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, 2002

|_| 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, 2002, there were 60,190,481 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, 2002 and 3
December 31, 2001

Consolidated Statements of Operations for the three 4
months ended March 31, 2002 and 2001

Consolidated Statements of Comprehensive Income for 5
the three months ended March 31, 2002 and 2001

Consolidated Statements of Cash Flows for the three 6
months ended March 31, 2002 and 2001

Notes to Consolidated Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations

Part II -- Other Information

Item 6. Exhibits and Reports on Form 8-K 22

Signatures 23

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

Tekelec
Consolidated Balance Sheets

March 31, December 31,
2002 2001
--------- -----------
(thousands)
Assets (unaudited)

Current assets:
Cash and cash equivalents ................................................ $ 104,257 $ 92,172
Short-term investments, at fair value .................................... 54,868 68,608
Accounts and notes receivable, less
allowances of $5,422 and $5,349, respectively .......................... 52,796 68,467
Inventories .............................................................. 17,931 21,317
Deferred income taxes, net ............................................... 15,675 15,840
Prepaid expenses and other current assets ................................ 13,245 16,417
--------- ---------
Total current assets ................................................. 258,772 282,821
Long-term investments, at fair value .......................................... 97,646 70,200
Property and equipment, net ................................................... 32,782 34,759
Investments in privately-held companies ....................................... 16,500 16,500
Deferred income taxes, net .................................................... 5,478 4,350
Other assets .................................................................. 3,134 3,482
Goodwill, net ................................................................. 44,942 44,725
Intangible assets, net ........................................................ 24,223 27,567
--------- ---------
Total assets ......................................................... $ 483,477 $ 484,404
========= =========

Liabilities And Shareholders' Equity
Current liabilities:
Trade accounts payable ................................................... $ 14,312 $ 16,903
Accrued expenses ......................................................... 24,227 22,583
Accrued payroll and related expenses ..................................... 12,068 9,986
Current portion of deferred revenues ..................................... 43,934 46,587
Income taxes payable ..................................................... 1,178 1,594
--------- ---------
Total current liabilities ............................................ 95,719 97,653
Long-term convertible debt .................................................... 123,962 122,992
Deferred income taxes ......................................................... 8,803 9,983
Long-term portion of deferred revenues ........................................ 4,624 4,954
--------- ---------
Total liabilities .................................................... 233,108 235,582
--------- ---------
Commitments and contingencies
Shareholders' equity:
Common stock, without par value, 200,000,000 shares authorized;
issued and outstanding 2002-60,171,208;
2001-60,107,087, respectively ............................................ 172,505 171,846
Retained earnings ........................................................ 79,675 78,525
Accumulated other comprehensive loss ..................................... (1,811) (1,549)
--------- ---------
Total shareholders' equity ........................................... 250,369 248,822
--------- ---------
Total liabilities and shareholders' equity ........................... $ 483,477 $ 484,404
========= =========

See notes to consolidated financial statements.

Tekelec
Consolidated Statements of Operations
(unaudited)

Three Months Ended
March 31,
--------------------
2002 2001
-------- --------
(thousands, except per share data)

Revenues ..................................................... $ 72,619 $ 84,315

Cost of sales:
Cost of goods sold ...................................... 24,364 26,684
Amortization of purchased technology .................... 2,597 2,589
-------- --------
Total cost of sales ........................... 26,961 29,273
-------- --------
Gross profit .................................. 45,658 55,042
-------- --------
Operating expenses:
Research and development ................................ 17,273 18,674
Selling, general and administrative ..................... 25,542 26,918
Amortization of goodwill and other intangible assets .... 400 5,416
-------- --------
Total operating expenses ............................ 43,215 51,008
-------- --------

Income from operations ....................................... 2,443 4,034
Other income (expense):
Interest income ......................................... 1,540 2,586
Interest expense ........................................ (2,272) (2,223)
Other, net .............................................. (50) 158
-------- --------
Total other income (expense) ........................ (782) 521
-------- --------

Income before provision for income taxes ..................... 1,661 4,555
Provision for income taxes .............................. 511 3,186
-------- --------
Net income .......................................... $ 1,150 $ 1,369
======== ========

Earnings per share:
Basic ................................................... $ 0.02 $ 0.02
Diluted ................................................. 0.02 0.02

Weighted average number of shares outstanding:
Basic ................................................... 60,143 59,037
Diluted ................................................. 61,776 62,426

See notes to consolidated financial statements.

Tekelec
Consolidated Statements of Comprehensive Income
(unaudited)

Three Months Ended
March 31,
------------------
2002 2001
------- -------
(thousands)

Net income .................................. $ 1,150 $ 1,369
Other comprehensive expense:
Foreign currency translation adjustments (262) (1,229)
------- -------
Comprehensive income ........................ $ 888 $ 140
======= =======

See notes to consolidated financial statements.

Tekelec
Consolidated Statements of Cash Flows
(unaudited)

Three Months Ended
March 31,
----------------------
2002 2001
--------- ---------
(thousands)

Cash flows from operating activities:
Net income ...................................................... $ 1,150 $ 1,369
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Allowance for doubtful accounts ............................ 73 1,800
Depreciation ............................................... 4,580 3,753
Amortization ............................................... 2,997 7,957
Amortization of deferred financing costs ................... 205 205
Convertible debt accretion ................................. 970 908
Deferred income taxes ...................................... (2,158) (1,070)
Stock based compensation ................................... 82 65
Tax benefit related to stock options exercised ............. 291 1,053
Changes in operating assets and liabilities:
Accounts and notes receivable ............................ 15,361 25,483
Inventories .............................................. 3,358 (751)
Income taxes receivable .................................. -- (11)
Prepaid expenses and other current assets ................ 3,152 --
Trade accounts payable ................................... (2,341) 13
Accrued expenses ......................................... 1,665 991
Accrued payroll and related expenses ..................... 2,088 (293)
Deferred revenues ........................................ (2,983) 20,471
Income taxes payable ..................................... (411) 545
--------- ---------
Total adjustments ...................................... 26,929 61,119
--------- ---------
Net cash provided by operating activities .............. 28,079 62,488
--------- ---------
Cash flows from investing activities:
Proceeds from maturity of available-for-sale securities .... 65,871 122,615
Purchase of available-for-sale securities .................. (79,577) (49,892)
Purchase of property and equipment ......................... (2,616) (7,721)
Purchase of technology ..................................... -- (69)
Increase in other assets ................................. 257 (585)
--------- ---------
Net cash provided by (used in) investing activities .... (16,065) 64,348
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ..................... 286 1,599
--------- ---------
Net cash provided by financing activities .............. 286 1,599
--------- ---------
Effect of exchange rate changes on cash ......................... (215) (683)
--------- ---------
Net change in cash and cash equivalents .................... 12,085 127,752
Cash and cash equivalents at beginning of period ................ 92,172 65,690
--------- ---------
Cash and cash equivalents at end of period ...................... $ 104,257 $ 193,442
========= =========

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, 2001, 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, 2002 and 2001 are for
the thirteen weeks ended March 29, 2002 and March 30, 2001, respectively.

These consolidated financial statements should be read in conjunction with
the consolidated financial statements for the year ended December 31, 2001, and
the notes thereto in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 establishes new standards for accounting and reporting requirements for
business combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method for combinations initiated after June 30, 2001. SFAS
No. 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. SFAS No. 142 was adopted on January 1, 2002 and
goodwill will now be tested for impairment at the reporting unit at least
annually and whenever events or circumstances occur indicating that goodwill
might be impaired. Amortization of goodwill, including goodwill recorded in past
business combinations, will cease. Upon adoption of SFAS No. 142, the Company
has determined that there was no goodwill impairment.

Upon adoption of SFAS No. 142 on January 1, 2002, the assembled workforce
intangible amount was reclassified to goodwill and goodwill will no longer be
amortized. The net income for the three months ended March 31, 2001 includes
amortization of goodwill and assembled workforce of $5.0 million. The adjusted
net income and earnings per share information for the three months ended March
31, 2001 as if SFAS No. 142 was adopted on January 1, 2001 was:

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

As As
reported adjusted
-------- ---------
Net income (thousands) ................. $ 1,150 $ 6,291
Basic earnings per share ............... 0.02 0.11
Diluted earnings per share ............. 0.02 0.10

With the adoption of SFAS No. 142, the identifiable intangible assets will
continue to be amortized over the estimated useful lives. The estimated
aggregate amortization expense for intangibles for the remainder of 2002 is $8.9
million. The estimated aggregate amortization expense for intangibles for the
subsequent years is:

For the Years Ending December 31,
(thousands)
2003 ................................... $11,364
2004 ................................... 3,916
Thereafter ............................. --
-------
$15,280
=======

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This Statement also supersedes the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of. This Statement also amends ARB No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
temporarily controlled subsidiary. The adoption date for SFAS No. 144 was
effective January 1, 2002 and 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,
2002 2001
-------- --------
The components of inventories are: (thousands)

Raw materials ....................................... $ 7,191 $ 8,490
Work in process ..................................... 1,473 2,530
Finished goods ...................................... 9,267 10,297
-------- --------
$ 17,931 $ 21,317
======== ========

Property and equipment consist of the following:

Manufacturing and development equipment ............. $ 54,502 $ 52,674
Furniture and office equipment ...................... 28,293 27,990
Demonstration equipment ............................. 5,270 5,053
Leasehold improvements .............................. 8,553 8,525
-------- --------
96,618 94,242
Less, accumulated depreciation and amortization ..... (63,836) (59,483)
-------- --------
Property and equipment, net .................... $ 32,782 $ 34,759
======== ========

Intangible assets consist of the following:

Purchased technology ................................ $ 50,193 $ 50,193
Other ............................................... 10,000 13,000
-------- --------
60,193 63,193
Less accumulated amortization ....................... (35,970) (35,626)
-------- --------
Intangible assets, net ......................... $ 24,223 $ 27,567
======== ========

C. Related Party Transactions

The Company's Japanese subsidiary purchases, for resale under a
distribution arrangement, products from an affiliate in which three of the
Company's directors are directors and shareholders. These purchases from the
related party were $923,000 and $352,000 for the three months ended March 31,
2002 and 2001, respectively. Amounts due to the related party at March 31, 2002
and December 31, 2001 were $402,000 and $168,000, respectively.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

D. Income Taxes

The income tax provision for the three-month periods ended March 31, 2002
and 2001 was $511,000 and $3.2 million, respectively, and reflected the effect
of non-deductible acquisition-related costs, partially offset by benefits of
$1.1 million for both periods 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 periods ended March 31, 2002 and 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.

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 $1.5 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 (4.75% at March 31, 2002), and expires on October
31, 2002, 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 $1.5 million with interest at the Japanese prime
rate (1.375% at March 31, 2002) plus 0.125% per annum which expire between June
2002 and August 2002, 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

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

In March 2002, the Lemelson Medical, Education & Research Foundation,
Limited Partnership ("Lemelson") filed a complaint against thirty defendants,
including Tekelec, in the United States District Court for the District of
Arizona. The complaint alleges that all defendants make, offer for sale, sell,
import, or have imported products that infringe eighteen patents assigned to
Lemelson, and the complaint also alleges that the defendants use processes that
infringe the same patents. The patents at issue relate to computer image
analysis technology and automatic identification technology. Lemelson has not
identified the specific Tekelec products or processes that allegedly infringe
the patents at issue, and Tekelec is currently investigating which products
and/or processes might be subject to the lawsuit. At present, the lawsuit is
stayed pending a non-appealable resolution of a lawsuit, involving the same
patents, that is pending in the United States District Court for the District of
Nevada and that is scheduled for trial in November 2002. Tekelec currently
believes that the ultimate outcome of the lawsuit will not have a material
adverse effect on its financial condition or overall results of operations.

G. Operating Segment Information

The Network Systems operating segment develops, markets and sells the
Company's Eagle signaling products based on the Company's high capacity Eagle 5
Signaling Application System (SAS) platform; the IP7 Secure Gateway, an SS7/IP
gateway for signaling in converged networks, and other IP7 convergence products;
Sentinel, a complete network monitoring and revenue assurance system; 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.

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 MGTS 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.

Tekelec
Notes to Consolidated Financial Statements
(unaudited)

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.

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

Operating Segments
Revenues
--------
Three Months Ended
March 31,
---------------------
2002 2001
-------- --------
Network Systems ....................................... $ 51,321 $ 58,451
Network Diagnostics ................................... 6,537 10,860
Contact Center ........................................ 9,051 8,467
Japan Diagnostics ..................................... 6,061 7,411
Intercompany Eliminations ............................. (351) (874)
-------- --------
Total revenues ................................... $ 72,619 $ 84,315
======== ========

Income from Operations
----------------------
Three Months Ended
March 31,
---------------------
2002 2001
-------- --------
Network Systems ....................................... $ 11,159 $ 15,985
Network Diagnostics ................................... (3,076) 573
Contact Center ........................................ 3,659 2,997
Japan Diagnostics ..................................... 369 (87)
Intercompany Eliminations ............................. 778 948
General Corporate (1) ................................. (10,446) (16,382)
-------- --------
Total income from operations ..................... $ 2,443 $ 4,034
======== ========

- ----------
(1) General Corporate includes acquisition-related charges and amortization of
$2,800 and $7,816 for the three months ended March 31, 2002 and 2001,
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,
---------------------
2002 2001
-------- --------
Network Systems ....................................... $ 51,314 $ 58,567
Network Diagnostics ................................... 12,254 17,281
Contact Center ........................................ 9,051 8,467
-------- --------
Total revenues from external customers ........... $ 72,619 $ 84,315
======== ========

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

Three Months Ended
March 31,
---------------------
2002 2001
-------- --------
North America ......................................... $ 53,506 $ 68,716
Japan ................................................. 5,942 7,368
Europe ................................................ 7,154 4,347
Rest of World ......................................... 6,017 3,884
-------- --------
Total revenues from external customers ........... $ 72,619 $ 84,315
======== ========

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,
2002 2001
--------- ---------
United States ......................................... $ 103,464 $ 112,478
Japan ................................................. 775 1,454
Other ................................................. 842 951
--------- ---------
Total long-lived assets .......................... $ 105,081 $ 114,883
========= =========

Sales to one customer accounted for 11% of revenues for the three months
ended March 31, 2002, and included sales from network systems, network
diagnostics and contact center operating segments. 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.

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, 2002 and 2001:

Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------
For the Three Months Ended March 31, 2002: (thousands, except per share amount)

Basic EPS ............................................. $ 1,150 60,143 $ 0.02
Effect of Dilutive Securities - Stock
Options and Warrants ............................. -- 1,633
---------- ----------
Diluted EPS ........................................... $ 1,150 61,776 $ 0.02
========== ==========

For the Three Months Ended March 31, 2001:

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
========== ==========

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 21.1 million and 14.4 million for the
quarters ended March 31, 2002 and 2001, 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, 2001. 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. The Company's network systems product line consists
principally of the Eagle 5 SAS and products, features and applications based on
the Eagle platform, including the IP7 Secure Gateway and the Company's local
number portability solution, Sentinel, ASi 4000 Service Control Point, VXi Media
Gateway Controller and other convergence products.

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

Contact Center. 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.

Results of Operations

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

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

Three Months Ended
March 31,
----------------------
2002 2001
----- -----

Revenues ................................................. 100.0% 100.0%
Cost of goods sold ....................................... 33.6 31.6
Amortization of purchased technology ..................... 3.6 3.1
----- -----
Gross profit ............................................. 62.8 65.3

Research and development ................................. 23.8 22.1
Selling, general and administrative ...................... 35.1 31.9
Amortization of goodwill and other purchased intangible .. 0.6 6.5
----- -----
Total operating expenses ................................. 59.5 60.5
----- -----

Income from operations ................................... 3.3 4.8
Interest and other income (expense), net ................. (1.0) 0.6
----- -----
Income before provision for income taxes ................. 2.3 5.4

Provision for income taxes ............................... 0.7 3.8
----- -----
Net income ............................................... 1.6% 1.6%
===== =====

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,
----------------------
2002 2001
------ ------
Network Systems .......................................... 71% 70%
Network Diagnostics ...................................... 17 20
Contact Center ........................................... 12 10
----- -----
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,
----------------------
2002 2001
------ ------
North America ............................................ 74% 81%
Japan .................................................... 8 9
Europe ................................................... 10 5
Rest of World ............................................ 8 5
----- -----
Total ............................................ 100% 100%
===== =====

Three Months Ended March 31, 2002 Compared with the Three Months Ended
March 31, 2001

Revenues. The Company's revenues decreased by $11.7 million, or 14%,
during the first quarter of 2002 due primarily to lower sales of network systems
products and services and secondarily to lower network diagnostics products
sales.

Revenues from network systems products decreased by $7.3 million, or 12%,
due primarily to lower sales of Eagle signaling products and services, local
number portability products and extensions and upgrades in 2002 as compared to
2001.

Revenues from network diagnostics products decreased by $5.0 million, or
29%, due primarily to lower sales of the MGTS i3000 product.

Revenues from Contact Center products increased by $584,000, or 7%, due
primarily to higher TotalView product sales.

Revenues in North America decreased by $15.2 million, or 22%, due
primarily to lower sales of Eagle signaling products. Sales in Japan decreased
by $1.4 million, or 19%, due primarily to lower MGTS i3000 product sales and
product development revenue. Revenues in Europe increased by $2.8 million, or
65%, due to higher Eagle signaling product sales. Rest of world revenues
increased by $2.1 million, or 55%, due to higher Eagle signaling product sales.

The impact of exchange rate fluctuations on currency translations
decreased revenues by $577,000, or 1%, and decreased net income by $81,000, or
6.6% in the first quarter of 2002.

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, both
domestically and internationally, 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 Controller network systems products, and the MGTS
i3000 diagnostics product.

Gross Profit. Gross profit as a percentage of revenues decreased to 62.8%
in the first quarter of 2002 compared with 65.3% in the first quarter of 2001.
The decrease in gross margins was primarily due to lower sales of higher margin
large network systems in 2002 as compared to 2001.

Research and Development. Research and development expenses in the first
quarter of 2002 decreased overall by $1.4 million, or 8%, and increased as a
percentage of revenues to 23.8% in the first quarter of 2002 from 22.1% in the
first quarter of 2001. The dollar decrease in 2002 was primarily due to
decreased usage of material supplies and contract labor.

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. Selling, general and
administrative expenses for the first quarter of 2002 decreased by $1.4 million
to $25.5 million, and increased as a percentage of revenue to 35.1% for the
three months ended March 31, 2002 from 31.9% for the three months ended March
31, 2001. The dollar decrease was primarily due to fewer additions to the
allowance for doubtful accounts in 2002 as compared to 2001.

Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and intangible assets in the first quarter of 2002 decreased by $5.0 million to
$400,000, and decreased as a percentage of revenues to 0.6% for the three months
ended March 31, 2002 from 6.5% for the three months ended March 31, 2001. This
decrease was due to the adoption of SFAS 142 on January 1, 2002 which no longer
permits the amortization of acquisition-related goodwill.

Interest and Other Income (Expense), net. In the first quarter of 2002,
interest expense increased slightly by $49,000, while interest income decreased
$1.0 million, or 40%, due to lower interest rates in 2002 compared to 2001.

Income Taxes. The income tax provision for the first quarter of 2002 was
$511,000 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 periods ended March 31, 2002 and 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 source income.

Liquidity and Capital Resources

During the three-month period ended March 31, 2002, cash and cash
equivalents increased by $12.1 million to $104.3 million, including the net
purchase of $13.7 million of short-term and long-term investments. Operating
activities, including the effects of exchange rate changes on cash, provided
$27.9 million. Financing activities, which represented proceeds from the
issuance of Common Stock upon the exercise of options, provided $286,000, and
investing activities, excluding the net usage of cash for the purchase of
short-term and long-term investments, used $2.4 million primarily due to capital
expenditures.

Cash flows from operating activities was comprised mainly of net income
adjusted for depreciation and amortization and a decrease in accounts
receivable. Net accounts receivable decreased by 23% during the first quarter
of 2002 due primarily to strong collections activity.

Capital expenditures of $2.6 million during the first three months of 2002
represented the planned addition of equipment principally for research and
development, manufacturing operations and a company wide information system.

The Company has a $20.0 million line of credit with a U.S. bank and lines
of credit aggregating $1.5 million available to the Company's Japanese
subsidiary from various Japan-based banks.

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

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.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes
new standards for accounting and reporting requirements for business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method for combinations initiated after June 30, 2001. SFAS
No. 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. SFAS No. 142 was adopted on January 1, 2002 and
goodwill will now be tested at the reporting unit at least annually and whenever
events or circumstances occur indicating that goodwill might be impaired.
Amortization of goodwill, including goodwill recorded in past business
combinations, will cease. Upon adoption of SFAS No. 142, the Company has
determined that there was no goodwill impairment. See Note "A" to the
consolidated financial statements for further detail on the effects of
implementing SFAS No. 142.

"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; 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
2001 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 2002 Executive Officer Bonus Plan

10.2 Nonstatutory Stock Option Agreement dated January 18, 2002,
between the Registrant and Lori A. Craven

10.3 Nonstatutory Stock Option Agreement dated January 18, 2002,
between the Registrant and Daniel B. Walters

10.4 Agreement to Provide Retiree Medical Benefits and Stock Option
Benefits dated January 3, 2002 between the Registrant and
Michael L. Margolis, as amended by Amendment No. 1 thereto
dated February 1, 2002

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Registrant during the
quarter ended March 31, 2002.

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, 2002

/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)