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 June 30, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-15135

TEKELEC
(Exact name of registrant as specified in its charter)

CALIFORNIA
(State or other jurisdiction of incorporation or organization)

95-2746131
(I.R.S. Employer Identification No.)

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 August 11, 1997, there were 25,564,952 shares of the registrant's
common stock, without par value, outstanding (after giving effect to a
two-for-one stock split of the registrant's common stock effective
August 8, 1997; see Note I to Notes to Consolidated Financial Statements
included herein).

TEKELEC
FORM 10-Q
INDEX
PAGE

PART I -- FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets at June 30, 1997
and December 31, 1996 3

Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and 1996 4

Consolidated Statements of Cash Flow for the six
months ended June 30, 1997 and 1996 5

Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11

PART II -- OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders 18

Item 6. Exhibits and Reports on Form 8-K 19

SIGNATURES 21

PART I -- FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TEKELEC
CONSOLIDATED BALANCE SHEETS

JUNE 30, December 31,
1997 1996
------------ ------------
(thousands, except share data)
ASSETS (unaudited) (audited)

CURRENT ASSETS:
Cash and cash equivalents ............................. $ 25,264 $ 17,211
Short-term investments, at fair value ................. 9,018 17,913
Accounts and notes receivable, less
allowances of $413 and $368, respectively ........... 23,527 17,026
Inventories ........................................... 12,932 8,116
Amounts due from related parties ...................... 2,373 2,381
Prepaid expenses and other current assets ............. 3,598 1,747
------------ ------------
Total current assets .............................. 76,712 64,394
Long-term investments, at fair value ....................... 11,066 9,120
Property and equipment, net ................................ 9,270 8,174
Other assets ............................................... 830 830
------------ ------------
Total assets ...................................... $ 97,878 $ 82,518
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Trade accounts payable ................................ $ 5,819 $ 5,631
Accrued expenses ...................................... 6,001 5,989
Accrued payroll and related expenses .................. 4,011 4,027
Deferred revenues ..................................... 10,472 3,778
Income taxes payable .................................. 1,158 1,342
------------ ------------
Total current liabilities ......................... 27,461 20,767
------------ ------------
Total liabilities ................................. 27,461 20,767
------------ ------------
SHAREHOLDERS' EQUITY (NOTE I):
Common stock, without par value,
100,000,000 shares authorized; 25,124,882 and
24,020,198 shares issued and outstanding,
respectively ........................................ 60,386 57,049
Retained earnings ..................................... 8,877 3,879
Cumulative translation adjustment ..................... 1,154 823
------------ ------------
Total shareholders' equity ........................ 70,417 61,751
------------ ------------
Total liabilities and shareholders' equity ........ $ 97,878 $ 82,518
============ ============

See notes to consolidated financial statements.

TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(thousands, except per share data)

REVENUES:
Sales to third parties ...................... $ 24,279 $ 15,898 $ 43,619 $ 27,033
Sales to related parties .................... 798 966 2,035 1,691
------------ ------------ ------------ ------------
Total revenues .......................... 25,077 16,864 45,654 28,724
------------ ------------ ------------ ------------

COSTS AND EXPENSES:
Cost of goods sold .......................... 9,012 6,741 15,690 11,336
Research and development .................... 4,789 4,372 9,257 8,687
Selling, general and administrative ......... 7,914 7,302 15,481 14,170
------------ ------------ ------------ ------------
Total costs and expenses ................ 21,715 18,415 40,428 34,193
------------ ------------ ------------ ------------

Income (Loss) from operations .................... 3,362 (1,551) 5,226 (5,469)
Other income (expense):
Interest, net ............................... 513 417 1,029 840
Other, net .................................. (29) (17) (12) (62)
------------ ------------ ------------ ------------
Total other income ...................... 484 400 1,017 778
------------ ------------ ------------ ------------

Income (Loss) before provision for income taxes .. 3,846 (1,151) 6,243 (4,691)
Provision for income taxes .................. 476 261 1,245 689
------------ ------------ ------------ ------------
NET INCOME (LOSS) ....................... $ 3,370 $ (1,412) $ 4,998 $ (5,380)
============ ============ ============ ============

EARNINGS (LOSS) PER SHARE (NOTE I):
Primary ..................................... $ 0.12 $ (0.06) $ 0.18 $ (0.23)
Fully diluted ............................... 0.12 (0.06) 0.18 (0.23)

WEIGHTED AVERAGE NUMBER OF SHARES (NOTE I):
Primary ..................................... 27,588 23,434 27,168 23,354
Fully diluted ............................... 28,092 23,434 27,960 23,354

See notes to consolidated financial statements.

TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)

Six Months Ended
June 30,
---------------------------
1997 1996
------------ ------------
(thousands)

CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 4,998 $ (5,380)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .............................. 2,228 1,801
Changes in current assets and liabilities:
Accounts and notes receivable ............................ (6,509) 6,654
Inventories .............................................. (4,784) (2,436)
Amounts due from related parties ......................... 7 1,426
Prepaid expenses and other current assets ................ (1,836) (187)
Trade accounts payable ................................... 186 (227)
Accrued expenses ......................................... 1 (1,547)
Accrued payroll and related expenses ..................... (26) (158)
Deferred revenues ........................................ 6,694 807
Income taxes payable ..................................... (192) (391)
------------ ------------
Total adjustments ...................................... (4,231) 5,742
------------ ------------
Net cash provided by operating activities ............. 767 362
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities .... 15,000 --
Purchase of available-for-sale securities .................. (8,051) (18,089)
Purchase of property and equipment ......................... (3,304) (3,113)
Decrease in other assets ................................... 11 195
------------ ------------
Net cash provided by (used in) investing activities .... 3,656 (21,007)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings ........................ -- 245
Repayment of long-term debt ................................ -- (120)
Repayment of other obligations ............................. -- (25)
Proceeds from issuance of common stock ..................... 3,337 1,000
------------ ------------
Net cash provided by financing activities .............. 3,337 1,100
------------ ------------
Effect of exchange rate changes on cash ......................... 293 (538)
------------ ------------
Net change in cash and cash equivalents .................... 8,053 (20,083)
Cash and cash equivalents at beginning of period ................ 17,211 43,609
------------ ------------
Cash and cash equivalents at end of period ...................... $ 25,264 $ 23,526
============ ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR
Interest ................................................... $ -- $ 70
Income taxes ............................................... 1,396 1,107

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, 1996, 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 period 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. However,
for financial statement presentation purposes, the reporting periods are
referred to as ended on the last calendar day of the quarter. The accompanying
financial statements for the three and six months ended June 30, 1997 and 1996
are for the thirteen and twenty-six weeks ended June 27, 1997 and June 28, 1996,
respectively.

Earnings per share are computed using the weighted average number of
shares outstanding and dilutive common stock equivalents (options and warrants).

These consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 1996
and the notes thereto in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.

B. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED

In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." This statement requires dual presentation of newly defined basic and
diluted earnings per share ("EPS") on the face of the income statement for all
entities with complex capital structures. The accounting standard is effective
for fiscal years ending after December 15, 1997 and requires restatement of all
prior period EPS data presented. Earlier application is not permitted. However,
disclosure of pro forma EPS data computed using SFAS No. 128 in the notes to the
financial statements is permitted in the periods prior to required adoption. The
pro forma EPS data for the three and six months ended June 30, 1997 and 1996
computed using SFAS No. 128 is as follows (shares in thousands):

Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
EARNINGS (LOSS) PER SHARE: 1997 1996 1997 1996
------- ------- ------ --------
Basic................................... $ 0.14 $(0.06) $ 0.20 $(0.23)
Diluted................................. 0.12 (0.06) 0.18 (0.23)

WEIGHTED AVERAGE NUMBER OF SHARES:

Basic................................... 24,928 23,434 24,676 23,354
Diluted................................. 27,588 23,434 27,168 23,354

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
shareholders' equity during the period except those resulting from investments
by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and requires restatement of earlier
periods presented. Management is currently evaluating the requirements of SFAS
No. 130.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that a public enterprise reports information about operating
segments in annual financial statements, and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997 and requires restatement of earlier periods
presented. Management is currently evaluating the requirements of SFAS No. 131.

C. FAIR VALUE OF INVESTMENTS

The Company has short-term investments in corporate debt securities
with original maturities of less than 90 days whose carrying amounts approximate
their fair values because of their short maturities. These short-term
investments are included in cash and cash equivalents, are classified as
held-to-maturity securities and amounted to $11.8 million and $3.0 million at
June 30, 1997 and December 31, 1996, respectively. At June 30, 1997, the Company
also had investments classified as available-for-sale securities included in
short-term and long-term investments, consisting of $20.1 million of United
States Treasury Notes with maturities of up to two years. These
available-for-sale securities are accounted for at their fair value, and
unrealized gains and losses on these securities are reported as a separate
component of shareholders' equity. At June 30, 1997, unrealized gains or losses
on available-for-sale securities were not significant.

TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

D. CERTAIN BALANCE SHEET ITEMS

The components of inventories are:

JUNE 30, December 31,
1997 1996
------------ ------------
(thousands)

Raw materials .................................... $ 2,861 $ 2,825
Work in process .................................. 2,792 1,869
Finished goods ................................... 7,279 3,422
------------ ------------
$ 12,932 $ 8,116
============ ============

Property and equipment consist of the following:

Manufacturing and development equipment .......... $ 15,430 $ 13,520
Furniture and office equipment ................... 7,702 7,300
Demonstration equipment .......................... 3,925 4,055
Leasehold improvements ........................... 1,147 1,118
------------ ------------
28,204 25,993

Less, accumulated depreciation and amortization .. (18,934) (17,819)
------------ ------------
Property and equipment, net ...................... $ 9,270 $ 8,174
============ ============

E. RELATED PARTY TRANSACTIONS

Sales to related parties consist of, and amounts due from related
parties are, the result of transactions between the Company and foreign
affiliates controlled by the Company's Chairman of the Board.

F. INCOME TAXES

For the three-month and six-month periods ended June 30, 1997, the
Company had tax provisions of $476,000 and $1,245,000, respectively, resulting
in effective tax rates of 12% and 20%, respectively. The provisions for 1997
were primarily foreign taxes on the income of the Company's Japanese subsidiary
and the provision for taxes on the Company's U.S. taxable income at the federal
alternative minimum tax rate and applicable state tax rates. Although the
Company's pre-tax results for the three-month and six-month periods ended June
30, 1996 showed a loss, the Company had tax provisions of $261,000 and $689,000,
respectively, which were principally foreign taxes on the income of the
Company's Japanese subsidiary and reflected the Company's inability to currently
recognize a benefit for its U.S. loss and credits carryforwards, which remain
available to reduce future U.S. taxes. The Company anticipates that it has
sufficient loss and credits carryforwards available to offset most of its
expected U.S. taxes in 1997.

TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

G. BORROWINGS

The Company has a $10.0 million line of credit with a U.S. bank and
lines of credit aggregating $3.1 million available to the Company's Japanese
subsidiary from certain Japan-based banks.

The Company's $10.0 million line of credit is collateralized by
substantially all of the Company's assets, bears interest at, or in some cases
below, the U.S. prime rate (8.5% at June 30, 1997), and expires June 30, 1998,
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 with which the Company is in compliance. 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 $3.1 million with interest at the Japanese prime
rate (1.625% at June 30, 1997) plus 0.125% per annum which expire between March
31, 1998 and August 5, 1998, if not renewed. There have been no borrowings under
these lines of credit.

H. MAJOR CUSTOMERS

Sales to NYNEX amounted to 15% of revenues for the second quarter of
1997. Sales to GTE amounted to 21% of revenues for the second quarter of 1996,
and sales to Nippon Telegraph & Telephone amounted to 10% of revenues for the
second quarter of 1996.

Sales to Nippon Telegraph & Telephone amounted to 11% and 12% of
revenues for the first six months of 1997 and 1996, respectively. Sales to NYNEX
amounted to 13% of revenues for the first six months of 1997 and sales to GTE
amounted to 13% of revenues for the first six months of 1996.

I. COMMON STOCK

On July 24, 1997, the Company's Board of Directors approved a
two-for-one stock split of the Company's common stock. The additional stock will
be distributed on August 22, 1997 to shareholders of record on August 8, 1997.
All references to numbers of shares and related prices, and per share amounts
have been restated to reflect the stock split.

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 by 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, 1996.
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.

RESULTS OF OPERATIONS

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

Percentage of Revenues
---------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------

Revenues ............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................... 35.9 40.0 34.4 39.5
-------- -------- -------- --------
Gross profit ......................... 64.1 60.0 65.6 60.5
-------- -------- -------- --------

Research and development ............. 19.1 25.9 20.3 30.2
Selling, general and administrative .. 31.6 43.3 33.9 49.3
-------- -------- -------- --------
Total operating expenses ............. 50.7 69.2 54.2 79.5
-------- -------- -------- --------
Income (Loss) from operations ........ 13.4 (9.2) 11.4 (19.0)

Interest and other income, net ....... 1.9 2.4 2.2 2.7
-------- -------- -------- --------
Income(Loss) before provision for
income taxes ...................... 15.3 (6.8) 13.6 (16.3)
Provision for income taxes ........... 1.9 1.6 2.7 2.4
-------- -------- -------- --------
Net income (loss) .................... 13.4% (8.4)% 10.9% (18.7)%
======== ======== ======== ========

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 Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------

Data network diagnostics ............ 17% 25% 18% 36%
Intelligent network diagnostics ..... 28 33 32 30
Network switching ................... 55 42 50 34
-------- -------- -------- --------
Total ...................... 100% 100% 100% 100%
======== ======== ======== ========

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

North America ...................... 73% 64% 69% 60%
Japan .............................. 13 18 18 22
Europe ............................. 5 8 5 9
Rest of the World .................. 9 10 8 9
-------- -------- -------- --------
Total ..................... 100% 100% 100% 100%
======== ======== ======== ========

THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE
THREE MONTHS ENDED JUNE 30, 1996

Revenues. The Company's revenues increased by $8.2 million, or 49%,
during the second quarter of 1997 due to higher sales of network switching
products and intelligent network diagnostics products.

Revenues from switching products increased by $6.8 million, or 95%, in
the second quarter of 1997 primarily due to an 86% increase in EAGLE STP unit
sales as a result of increased market acceptance principally in the U.S.
Additionally, EAGLE STP average selling price increased as a result of the
Company's sales of larger systems in the Regional Bell Operating Company (RBOC)
market. The Company expects that its switching product revenues will continue to
grow both in dollars and as a percentage of revenues for the remainder of 1997
when compared to 1996.

Revenues from intelligent network diagnostics products increased by
$1.5 million, or 28%, due primarily to increased MGTS product sales in the U.S.

Revenues from data network diagnostics products decreased by $100,000,
or 2%. The Company has taken steps to expand its Chameleon products' reach into
the network operator market including the planned introduction, in the second
half of 1997, of software applications addressing specific needs of this market
which could provide additional sales opportunities.

Revenues in North America increased by $7.6 million, or 72%, primarily
as a result of higher EAGLE STP and MGTS product sales. Sales in Japan increased
by $281,000, or 9%, primarily due to higher Chameleon product sales, partially
offset by unfavorable exchange rate fluctuations on foreign currency
translations. Other international revenues increased by $292,000 or 9%.

The impact of exchange rate fluctuations on foreign currency
translations decreased revenues by approximately $400,000, or 2%, and decreased
net income by $26,000, or 1%, in the second quarter of 1997.

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 STP product and the successful
introduction of new applications such as the Company's EAGLE STP/Local Number
Portability feature.

Gross Profit. Gross profit as a percentage of revenues increased from
60% in the second quarter of 1996 to 64% in the second quarter of 1997,
primarily due to higher switching product margins and improved manufacturing
efficiencies due to higher sales volumes. These factors were partially offset by
a lower proportion of diagnostics product sales, which typically carry higher
margins than switching products.

Research and Development. Although research and development expenses
increased by $417,000, or 10%, in the second quarter of 1997, such expenses
decreased as a percentage of revenues from 26% in the second quarter of 1996 to
19% in the second quarter of 1997. The dollar increase was due to increased
switching product expenses of approximately $800,000, partially offset by lower
research and development spending for diagnostics products. This increase was
primarily attributable to ongoing development expenses for the Company's local
number portability feature on the EAGLE STP product and consisted principally of
expenses incurred in connection with the hiring of additional personnel and
contractors and higher depreciation expenses as a result of equipment
acquisitions. Based on expected revenues and expense levels, the Company
believes that research and development expenses will continue to be lower as a
percentage of revenues for the remainder of 1997 when compared with 1996.

Selling, General and Administrative Expenses. Although selling, general
and administrative expenses increased by $612,000, or 8%, in the second quarter
of 1997, such expenses decreased as a percentage of revenues from 43% in the
second quarter of 1996 to 32% in the second quarter of 1997. The dollar increase
was due primarily to the accrual of certain costs for performance-related award
programs and increased support infrastructure costs to meet the requirements of
the growing EAGLE installed base and higher sales levels. Based on expected
revenues and expense levels, the Company believes that selling, general and
administrative expenses will continue to be lower as a percentage of revenues
for the remainder of 1997 when compared with 1996.

Income Taxes. For the three-month period ended June 30, 1997, the
Company had a tax provision of $476,000, resulting in an effective tax rate of
12%. The provision for 1997 was primarily foreign taxes on the income of the
Company's Japanese subsidiary and the provision for taxes on the Company's U.S.
taxable income at the federal alternative minimum tax rate and applicable state
tax rates. Although the Company's pre-tax results for the three-month period
ended June 30, 1996 showed a loss, the Company had a tax provision of $261,000
for such period. This provision was principally foreign taxes on the income of
the Company's Japanese subsidiary and reflected the Company's inability to
currently recognize a benefit for its U.S. loss and credits carryforwards, which
remain available to reduce future U.S. taxes. The Company anticipates that

it has sufficient loss and credits carryforwards available to offset most of its
expected U.S. taxes in 1997.

SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE
SIX MONTHS ENDED JUNE 30, 1996

Revenues. The Company's revenues increased by $16.9 million, or 59%,
during the first six months of 1997 due primarily to higher sales of network
switching products and intelligent network diagnostics products. Sales of data
network diagnostics products decreased both in dollars and as a percentage of
total sales.

Revenues from switching products increased by $13.1 million, or 133%,
primarily due to a 90% increase in EAGLE STP unit sales as a result of increased
market acceptance primarily in the U.S. Additionally, EAGLE STP average selling
price increased as a result of the Company's sales of larger systems in the
Regional Bell Operating Company (RBOC) market.

Revenues from intelligent network diagnostics products increased by
$6.0 million, or 70%, primarily due to strong demand for the Company's MGTS
products particularly in the domestic and Japanese wireless markets.

Revenues from data network diagnostics products, which consisted
primarily of sales to the research and development market, decreased by $2.2
million, or 22%, due primarily to lower worldwide sales in the first quarter of
1997 of the Company's Chameleon products.

Revenues in North America increased by $14.9 million, or 89%, primarily
as a result of higher EAGLE STP and MGTS product sales. Sales in Japan increased
by $1.7 million, or 27%, due primarily to higher MGTS product sales, partially
offset by unfavorable exchange rate fluctuations on foreign currency
translations. Other international revenues increased by $320,000 or 6%.

The impact of exchange rate fluctuations on foreign currency
translations decreased revenues by $1.1 million, or 2%, and decreased the
Company's net income by $102,000, or 2%, in the first six months of 1997.

Gross Profit. Gross profit as a percentage of revenues increased from
61% in the first half of 1996 to 66% in the first half of 1997, primarily due to
higher switching product margins and improved manufacturing efficiencies as a
result of higher sales volumes. These factors were partially offset by a lower
proportion of diagnostics product sales, which typically carry higher margins
than switching products. In addition, switching product margins in the first
half of 1996 were adversely impacted by certain non-recurring costs.

Research and Development. Although research and development expenses
increased overall by $570,000, or 7%, in the first six months of 1997, such
expenses decreased as a

percentage of revenues from 30% in the first six months of 1996 to 20% in the
first six months of 1997. The dollar increase in such expenses was primarily
attributable to ongoing development expenses for the Company's local number
portability solution on the EAGLE STP product and consisted principally of
expenses incurred in connection with the hiring of additional personnel and
contractors and higher depreciation expenses as a result of equipment
acquisitions. This increase was partially offset by lower research and
development spending for diagnostics products.

Selling, General and Administrative Expenses. Although selling, general
and administrative expenses increased by $1.3 million, or 9%, in the first six
months of 1997, such expenses decreased as a percentage of revenues from 49% in
the first six months of 1996 to 34% in the first six months of 1997. The dollar
increase in such expenses was primarily due to increased support infrastructure
costs to meet the requirements of the growing EAGLE installed base and higher
sales levels, and the accrual of certain costs for performance-related award
programs.

Income Taxes. For the six-month period ended June 30, 1997, the Company
had a tax provision of $1.2 million, resulting in an effective tax rate of 20%.
The provision for 1997 was primarily foreign taxes on the income of the
Company's Japanese subsidiary and the provision for taxes on the Company's U.S.
taxable income at the federal alternative minimum tax rate and applicable state
tax rates. Although the Company's pre-tax results for the six-month period ended
June 30, 1996 showed a loss, the Company had a tax provision of $689,000 for
such period. This provision was primarily foreign taxes on the income of the
Company's Japanese subsidiary and reflected the Company's inability to currently
recognize a benefit for its U.S. loss and credits carryforwards, which remain
available to reduce future U.S. taxes.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 1997, cash and cash equivalents
increased by $8.1 million to $25.3 million, primarily due to a net transfer of
approximately $6.9 million from short-term and long-term investments. In
addition, financing activities provided $3.3 million, operating activities,
including the effects of exchange rate changes on cash, provided $1.1 million
while capital expenditures used $3.3 million.

Accounts receivable, including amounts due from related parties,
increased by 33% during the first six months of 1997 due primarily to higher
sales levels and $6.7 million in accounts receivable billings for which revenue
had not yet been recognized. These billings primarily represented shipments to
customers for which revenue recognition is dependent upon customer acceptance,
which had not yet occurred at June 30, 1997. Inventories increased by 59% during
the first six months of 1997 primarily to meet customer shipments scheduled for
the third quarter of 1997 and product requirements for customer trials. Deferred
revenues increased by 177% primarily due to shipments to customers with extended
acceptance periods.

Capital expenditures amounted to $3.3 million during the first six
months of 1997 and represented the planned addition of equipment principally for
EAGLE research and development.

The net cash provided by financing activities in the first six months
of 1997 amounted to $3.3 million which represented net proceeds from the
issuance of Common Stock upon the exercise of stock options and warrants.

The Company has a $10.0 million line of credit with a U.S. bank and
lines of credit aggregating $3.1 million available to the Company's Japanese
subsidiary from certain Japan-based banks.

The Company's $10.0 million line of credit is collateralized by
substantially all of the Company's assets, bears interest at, or in some cases
below, the U.S. prime rate (8.5% at June 30, 1997), and expires June 30, 1998,
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 for which the Company is in compliance. There have been no borrowings
under this credit facility.

Upon the expiration of the above-described credit facilities, the
Company believes that, if necessary, it would be able to arrange for credit
facilities on terms generally no less favorable than those described above.

The Company believes that existing working capital, funds generated
from operations, and its current bank lines of credit should be sufficient to
satisfy anticipated operating requirements at least through 1997.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED

In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." This statement requires dual presentation of newly defined basic and
diluted earnings per share ("EPS") on the face of the income statement for all
entities with complex capital structures. The accounting standard is effective
for fiscal years ending after December 15, 1997 and requires restatement of all
prior period EPS data presented. Earlier application is not permitted. The
Company has determined that in some periods the presentation of basic EPS data
under SFAS No. 128 may differ significantly from previously reported EPS data as
a result of the exclusion of dilutive common stock equivalents (options and
warrants) in the basic EPS calculation. See Note B for further information and
the pro forma impact on EPS data for the periods ending June 30, 1997 and 1996.

investments by, or distributions to, shareholders. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. Management is currently evaluating the requirements
of SFAS No. 130.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1996

The statements which are not actual reported financial results or
historical facts contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are forward-looking statements
that involve certain risks and uncertainties including, but not limited to,
timing of significant orders and shipments, product mix, capital spending
patterns of customers, competition and pricing, new product introductions by the
Company or its competitors, carrier deployment of intelligent network services,
the timing of research and development expenditures, regulatory changes, general
economic conditions and other risks described in the Company's Annual Report on
Form 10-K and in the Company's other Securities and Exchange Commission filings.

PART II -- OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) On May 21, 1997, the Company held its 1997 Annual Meeting of
Shareholders (the "Annual Meeting").

(b) At the Annual Meeting, the following persons were elected as
directors of the Company. The number of votes cast for each director, as well as
the number of votes withheld, are listed opposite each director's name.

Name of Director Votes Cast for Director Votes Withheld
- -------------------------------------- ------------------------ --------------

Robert V. Adams ........................ 10,152,417 160,298
Jean-Claude Asscher .................... 10,293,217 19,498
Daniel L. Brenner ...................... 10,292,431 20,284
Howard Oringer ......................... 10,274,481 38,234
Jon F. Rager ........................... 10,293,181 19,534
Allan J. Toomer ........................ 10,291,735 20,980

(c) At the Annual Meeting, the shareholders approved, with 5,792,383
votes cast in favor and 2,343,827 votes cast against, an amendment to the
Company's 1994 Stock Option Plan increasing the aggregate number of shares of
Common Stock authorized for issuance thereunder from 2,000,000 to 3,000,000.
There were 10,016 abstentions and 2,166,489 broker nonvotes with respect to this
matter.

(d) At the Annual Meeting, with 10,297,105 votes cast in favor, the
shareholders ratified the appointment of Coopers & Lybrand L.L.P. as independent
accountants of the Company for the year ending December 31, 1997. 8,365 votes
were cast against such ratification, and there were 7,245 abstentions with
respect to this matter.

PART II -- OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 Amended and Restated Articles of Incorporation of the
Registrant

11.1 Statement of Computation of Earnings Per Share for the
Three and Six Months Ended June 30, 1997 and 1996.

27.1 Financial Data Schedule

(b) Reports

No reports on Form 8-K were filed by the Company during the
six months ended June 30, 1997.

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

August 14, 1997 /s/ Allan J. Toomer
----------------------------------------
Allan J. Toomer
President
(Duly authorized officer)

/s/ Gilles C. Godin
----------------------------------------
Gilles C. Godin
Chief Financial Officer and
Vice President, Finance
(Principal financial and chief
accounting officer)

INDEX TO EXHIBITS

Exhibit Number Description
- -------------- ----------------------------------------------------------------

3.1 Amended and Restated Articles of Incorporation of the Registrant

11.1 Statement of Computation of Earnings Per Share for the Three and
Six Months Ended June 30, 1997 and 1996

27.1 Financial Data Schedule