulated depreciation and amortization (46,636) (43,130)
--------- ---------
Property and equipment, net ............... $ 35,602 $ 31,700
========= =========

Intangible assets consist of the following:

Goodwill ....................................... $ 95,274 $ 95,274
Purchased technology ........................... 50,204 50,285
Other .......................................... 13,000 13,000
--------- ---------
158,478 158,559
Less accumulated amortization .................. (62,143) (54,336)
--------- ---------
Intangible assets, net .................... $ 96,335 $ 104,223
========= =========

C. Related Party Transactions

Sales to related parties consisted of transactions between the Company and
foreign affiliates controlled by the Company's Chairman of the Board. In April
2000, these foreign affiliates were sold to an unrelated company. Sales
transacted subsequent to the sale of the former affiliates and amounts due are
no longer considered related party transactions. Sales to related parties in
2000 amounted to $728,000 for the three months ended March 31, 2000.

The Company's Japanese subsidiary serves as a distributor of products it
purchases from an affiliate of which three of the Company's directors are
directors and shareholders. These purchases from the related party were $352,000
and $320,000 for the three months ended March 31, 2001 and 2000, respectively.
Amounts due to the related party at March 31, 2001 and 2000 were $203,000 and
$82,000, respectively.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

D. Income Taxes

The income tax provision for the three-month periods ended March 31, 2001
and 2000 was $3.2 million and $1.6 million, respectively, and reflected the
effect of non-deductible acquisition-related costs, partially offset by benefits
of $1.1 million and $1.2 million, respectively, from the utilization of deferred
tax liabilities related to certain of these acquisition-related costs. Excluding
the effect of these acquisition-related items, an estimated effective tax rate
of 35% was applied for the three-month period ended March 31, 2001 and
represented federal, state and foreign taxes on the Company's income, reduced
primarily by research and development credits, foreign tax credits, and other
benefits from foreign sourced income, compared to an effective tax rate of 36%
for the three-month period ended March 31, 2000.

E. Lines of Credit and Borrowings

The Company has a $20.0 million line of credit with a U.S. bank and lines
of credit aggregating $2.4 million available to the Company's Japanese
subsidiary from various Japan-based banks.

The Company's $20.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at or, in some cases,
below the lender's prime rate (8.0% at March 31, 2001), and expires on July 31,
2001, if not renewed. Under the terms of this facility, the Company is required
to maintain certain financial ratios and meet certain net worth and indebtedness
tests. The Company believes it is in compliance with these requirements. There
have been no borrowings under this credit facility.

The Company's Japanese subsidiary has collateralized yen-denominated lines
of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $2.4 million with interest at the Japanese prime
rate (1.375% at March 31, 2001) plus 0.125% per annum which expire between
August 2001 and November 2001, if not renewed. There have been no borrowings
under these lines of credit.

In November 1999, the Company completed the private placement of $135.0
million principal amount at maturity of 3.25% convertible subordinated discount
notes due in 2004 (the "Notes"), issued at 85.35% of their face amount
(equivalent to gross proceeds of approximately $115.2 million at issuance before
discounts and expenses). The Notes are callable after the first three years.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

F. Commitments and Contingencies

In August 2000, Alcatel USA, Inc. and Alcatel USA Sourcing, L.P.
(collectively, "Alcatel") filed a complaint against Tekelec in the United States
District Court for the Eastern District of Texas, Sherman Division. The
complaint alleges that Tekelec makes and sells products that infringe two
patents owned by Alcatel Sourcing. The patents at issue relate to a system and
method for application location register routing in a telecommunications
network. Although Alcatel does not identify in its complaint the specific
Tekelec products that purportedly infringe the patents at issue, Tekelec
believes that Alcatel's allegations relate to a particular software application
offered by Tekelec as a feature on its EAGLE STP for routing query messages in
wireless networks. Alcatel seeks a permanent injunction enjoining the Company
from infringing the patents at issue, unspecified general and exemplary damages,
and an award of costs.

In September 2000, Tekelec filed an answer and counterclaim to Alcatel's
complaint denying Alcatel's claims of infringement and raising several
affirmative defenses. Tekelec has also asserted several counterclaims against
Alcatel seeking declaratory relief that Tekelec has not infringed the Alcatel
patents and that such patents are invalid and unenforceable. Tekelec believes
that it has strong defenses to Alcatel's claims on the grounds of invalidity,
noninfringement and inequitable conduct by Alcatel, and is defending the action
vigorously. The parties are currently engaged in pre-trial discovery. A trial
date has been scheduled for the second quarter of 2002.

G. Operating Segment Information

The Network Systems operating segment develops, markets and sells the
Company's Eagle STP products based on the Company's high capacity packet
switching platform; the IP7 Secure Gateway, an SS7/IP gateway for signaling in
converged networks, and other IP7 convergence products; and network systems
products resulting from the Company's acquisition of IEX, including ASi 4000
Service Control Point, an advanced database server used for the provisioning of
telephony applications, and VXi Media Gateway Controller, a controller for
converged networks. During 2000, the Company's business segments were
reorganized to include the Sentinel network surveillance system in the Network
Systems product segment. Prior periods segment information has been restated to
reflect this reorganization.

The Network Diagnostics operating segment develops, markets and sells
diagnostic products, including MGTS, a diagnostic tool used primarily by
equipment suppliers for research and development, and i3000, a diagnostic tool
for converged and third generation wireless networks. The Japan Diagnostics
operating segment sells the Company's and third parties' diagnostic products to
customers in Japan.

At the end of 2000, the IEX Call Center business was renamed Contact Center
in order to reflect the products' evolution to support multimedia contact
centers. The Contact Center operating segment develops, markets and sells
software-based solutions for call centers, including TotalView Workforce
Management and TotalNet Call Routing.

Transfers between operating segments are made at prices reflecting market
conditions. The allocation of revenues from external customers by geographical
area is determined by the destination of the sale.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

The Company's operating segments and geographical information are as follows (in
thousands):

Operating Segments

Revenues
Three Months Ended
March 31,
----------------------
2001 2000
-------- --------

Network Systems .................................. $ 58,451 $ 40,847
Network Diagnostics .............................. 10,860 8,350
Contact Center Products .......................... 8,467 6,686
Japan Diagnostics ................................ 7,411 4,799
Intercompany Eliminations ........................ (874) (620)
-------- --------
Total revenues .............................. $ 84,315 $ 60,062
======== ========

Income (Loss)from Operations
Three Months Ended
March 31,
----------------------
2001 2000
-------- --------

Network Systems .................................. $ 15,985 $ 11,179
Network Diagnostics .............................. 573 684
Contact Center Products .......................... 2,997 1,916
Japan Diagnostics ................................ (87) 215
Intercompany Eliminations ........................ 948 (136)
General Corporate (1) ............................ (16,382) (13,362)
-------- --------
Total income from operations................. $ 4,034 $ 496
======== ========

- ----------

(1) General Corporate includes acquisition-related charges and amortization of
$7,816 and $8,072 for the three months ended March 31, 2001 and 2000,
respectively.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

Enterprise-Wide Disclosures

The following table sets forth, for the periods indicated, revenues from
external customers by principal product line:

Three Months Ended
March 31,
------------------
2001 2000
---- ----

Network Systems .................................... $58,567 $40,847
Network Diagnostics ................................ 17,281 12,529
Contact Center Products ............................ 8,467 6,686
------- -------
Total revenues from external customers ........ $84,315 $60,062
======= =======

The following table sets forth, for the periods indicated, revenues from
external customers by geographic territory:

Three Months Ended
March 31,
------------------
2001 2000
---- ----
North America ...................................... $68,716 $47,575
Japan .............................................. 7,368 4,804
Europe ............................................. 4,347 2,642
Rest of World ...................................... 3,884 5,041
------- -------
Total revenues from external customers ........ $84,315 $60,062
======= =======

The following table sets forth, for the periods indicated, long-lived assets by
geographic area in which the Company holds assets:

March 31, December 31,
2000 2000
-------- --------

United States .............................. $134,276 $138,393
Japan ...................................... 1,006 1,024
Other ...................................... 809 331
-------- --------
Total long-lived assets ............... $136,091 $139,748
======== ========

Sales to one customer accounted for 29% of revenues for the three months ended
March 31, 2001, and included sales from network systems, network diagnostics and
contact center operating segments. There were no customers accounting for 10% or
more of revenues for the three months ended March 31, 2000.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

H. Earnings Per Share

The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the
three months ended March 31, 2001 and 2000:

Net Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
For the Three Months Ended March 31, 2001: -------------------------------------------
(thousands except per share amount)

Basic EPS .................................. $ 1,369 59,037 $ 0.02
Effect of Dilutive Securities - Stock
Options and Warrants .................. -- 3,389
------- -------
Diluted EPS ................................ $ 1,369 62,426 $ 0.02
======= =======

For the Three Months Ended March 31, 2000:

Basic EPS .................................. $(1,802) 56,537 $ (0.03)
Effect of Dilutive Securities - Stock
Options and Warrants .................. -- --
------- -------
Diluted EPS ................................ $(1,802) 56,537 $ (0.03)
======= =======

The computation of diluted number of shares excludes unexercised stock
options and warrants and potential shares issuable upon conversion of the
Company's convertible subordinated discount notes that are anti-dilutive. The
numbers of such shares excluded were 14.4 million and 7.7 million for the
quarters ended March 31, 2001 and 2000, respectively.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and the
notes thereto included in Item 1 of this Quarterly Report and the Consolidated
Financial Statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. Historical
results and percentage relationships among any amounts in the financial
statements are not necessarily indicative of trends in operating results for any
future periods.

Overview

The Company's product offerings are currently organized along three
distinct product lines: network systems, network diagnostics and contact center.

Network Systems Products. The Company's network systems product line
consists principally of the Eagle STP and products, features and applications
based on the Eagle platform, including the IP7 Secure Gateway and the Company's
local number portability solution, ASi 4000 Service Control Point, VXi Media
Gateway Controller and other convergence products. During 2000, the Company's
business segments were reorganized to include the Sentinel network surveillance
system in the network systems products segment.

Network Diagnostics Products. This product line consists principally of the
MGTS and MGTS i3000 families of diagnostics products.

Contact Center Products. The Company's IEX contact center products provide
planning, management and call routing and control tools for single contact
centers and for complex, multiple site contact center environments. This product
line includes the TotalView Workforce Management and TotalNet Call Routing
solutions. In 2000, the IEX Call Center Division was renamed the Contact Center
Division due to the products' evolution to support multimedia contact centers.

Results of Operations

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

Percentage of Revenues
----------------------

Three Months Ended
March 31,
----------------------
2001 2000
---- ----

Revenues ................................................... 100.0% 100.0%
Cost of goods sold ......................................... 31.6 32.9
Amortization of purchased technology ....................... 3.1 4.2
------ ------
Gross profit ............................................... 65.3 62.9

Research and development ................................... 22.1 20.4
Selling, general and administrative ........................ 31.9 32.2
Amortization of goodwill and other purchased intangibles ... 6.5 9.5
------ ------
Total operating expenses ................................... 60.5 62.1
------ ------

Income from operations ..................................... 4.8 0.8
Interest and other income (expense), net ................... 0.6 (1.2)
------ ------
Income (Loss) before provision for income taxes ............ 5.4 (0.4)

Provision for income taxes ................................. 3.8 2.6
------ ------
Net income (loss) .......................................... 1.6% (3.0%)
====== ======

The following table sets forth, for the periods indicated, the revenues by
principal product line as a percentage of total revenues.

Percentage of Revenues
----------------------

Three Months Ended
March 31,
----------------------
2001 2000
---- ----

Network Systems ........................................ 70% 68%
Network Diagnostics .................................... 20 21
Contact Center ......................................... 10 11
---- ----
Total .......................................... 100% 100%
==== ====

The following table sets forth, for the periods indicated, the revenues by
geographic territories as a percentage of total revenues:

Percentage of Revenues
----------------------

Three Months Ended
March 31,
----------------------
2001 2000
---- ----

North America .......................................... 81% 79%
Japan .................................................. 9 8
Europe ................................................. 5 4
Rest of World .......................................... 5 9
---- ----
Total .......................................... 100% 100%
==== ====

Three Months Ended March 31, 2001 Compared with the Three Months Ended
March 31, 2000

Revenues. The Company's revenues increased by $24.3 million, or 40%, during
the first quarter of 2001 due primarily to higher sales of network systems
products and services and secondarily to increased network diagnostics products
sales.

Revenues from network systems products increased by $17.7 million, or 43%,
to $58.6 million due primarily to higher unit sales of Eagle STP products and
services, increased local number portability sales and increased sales of
extensions and upgrades.

Revenues from network diagnostics products increased by $4.8 million, or
38%, due primarily to higher sales of the MGTS i3000 product.

Revenues from Contact Center increased by $1.8 million, or 27%, due mainly
to higher TotalView product sales.

Revenues in North America increased by $21.1 million, or 44%, due primarily
to the higher sales of Eagle STP products. Sales in Japan increased by $2.6
million, or 53%, due primarily to higher sales of the MGTS i3000 product and
third-party data diagnostics products. Revenues in Europe increased by $1.7
million, or 65%, due to higher network diagnostics product sales. Rest of world
revenues decreased by $1.2 million, or 23%, due to lower network systems product
sales.

The impact of exchange rate fluctuations on currency translations decreased
revenues by $949,000, or 1%, and increased net income slightly by $39,000, or
2.9% in the first quarter of 2001.

A significant portion of the Company's revenues in each quarter results
from orders that are received in that quarter, and are difficult to predict.
Further, the Company typically generates a significant portion of its revenues
for each quarter in the last month of the quarter. The Company establishes its
expenditure levels based on its expectations as to future revenues, and if
revenue levels were to fall below expectations, then such shortfall would cause
expenses to be disproportionately high. Therefore, a drop in near-term demand
would significantly affect revenues, causing a disproportionate reduction in
profits or even losses in a quarter.

The Company believes that its future revenue growth depends in large part
upon a number of factors, including the continued market acceptance of the
Company's products, particularly the Eagle products and related applications as
well as the Company's suite of products for converged circuit and packet
networks, including the IP7 Secure Gateway and VXi media gateway network systems
products and the MGTS i3000 diagnostics product.

The Company's quarterly financial results could be materially adversely
affected by a number of additional factors, including, among others, a slowdown
or reduction in capital spending by the Company's customers, unanticipated
delays or problems in releasing new products, a slowing in the convergence of
voice and data networks and the inability of the Company's customers to obtain
financing or to finance capital expenditures.

Gross Profit. Gross profit as a percentage of revenues increased to 65.3%
in the first quarter of 2001 compared with 62.9% in the first quarter of 2000.
The increase in gross margins was primarily due to higher network systems
margins attributable to a greater proportion of higher margin large system
sales.

Research and Development. Research and development expenses in the first
quarter of 2001 increased overall by $6.4 million, or 53%, and increased as a
percentage of revenues to 22.1% in the first quarter of 2001 from 20.4% in the
first quarter of 2000. The increase was attributable principally to the
increased expenses incurred in connection with the hiring of additional
personnel for product development and enhancements for both network systems and
network diagnostics products, primarily related to the Company's continued
development of products to address the Internet Protocol ("IP")/Signaling System
#7 ("SS7") and media gateway controller, or "softswitch," markets. Based on the
Company's present product development plans, the Company expects that its
research and development expenses for 2001 will increase in dollars when
compared to 2000.

The Company intends to continue to make substantial investments in product
and technology development and believes that its future success depends in large
part upon its ability to continue to enhance existing products and to develop or
acquire new products that maintain the Company's technological competitiveness.

Selling, General and Administrative Expenses. Although selling, general and
administrative expenses in the first quarter of 2001 increased by $7.6 million,
or 39%, such expenses decreased as a percentage of revenues to 31.9% from 32.2%
in the first quarter of 2000. The dollar increase was primarily due to increased
personnel and infrastructure-related expenses incurred to support the Company's
installed base and anticipated higher sales levels. The Company expects that
selling, general and administrative expenses for the remainder of 2001 will
increase in dollars when compared to prior periods.

Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and intangible assets in the first quarter of 2001 decreased slightly by
$256,000 to $5.4 million, and decreased as a percentage of revenues to 6.5% for
the three months ended March 31, 2001 from 9.5% for the three months ended March
31, 2000.

Interest and Other Income (Expense), net. Interest expense was flat at $2.2
million for the first quarter of 2001 and 2000. Interest income increased $1.1
million, or 71%, due to higher invested cash balances in 2001 compared to 2000.

Income Taxes. The income tax provision for the first quarter of 2001 was
$3.2 million and reflected the effect of non-deductible acquisition-related
costs, partially offset by a benefit of $1.1 million from the utilization of
deferred tax liabilities related to certain of these acquisition-related costs.
Excluding the effect of these acquisition-related items, an estimated effective
tax rate of 35% was applied for the three-month period ended March 31, 2001 and
represented federal, state and foreign taxes on the Company's income, reduced
primarily by research and development credits, foreign tax credits, and other
benefits from foreign sourced income, compared to an effective tax rate of 36%
for the three-month period ended March 31, 2000.

Liquidity and Capital Resources

During the three-month period ended March 31, 2001, cash and cash
equivalents increased by $127.8 million to $193.4 million, after net proceeds of
$72.7 million from the sale of short-term and long-term investments. Operating
activities, including the effects of exchange rate changes on cash, provided
$61.8 million. Financing activities, which represented proceeds from the
issuance of Common Stock upon the exercise of options and warrants, provided
$1.6 million, and investing activities, excluding the net proceeds from the sale
of short-term and long-term investments, used $8.4 million primarily due to
capital expenditures.

Cash flow from operating activities was comprised mainly of net income
adjusted for depreciation and amortization, a decrease in accounts receivable,
and an increase in deferred revenues. Net accounts receivables decreased by 28%
during the first quarter of 2001 due primarily to strong collections activity.
The increase in deferred revenues was primarily as a result of increased
revenues related to transactions pending completion of acceptance or delivery
requirements and higher extended warranty service revenues which are deferred
and recognized ratably over the warranty period.

Capital expenditures of $7.7 million during the first three months of 2001
represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion.

The Company has a $20.0 million line of credit with a U.S. bank and lines
of credit aggregating $2.4 million available to the Company's Japanese
subsidiary from various Japan-based banks.

indebtedness tests. The Company believes it is in compliance with these
requirements. There have been no borrowings under this credit facility.

The Company's Japanese subsidiary has collateralized yen-denominated lines
of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $2.4 million with interest at the Japanese prime
rate (1.375% at March 31, 2001) plus 0.125% per annum, which expire between
August 2001 and November 2001, if not renewed. There have been no borrowings
under these lines of credit.

The Company believes that its existing working capital, funds generated
through operations, and its current bank lines of credit will be sufficient to
satisfy operating requirements for at least the next twelve months. Nonetheless,
the Company may seek additional sources of capital as necessary or appropriate
to fund acquisitions or to otherwise finance the Company's growth or operations;
however, there can be no assurance that such funds, if needed, will be available
on favorable terms, if at all.

New Accounting Pronouncement

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

The statements that are not historical facts contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this Quarterly Report on Form 10-Q are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that reflect the current belief, expectations or intent of the Company's
management. These statements are subject to and involve certain risks and
uncertainties including, but not limited to, timing of significant orders and
shipments and the resulting fluctuation of the Company's operating results;
changes in customer product mix; customer acceptance of the Company's products;
capital spending patterns of customers; the Company's limited product offerings;
risks relating to the convergence of voice and data networks; competition and
pricing; the Company's relatively limited number of customers; new product
introductions by the Company or its competitors; risks related to the Company's
acquisition of IEX; product liability risks; the continued growth in third party
purchases of diagnostics systems; uncertainties relating to the Company's
international operations; intellectual property protection; carrier deployment
of new technologies and intelligent network services; the level and timing of
research and development expenditures; regulatory changes; general economic
conditions; and other risks described in this Quarterly Report, the Company's
Annual Report on Form 10-K for 2000 and in certain of the Company's other
Securities and Exchange Commission filings. Many of these risks and
uncertainties are outside of the Company's control and are difficult for the
Company to forecast or mitigate. Actual results may differ materially from those
expressed or implied in such forward-looking statements. The Company is not
responsible for updating or revising these forward-looking statements. Undue
emphasis should not be placed on any forward-looking statements contained herein
or made elsewhere by or on behalf of the Company.

PART II --OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1 2001 Officer Bonus Plan

10.2 Employment Offer Letter dated January 18, 2001, between the Registrant
and Frederick M. Lax

10.3 Nonstatutory Stock Option Agreement dated February 1, 2001, between
the Registrant and Frederick M. Lax

10.4 Stock Award Agreement dated February 1, 2001, between the Registrant
and Frederick M. Lax

10.5 Employment Offer Letter dated February 2, 2001, between the Registrant
and Danny L. Parker

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Registrant during the quarter
ended March 31, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

TEKELEC

May 15, 2001

/s/ Michael L. Margolis
---------------------------------------
Michael L. Margolis
President and Chief Executive Officer
(Duly authorized officer)

/s/ Paul J. Pucino
---------------------------------------
Paul J. Pucino
Vice President and Chief Financial
Officer (Principal Financial and Chief
Accounting Officer)