TEKELEC, 10-Q, 2000-08-14

TEKELEC
10-Q, 2000-08-14
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

Previous: WESTIN HOTELS LTD PARTNERSHIP, 10-Q, EX-27, 2000-08-14

Next: TEKELEC, 10-Q, EX-10.1, 2000-08-14

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, 2000

[ ] 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 August 2, 2000, there were 58,289,604 shares of the registrant's
common stock, without par value, outstanding.

<PAGE>

TEKELEC
FORM 10-Q
INDEX

PART I -- FINANCIAL INFORMATION PAGE
------------------------------- ----

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 3

Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and
1999 4

Consolidated Statements of Comprehensive
Income for the three and six months ended June
30, 2000 and 1999 5

Consolidated Statements of Cash Flow for the
six months ended June 30, 2000 and 1999 6

Notes to Consolidated Financial Statements 8

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17

PART II -- OTHER INFORMATION
----------------------------

Item 4. Submission of Matters to a Vote of Security Holders 27

Item 5. Other Information 27

Item 6. Exhibits and Reports on Form 8-K 28

SIGNATURES
----------

2
<PAGE>

PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TEKELEC
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, December 31,
2000 1999
----------- ------------
(thousands, except share data)
(UNAUDITED) (audited)
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents............. $ 89,635 $ 46,671
Short-term investments, at fair value. 12,675 37,997
Accounts and notes receivable, less
allowances of $1,413 and $1,478,
respectively.......................... 75,883 83,649
Inventories........................... 23,691 24,310
Amounts due from related parties...... -- 1,847
Income taxes receivable............... 9,891 --
Deferred income taxes, net............ 9,711 8,365
Prepaid expenses and other current
assets................................ 13,850 5,150
---------- ----------
Total current assets............... 235,336 207,989
Long-term investments, at fair value..... 39,153 21,996
Property and equipment, net.............. 25,158 21,667
Intangible assets, net................... 119,572 135,706
Deferred income taxes, net............... 2,821 2,780
Other assets............................. 4,111 4,296
---------- ----------
Total assets....................... $ 426,151 $ 394,434
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Trade accounts payable................ $ 13,220 $ 16,249
Accrued expenses...................... 14,030 19,196
Accrued payroll and related expenses.. 7,946 8,937
Current portion of deferred revenues.. 40,319 35,330
Income taxes payable.................. -- 575
---------- ----------
Total current liabilities.......... 75,515 80,287
Long-term convertible debt............... 117,498 115,786
Long-term portion of deferred revenues... 2,518 2,537
Long-term deferred income tax liability.. 16,846 19,229
---------- ----------
Total liabilities.................. 212,377 217,839
---------- ----------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Common stock, without par value,
200,000,000 shares authorized;
58,055,937 and
55,713,127 shares issued and
outstanding, respectively........ 138,897 101,385
Retained earnings..................... 72,762 72,528
Accumulated other comprehensive income 2,115 2,682
---------- ----------
Total shareholders' equity......... 213,774 176,595
---------- ----------
Total liabilities and shareholders'
equity........................... $ 426,151 $ 394,434
========== ==========
</TABLE>

See notes to consolidated financial statements.

3
<PAGE>

TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(thousands except per share data)

<S> <C> <C> <C> <C>
REVENUES ............................ $ 74,148 $ 51,728 $ 134,210 $ 84,413

COSTS AND EXPENSES:
Cost of goods sold ............... 25,024 17,976 44,776 29,307
Amortization of purchased
technology ...................... 2,530 1,496 5,071 1,514
Research and development ......... 12,900 10,525 25,139 19,393
Selling, general and
administrative .................. 22,030 15,582 41,392 26,957
Amortization of goodwill and other
intangible assets................ 5,416 3,726 11,088 3,726
Acquired in-process research and
development and other acquisition-
related charges.................. -- 6,830 -- 6,830
Restructuring .................... -- -- -- 1,800
--------- --------- --------- ---------
Total costs and expenses ...... 67,900 56,135 127,466 89,527
--------- --------- --------- ---------

Income (Loss) from operations ....... 6,248 (4,407) 6,744 (5,114)
Other income (expense):
Interest income .................. 1,839 882 3,351 2,353
Interest expense ................. (2,165) (1,093) (4,358) (1,093)
Other, net ....................... (132) (6) (160) (2)
--------- --------- --------- ---------
Total other income (expense)... (458) (217) (1,167) 1,258
--------- --------- --------- ---------

Income (Loss) before provision for
income taxes....................... 5,790 (4,624) 5,577 (3,856)
Provision for income taxes ....... 3,754 1,512 5,343 1,788
--------- --------- --------- ---------
NET INCOME (LOSS) ............. $ 2,036 $ (6,136) $ 234 $ (5,644)
========= ========= ========= =========

EARNINGS (LOSS) PER SHARE:
Basic ............................ $ 0.04 $ (0.11) 0.00 $ (0.10)
Diluted .......................... 0.03 (0.11) 0.00 (0.10)

WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic ............................ 57,710 54,766 57,124 54,618
Diluted .......................... 64,129 54,766 63,992 54,618

</TABLE>

See notes to consolidated financial statements.

4
<PAGE>

TEKELEC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(thousands)

<S> <C> <C> <C> <C>
NET INCOME (LOSS)................. $ 2,036 $ (6,136) $ 234 $ (5,644)
-------- -------- -------- --------

Other comprehensive expense:
Foreign currency translation
adjustments................... (5) (39) (567) (587)
------- ------ ------- -------
COMPREHENSIVE INCOME (LOSS)....... $ 2,031 $ (6,175) $ (333) $ (6,231)
======= ====== ======= =======
</TABLE>

See notes to consolidated financial statements.

5
<PAGE>

TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)

<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
--------- ---------
(thousands)

<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:

Net income (loss)................................. $ 234 $ (5,644)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................... 5,586 3,705
Amortization................................... 16,159 5,770
Amortization of deferred financing costs....... 403 --
Write-off of acquired in-process research
and development............................... -- 6,000
Non-cash portion of restructuring charge....... -- 800
Convertible debt accretion .................... 1,712 --
Deferred income taxes.......................... (2,199) (538)
Changes in assets and liabilities (excluding
the effect of acquisition):
Accounts and notes receivable................ 7,543 5,172
Inventories.................................. 608 (1,337)
Amounts due from related parties............. 1,847 102
Income taxes receivable...................... 6,961 (445)
Prepaid expenses and other current assets.... (8,703) (3,226)
Trade accounts payable....................... (2,755) 1,138
Accrued expenses............................. (5,144) 2,630
Accrued payroll and related expenses......... (972) (6,198)
Deferred revenues............................ 4,965 1,843
Income taxes payable......................... (575) (1,390)
-------- --------
Total adjustments........................... 25,436 14,026
-------- --------
Net cash provided by operating activities... 25,670 8,382
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale
securities.................................... 42,397 80,916
Purchase of available-for-sale securities...... (34,232) (26,157)
Payments in connection with acquisition, net
of cash acquired.............................. -- (49,087)
Purchase of property and equipment............. (9,122) (5,482)
Purchase of technology......................... (25) (1,629)
Decrease (Increase) in other assets............ (239) 71
-------- --------
Net cash (used in) investing activities..... (1,221) (1,368)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock......... 19,070 2,371
-------- --------
Net cash provided by financing activities... 19,070 2,371
Effect of exchange rate changes on cash........... (555) (501)
-------- --------
Net change in cash and cash equivalents........ 42,964 8,884
Cash and cash equivalents at beginning of period.. 46,671 31,932
-------- --------
Cash and cash equivalents at end of period........ $ 89,635 $ 40,816
======== ========
</TABLE>

See notes to consolidated financial statements.

6
<PAGE>

TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW (CONT'D)
(unaudited)

<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
--------- ---------
(thousands)

<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION:

Tax benefit related to stock options........ $ 18,442 $ 1,181
Note payable in connection with acquisition. -- 100,000

Assets and liabilities recognized in connection with acquisition:

Accounts receivable....................... -- 9,957
Other current assets...................... -- 13,261
Investments............................... -- 7,255
Property and equipment.................... -- 3,490
Other assets.............................. -- 169
Intangibles............................... -- 61,000
Goodwill.................................. -- 94,774
Accounts payable.......................... -- 1,515
Other current liabilities................. -- 22,429
Deferred income tax liability............. -- 21,545
</TABLE>

See notes to consolidated financial statements.

7
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

A. BASIS OF PRESENTATION

The consolidated financial statements are unaudited, other than the
consolidated balance sheet at December 31, 1999, 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 financial
statements for the three and six months ended June 30, 2000 and 1999 are for the
thirteen and twenty-six weeks ended June 30, 2000 and July 2, 1999,respectively.

These consolidated financial statements should be read in conjunction with
the consolidated financial statements for the year ended December 31, 1999, and
the notes thereto in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.

On May 7, 1999, the Company purchased all of the outstanding stock of IEX
Corporation ("IEX"). The acquisition has been accounted for under the purchase
method of accounting, and accordingly, the consolidated financial statements
include the results and financial position of IEX beginning as of May 7, 1999.
See Note B.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Adoption of SAB 101 is required in the fourth quarter of 2000. The Company is
currently evaluating the provisions of SAB 101 and its potential impact on the
Company's revenue recognition policy.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
applied prospectively to new awards in a business combination, modifications to
outstanding awards, and changes to grantee status that occur on or after July 1,
2000, except for the provisions related to repricings and the definition of an
employee, which apply to awards after December 15, 1999. Additional provisions
of FIN 44 related to modifications to fixed stock option awards to add a reload
feature are effective for awards modified after January 12, 2000. The Company
believes that the adoption of FIN 44 will not have a material impact on its
financial statements.

8
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

B. ACQUISITION OF IEX CORPORATION

On May 7, 1999, the Company acquired all of the outstanding stock of IEX
Corporation ("IEX") for $163 million, consisting of $63 million in cash and $100
million in short-term notes that were refinanced with convertible notes in
November 1999 (See Note G). IEX develops, markets and sells solutions for
intelligent networks, call centers and other telecommunications markets.

The transaction has been accounted for under the purchase method of
accounting, and resulted in net goodwill and other intangibles of approximately
$133.4 million, with an average amortization period of five years. The total
purchase price, including acquisition expenses of $2.0 million, was allocated
among the assets acquired and liabilities assumed based on their estimated fair
values as follows:

<TABLE>
<CAPTION>
(thousands)
<S> <C>
In-process research and development............ $ 6,000
Developed and existing technology.............. 48,000
Other intangibles.............................. 13,000
Goodwill....................................... 95,274
Tangible assets acquired....................... 50,045
Deferred income tax liabilities associated with
certain tangible assets..................... (22,875)
Liabilities assumed............................ (24,444)
--------
$165,000
========
</TABLE>

Based on a third party appraisal, management determined that $6.0 million
of the purchase price represented acquired in-process research and development
that had not yet reached technological feasibility and had no alternative future
use. This amount was recorded as a non-recurring expense in the second quarter
of 1999. Amortization expense of purchased technology and other intangible
assets resulting from the acquisition amounted to $6.7 million and $13.5
million, net of amortization of associated deferred income tax liabilities of
$1.1 million and $2.4 million, for the three and six months ended June 30,
2000.

The following table shows pro forma revenue, net income (loss) and net
income (loss) per share of the Company giving effect to the IEX acquisition as
of the beginning of 1999, excluding the impact of one-time charges.

<TABLE>
<CAPTION>
For the Six Months Ended June 30,
2000 1999
------------------ ----------------
(thousands, except per share amounts)

<S> <C> <C>
Revenues................................ $ 134,210 $ 98,172
Net income (loss)....................... 234 (13,132)
Net income (loss) per share............. 0.00 (0.24)
</TABLE>

9
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

C. CERTAIN BALANCE SHEET ITEMS

<TABLE>
<CAPTION>
JUNE 30, December 31,
2000 1999
---------- ------------
The components of inventories are: (thousands)

<S> <C> <C>
Raw materials ......................... $ 9,556 $ 7,490
Work in process ....................... 1,940 2,366
Finished goods ........................ 12,195 14,454
--------- --------
$ 23,691 $ 24,310
========= ========

Property and equipment consist of the following:

Manufacturing and development equipment $ 35,437 $ 31,124
Furniture and office equipment ........ 18,054 16,007
Demonstration equipment ............... 3,200 3,207
Leasehold improvements ................ 5,522 4,105
--------- --------
62,213 54,443

Less, accumulated depreciation and
amortization......................... (37,055) (32,776)
--------- --------
Property and equipment, net ........ $ 25,158 $ 21,667
========= ========

Intangible assets consist of the following:
Goodwill............................... $ 95,274 $ 95,274
Purchased technology................... 49,737 49,712
Other.................................. 13,000 13,000
--------- --------
158,011 157,986
Less accumulated amortization.......... (38,439) (22,280)
--------- --------
Intangible assets, net.............. $ 119,572 $135,706
========= ========
</TABLE>

D. RELATED PARTY TRANSACTIONS

Sales to related parties consisted of, and amounts due from related
parties were the result 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 through the date
of the sale amounted to $51,000 and $739,000 for the three months ended June 30,
2000 and 1999, respectively, and $779,000 and $1.3 million for the six months
ended June 30, 2000 and 1999, respectively.

The Company's Japanese subsidiary purchases, for resale, products from an
affiliate controlled by the Company's Chairman under a distribution arrangement.
These purchases from the related party were $365,000 and $555,000 for the three
and six months ended June 30, 2000, respectively. Amounts due to the related
party at June 30, 2000 were $106,000.

10
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

E. RESTRUCTURING

During the first quarter of 1999, the Company announced a plan to scale
down its Data Network Diagnostics Division and integrate the division into its
Intelligent Network Diagnostics Division. In connection with this activity, the
Company recorded a restructuring charge of $1.8 million consisting of cash
severance costs for 27 terminated employees in management, research and
development, support and administrative functions, and non-cash charges
consisting of the write-down of certain assets to their net realizable value.
The costs consisted of the following:

<TABLE>
<CAPTION>
PROVISION
RECORDED
-----------
(thousands)

<S> <C>
Severance pay.................... $ 700
Other accrued expenses........... 300
Inventory........................ 350
Fixed assets..................... 200
Other assets..................... 250
-------
$ 1,800
</TABLE>

At December 31, 1999, all 27 employees had been terminated, and all of the
severance costs and other accrued expenses had been paid.

F. INCOME TAXES

The income tax provisions for the three and six month periods ended June
30, 2000 were $3.8 million and $5.3 million, respectively, and reflected the
effect of non-deductible acquisition-related costs, partially offset by benefits
of $1.1 million and $2.4 million, respectively from the utilization of deferred
tax liabilities related to certain of these acquisition-related costs. Although
the Company had a loss for the three and six month periods ended June 30, 1999,
income tax provisions of $1.5 million and $1.8 million, respectively, were
recorded, reflecting the effect of the non-deductible items described above,
partially offset by a benefit of $858,000 from the utilization of deferred tax
benefits related to certain of these items.

Excluding the effect of acquisition-related items, an estimated effective
tax rate of 36% was applied for the three and six month periods ended June 30,
2000 and 1999 and represented federal, state and foreign taxes on the Company's
income, reduced primarily by research and development and foreign tax credits

G. LINES OF CREDIT AND BORROWINGS

The Company had a $15.0 million line of credit that expired on June 30,
2000 and was replaced by a $20.0 million line of credit on July 31, 2000 on
substantially the same terms and conditions as the expired line of credit.

11
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

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 (9.5% at June 30, 2000), and expires on July 30,
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 $2.8 million with interest at the Japanese prime
rate (1.375% at June 30, 2000) plus 0.125% per annum which expire between August
and November 2000, if not renewed. There have been no borrowings under these
lines of credit.

In November 1999, the Company completed its private placement of $135.0
million principal amount at maturity of its 3.25% convertible subordinated
discount notes due 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.

H. 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 gateway for signaling in
converged networks, and other IP7 convergence products; and network systems
products resulting from the Company's acquisition of IEX, including Service
Control Point, an advanced database server used for the provisioning of
telephony applications, VoX Gateway Controller, a media gateway controller for
converged networks, and Prepaid Services, a prepaid calling platform. 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, Sentinel, a diagnostic tool used
primarily by network operators for testing and surveillance within
telecommunications networks and i3000, a diagnostic tool for converged networks.
The Japan Diagnostics operating segment sells the Company's and third parties'
diagnostic products to customers in Japan. The Call 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.

12
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

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

OPERATING SEGMENTS

<TABLE>
<CAPTION>
NET SALES
-------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
2000 1999 2000 1999
--------- -------- --------- ---------

<S> <C> <C> <C> <C>
Network Systems................... $ 47,638 $ 30,744 $ 84,156 $ 51,109
Network Diagnostics............... 14,158 12,664 26,836 20,546
Call Center Products.............. 8,019 4,878 14,706 4,878
Japan Diagnostics................. 6,295 3,672 11,094 8,505
Intercompany Eliminations......... (1,962) (230) (2,582) (625)
-------- ------- -------- --------
Total net sales................ 74,148 $ 51,728 $ 134,210 $ 84,413
======== ======== ========= ========
</TABLE>

<TABLE>
<CAPTION>
OPERATING INCOME (LOSS)
--------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2000 1999 2000 1999
---------- ---------- --------- ---------

<S> <C> <C> <C> <C>
Network Systems................... $ 14,558 $ 5,293 $ 24,346 $ 8,605
Network Diagnostics(1)............ 2,859 3,282 4,934 1,301
Call Center Products.............. 2,987 2,351 4,903 2,351
Japan Diagnostics................. 528 (109) 743 191
Intercompany Eliminations ........ (723) (8) (859) 153
General Corporate(2).............. (13,961) (15,216) (27,323) (17,715)
--------- --------- -------- --------
Total operating income (loss).. $ 6,248 $ (4,407) $ 6,744 $ (5,114)
========= ========= ======== ========
</TABLE>

--------------------------------

(1) Network Diagnostics operating segment reflects the $1,800 restructuring
charge recorded in the six months ended June 30, 1999 (see Note E).

(2) General Corporate includes acquisition-related charges and amortization of
$7,816 and $12,033 for the three months ended June 30, 2000 and 1999,
respectively, and $15,888 and $12,033 for the six months ended June 30,
2000 and 1999, respectively.

13
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

ENTERPRISE-WIDE DISCLOSURES

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

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2000 1999 2000 1999
-------- --------- --------- ---------

<S> <C> <C> <C> <C>
Network Systems................... $ 47,638 $ 30,744 $ 84,156 $ 51,109
Network Diagnostics............... 18,491 16,106 35,348 28,426
Call Center Products.............. 8,019 4,878 14,706 4,878
-------- -------- --------- --------
Total revenues from external
customers.................... $ 74,148 $ 51,728 $ 134,210 $ 84,413
======== ======== ========= ========
</TABLE>

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

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2000 1999 2000 1999
-------- --------- --------- ---------

<S> <C> <C> <C> <C>
North America..................... $ 53,306 $ 40,178 $ 100,880 $ 61,308
Japan............................. 6,320 3,672 11,124 8,505
Europe............................ 3,797 2,925 6,440 4,727
Rest of World..................... 10,725 4,953 15,766 9,873
------- ------- -------- -------
Total revenues from external
customers...................... $ 74,148 $ 51,728 $ 134,210 $ 84,413
======== ======== ========= ========
</TABLE>

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

<TABLE>
<CAPTION>
JUNE 30, December 31,
2000 1999
--------- ------------

<S> <C> <C>
United States..................... $ 147,393 $ 160,109
Japan............................. 1,095 1,175
Other............................. 353 385
--------- ---------
Total long-lived assets........ $ 148,841 $ 161,669
========= =========
</TABLE>

14
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

I. 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 and six month periods ended June 30, 2000 and 1999:

<TABLE>
<CAPTION>
NET INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2000: (thousands, except per share amount)

<S> <C> <C> <C>
Basic EPS................................ $ 2,036 57,710 $ 0.04
Effect of Dilutive Securities - Stock
Options and Warrants.................. -- 6,419
-------- ------
Diluted EPS.............................. $ 2,036 64,129 $ 0.03
======== ======

FOR THE THREE MONTHS ENDED JUNE 30, 1999:

Basic EPS................................ $ (6,136) 54,766 $ (0.11)
Effect of Dilutive Securities - Stock
Options and Warrants.................. -- --
-------- ------
Diluted EPS.............................. $ (6,136) 54,766 $ (0.11)
======== ======

FOR THE SIX MONTHS ENDED JUNE 30, 2000:

Basic EPS................................ $ 234 57,124 $ 0.00
Effect of Dilutive Securities - Stock
Options and Warrants.................. -- 6,868
-------- ------
Diluted EPS.............................. $ 234 63,992 $ 0.00
======== ======

FOR THE SIX MONTHS ENDED JUNE 30, 1999:

Basic EPS................................ $ (5,644) 54,618 $ (0.10)
Effect of Dilutive Securities - Stock
Options and Warrants.................. -- --
-------- ------
Diluted EPS.............................. $ (5,644) 54,618 $ (0.10)
======== ======
</TABLE>

J. COMMON STOCK

On August 25, 1997, the Company adopted a shareholder rights plan to
protect shareholders against unsolicited attempts to acquire control of the
Company where such transactions do not offer what the Company believes to be an
adequate price to all shareholders. Under the plan, a dividend distribution of
one right for each outstanding share of Tekelec Common Stock was made to
shareholders of record on September 5, 1997, and such rights expire on September
5, 2007. As adjusted to take into account the Company's 1998 two-for-one stock
split, each right, when exercisable, entitles the registered holder to purchase
from the Company one share of Common Stock at a price of $90 per share, subject
to adjustment (the "Purchase Price").

15
<PAGE>

TEKELEC
NOTES TO FINANCIAL STATEMENTS
(unaudited)

The rights will be exercisable only if a person or group (except for
certain exempted persons or groups, including those shareholders of the Company
who at the time of adoption of the plan beneficially owned more than 15% of the
Company's Common Stock) acquires 15% or more of Tekelec's Common Stock or
announces a tender offer which would result in ownership of 15% or more of the
Common Stock. Under the plan, if any person or group (other than the Company,
any subsidiary of the Company, any employee benefit plan of the Company or any
exempted person or group) acquires 15% or more of the Company's outstanding
voting stock without the prior written consent of the Company's Board of
Directors, each right, except those held by such acquiring persons or group,
would entitle the holder of the right to acquire, by paying to the Company the
then current Purchase Price, such number of shares of the Company's Common Stock
as would equal the result obtained by multiplying the then current Purchase
Price by the number of shares of Common Stock for which the right is then
exercisable and then dividing the product by 50% of the then current per-share
market price of the Company's Common Stock.

The Company may redeem the rights at a redemption price of $0.005 per
right at any time until ten business days after a person or group acquires 15%
or more of the Company's outstanding shares of voting stock. At any time after a
person or group acquires 15% or more, but less than 50%, of the Company's
outstanding shares of voting stock, the Company may also exchange each right for
one share of Common Stock.

16
<PAGE>

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, 1999. 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

In May 1999, the Company acquired all of the outstanding stock of IEX
Corporation ("IEX"), which develops, markets and sells solutions for intelligent
networks, call centers and other telecommunications markets. The Company
accounted for the IEX acquisition under the purchase method of accounting, and
the results of operations of IEX are included in the results of operations
beginning May 1999. In connection with the acquisition, the Company also
recorded approximately $133.4 million of goodwill and other intangible assets,
net of related deferred income tax liabilities, and $6.0 million of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use that was recorded as a
non-recurring expense in the second quarter of 1999.

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

NETWORK SYSTEMS PRODUCTS. Prior to the Company's May 1999 acquisition of
IEX, the Company's network systems product line was known as the network
switching product line and consisted 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. As a result of the
acquisition of IEX, the network systems product line has been expanded to
include IEX's network products, including, among others, Network Switch, Service
Node, Service Control Point, VoX Gateway Controller, Prepaid Services and other
convergence products.

NETWORK DIAGNOSTICS PRODUCTS. In January 1999, the Company scaled back its
data network diagnostics product line and integrated it into its intelligent
network diagnostics product line. Prior to that time, the Company treated these
product lines separately for organizational and financial reporting purposes.
Since that time, the Company has reported these products together as the network
diagnostics product line. This product line consists principally of the MGTS
family of diagnostics products, the Sentinel and the i3000.

17
<PAGE>

CALL CENTER PRODUCTS. The Company's IEX call center business develops and
supplies software-based solutions for call centers, and its products include the
TotalView workforce management and TotalNet call routing solutions.

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

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................... 33.7 34.8 33.4 34.7
Amortization of purchased technology .. 3.5 2.9 3.7 1.8
----- ----- ----- -----
Gross profit .......................... 62.8 62.3 62.9 63.5

Research and development .............. 17.4 20.3 18.7 23.0
Selling, general and administrative ... 29.7 30.1 30.8 32.0
Amortization of goodwill and other
purchased intangibles ................. 7.3 7.2 8.4 4.4
Non-recurring acquisition-related
charges ............................... -- 13.2 -- 8.1
Restructuring ......................... -- -- -- 2.1
----- ----- ----- -----
Total operating expenses .............. 54.4 70.8 57.9 69.6
----- ----- ----- -----

Income (loss) from operations ......... 8.4 (8.5) 5.0 (6.1)
Interest and other income (expense),
net ................................... (0.6) (0.4) (0.8) 1.5
----- ----- ----- -----
Income (loss) before provision for
income taxes .......................... 7.8 (8.9) 4.2 (4.6)

Provision for income taxes ............ 5.1 2.9 4.0 2.1
----- ----- ----- -----
Net income (loss) ..................... 2.7% (11.8)% 0.2% (6.7)%
===== ===== ===== =====
</TABLE>

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

PERCENTAGE OF REVENUES

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Network Systems................... 64% 59% 63% 61%
Network Diagnostics............... 25 32 26 33
Call Center Products.............. 11 9 11 6
---- ---- ---- ----
Total.......................... 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>

18
<PAGE>

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

PERCENTAGE OF REVENUES

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----

<S> <C> <C> <C> <C>
North America..................... 72% 78% 75% 73%
Japan............................. 9 7 8 10
Europe............................ 5 6 5 5
Rest of World..................... 14 9 12 12
--- --- --- ---
Total.......................... 100% 100% 100% 100%
=== === === ===
</TABLE>

THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
JUNE 30, 1999

REVENUES. The Company's revenues increased by $22.4 million, or 43%,
during the second quarter of 2000 due primarily to higher sales of network
systems products and services and secondarily to increased sales of MGTS and
call center products.

Revenues from network systems products increased by $16.9 million, or 55%,
to $47.6 million due primarily to higher sales of Eagle STP products, increased
sales for the Company's local number portability product and the addition of
sales of the Company's IP7 products, partially offset by lower sales of
extensions and upgrades.

Revenues from network diagnostics products increased by $2.4 million, or
15%, due principally to higher sales of the Company's MGTS diagnostics products.

Revenues from call center products increased by $3.1 million, or 64%, as a
result of revenues for the second quarter of 2000 reflecting sales for three
months compared to the inclusion in the second quarter of 1999 of only those
sales following the May 1999 acquisition of IEX.

Revenues in North America increased by $13.1 million, or 33%, due
primarily to higher sales of Eagle STP and call center products. Sales in Japan
increased by $2.6 million or 72% as a result of higher sales of MGTS and
third-party data diagnostics products. Revenues in Europe increased by $872,000,
or 30%, due to higher network systems and network diagnostic product sales. Rest
of world revenues increased by $5.8 million or 117% due primarily to higher
Eagle STP product sales.

The impact of exchange rate fluctuations on currency translations
increased revenues by $757,000, or 1%, and did not have a material effect on net
income in the second quarter of 2000.

19
<PAGE>

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 and
Sentinel diagnostic products, and market acceptance of the Company's suite of
products for converged circuit and packet networks, including the IP7 Secure
Gateway and VoX Gateway network systems products and the i3000 and IP7 Sentinel
diagnostics products.

GROSS PROFIT. Gross profit as a percentage of revenues was essentially
flat at 62.8% in 2000 compared to 62.3% in 1999. Excluding the amortization of
purchased technology related to the IEX acquisition, gross profit as a
percentage of revenues for the three months ended June 30, 2000 was 66.1%
compared to 65.2% for the three months ended June 30, 1999.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
overall by $2.4 million, or 23%, and decreased as a percentage of revenues to
17.4% in the second quarter of 2000 from 20.3% in the second quarter of 1999.
The dollar increase was attributable principally to 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") market. Based on the
Company's present product development plans, the Company expects that its
research and development expenses for the remainder of 2000 will increase in
dollars when compared to prior periods in 1999.

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 increased by $6.4 million, or 41%, and decreased as a
percentage of revenues to 29.7% in the second quarter of 2000 from 30.1% in the
second quarter of 1999. The dollar increase was primarily due to increased
personnel and infrastructure-related expenses incurred to support the growing
Eagle STP installed base and anticipated higher sales levels. The Company
expects that selling, general and administrative expenses for the remainder of
2000 will increase in dollars when compared to prior periods.

20
<PAGE>

INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense increased by
$1.1 million or 98% primarily as a result of interest incurred for convertible
debt issued in connection with the acquisition of IEX for the entire quarter
compared to two months of interest incurred during the quarter ended June 30,
1999 for notes issued in connection with the acquisition of IEX. Interest income
increased $957,000 or 108% due to higher invested cash balances in 2000 compared
to 1999 due to cash payments made in connection with the acquisition of IEX in
1999.

INCOME TAXES. The income tax provision for the second quarter of 2000 was
$3.8 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.
Although the Company had a loss for the three month period ended June 30, 1999,
an income tax provision of $1.5 million was recorded reflecting the effect of
the non-deductible items described above, partially offset by a benefit of
$858,000 for the utilization of deferred tax benefits related to certain of
these items.

Excluding the effect of acquisition-related items, an estimated effective
tax rate of 36% was applied for the three month periods ended June 30, 2000 and
1999 and represented federal, state and foreign taxes on the Company's income,
reduced primarily by research and development and foreign tax credits.

SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED
JUNE 30, 1999

REVENUES. The Company's revenues increased by $49.8 million, or 59%,
during the six months ended June 30, 2000 due primarily to higher sales of
network systems products and services and secondarily to the inclusion of
post-acquisition sales of IEX call center products following the acquisition of
IEX and higher sales of network diagnostics products.

Revenues from network systems products increased by $33.0 million, or 65%,
to $84.2 million due primarily to higher sales of Eagle STP products and the
addition of sales of the Company's IP7 products.

Revenues from network diagnostics products increased by $6.9 million, or
24%, due principally to higher sales of the Company's Sentinel and MGTS
diagnostics products.

Revenues from call center products increased by $9.8 million, or 201%, as
a result of revenues for the first half of 2000 reflecting sales for six months
compared to the inclusion in the first half of 1999 of only those sales
following the May 1999 acquisition.

Revenues in North America increased by $39.6 million, or 65%, due
primarily to higher sales of Eagle STP products and the inclusion of IEX product
sales. Sales in Japan increased $2.6 million or 31% as a result of higher sales
of MGTS and third-party data diagnostics products. Revenues in Europe increased
by $1.7 million, or 36%, due to higher network diagnostic product sales. Rest of
world revenues increased by $5.9 million or 60% due to increased Eagle STP
sales.

21
<PAGE>

The impact of exchange rate fluctuations on currency translations
increased revenues by $1.2 million, or 1%, and did not have a material effect on
net income in the six months ended June 30, 2000.

GROSS PROFIT. Gross profit as a percentage of revenues decreased to 62.9%
in the six months ended June 30, 2000 compared with 63.5% in the six months
ended June 30, 1999. The decrease in gross margins was primarily due to the
inclusion of amortization of purchased technology, principally in connection
with the acquisition of IEX, as the amortization of purchased technology was for
a six month period in 2000 as compared to a two month period of amortization in
the six months ended June 30, 1999. Excluding the amortization of purchased
technology related to the IEX acquisition, gross profit as a percentage of sales
was 66.4% for the six months ended June 30, 2000 compared to 65.3% for the six
months ended June 30, 1999, due primarily to higher network system margins.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
overall by $5.7 million, or 30%, and decreased as a percentage of revenues to
18.7% in the six months ended June 30, 2000 from 23% in the six months ended
June 30, 1999. The dollar increase was attributable principally to the inclusion
of post-acquisition IEX research and development expenses, and 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 IP/SS7 market.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $14.4 million, or 54%, and decreased as a
percentage of revenues to 30.8% in the six months ended June 30, 2000 from 31.9%
in the six months ended June 30, 1999. The dollar increase was primarily due to
the inclusion of post-acquisition IEX selling, general and administrative
expenses and increased personnel and infrastructure-related expenses incurred to
support the growing Eagle STP installed base and anticipated higher sales
levels.

INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense increased by
$3.3 million, or 299%, primarily as a result of interest incurred for
convertible debt issued in connection with the acquisition of IEX for the entire
six months compared to two months of interest incurred during the six months
ended June 30, 1999 for notes issued in connection with the acquisition of IEX.
Interest income increased $998,000 or 42% due to higher invested cash balances
in 2000 compared to 1999 due to cash payments made in connection with the
acquisition of IEX in 1999.

22
<PAGE>

INCOME TAXES. The income tax provision for the six months ended June 30,
2000 was $5.3 million and reflected the effect of non-deductible
acquisition-related costs, partially offset by a benefit of $2.4 million from
the utilization of deferred tax liabilities related to certain of these
acquisition-related costs. Although the Company had a loss for the six month
period ended June 30, 1999, an income tax provision $1.8 million was recorded,
reflecting the effect of the non-deductible items described above, partially
offset by a benefit of $858,000 from the utilization of deferred tax benefits
related to certain of these items.

Excluding the effect of acquisition-related items, an estimated effective
tax rate of 36% was applied for the six month periods ended June 30, 2000 and
1999 and represented federal, state and foreign taxes on the Company's income,
reduced primarily by research and development and foreign tax credits

LIQUIDITY AND CAPITAL RESOURCES

During the six month period ended June 30, 2000, cash and cash equivalents
increased by $43.0 million to $89.6 million, after net proceeds of $8.2 million
from the sale of short-term and long-term investments. Operating activities, net
of the effects of exchange rate changes on cash, provided $25.1 million.
Financing activities, which represented proceeds from the issuance of Common
Stock upon the exercise of options and warrants, provided $19.1 million, and
investing activities, excluding the net proceeds from the sale of short-term and
long-term investments, used $9.4 million primarily due to capital expenditures.

Accounts receivable, including amounts due from related parties, decreased
by 11% during the first six months of 2000 due to improvement in the linearity
of sales in the second quarter of 2000 compared to the fourth quarter of 1999
and strong collections activity. Prepaid expenses and other current assets
increased by $8.7 million in the first six months of 2000 due to costs of sales
that were deferred pending the completion of certain large systems projects.
Deferred revenue increased by 13% due to the deferral of revenue related to
these large systems projects. Trade accounts payable and accrued expenses
decreased by 19% and 27%, respectively, during the first six months of 2000 due
primarily to the timing of inventory purchases and sales tax payments.

Capital expenditures of $9.1 million during the first six months of 2000
represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion.

The Company had a $15.0 million line of credit that expired on June 30,
2000 which was replaced by a $20.0 million line of credit on August 2, 2000 on
substantially the same terms and conditions as the expired line of credit.

23
<PAGE>

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 (9.5% at June 30, 2000), and expires on July 15,
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.

On November 4, 1999, the Company used a portion of the net proceeds from
the Notes to retire all of the $100.0 million in short-term notes, which had
been issued in May 1999 in connection with the acquisition of IEX Corporation.

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 PRONOUNCEMENTS

24
<PAGE>

employee, which apply to awards after December 15, 1999. Additional provisions
of FIN 44 related to modifications to fixed stock option awards to add a reload
feature are effective for awards modified after January 12, 2000. The Company
believes that the adoption of FIN 44 will not have a material impact on its
financial statements.

YEAR 2000 COMPLIANCE

The Company has not experienced, and does not expect to experience, any
significant problems associated with year 2000 issues. Similarly, to the
Company's knowledge, distributors, suppliers, and other third parties with which
the Company conducts business have not experienced material year 2000 problems
to date. The Company did not incur material expenditures to test, repair, or
replace equipment in connection with year 2000 issues.

25
<PAGE>

"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 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; customer acceptance of the Company's products;
uncertainties relating to the Company's international operations; intellectual
property protection; carrier deployment of 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 1999 and in certain of the
Company's 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.

26
<PAGE>

PART II -- OTHER INFORMATION

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

(a) On May 12, 2000, the Company held its 2000 Annual Meeting of
Shareholders (the "Annual Meeting").

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

<TABLE>
<CAPTION>
NAME OF DIRECTOR VOTES CAST FOR DIRECTOR VOTES WITHHELD
---------------- ----------------------- --------------
<S> <C> <C>
Robert V. Adams 44,369,315 350,414
Jean-Claude Asscher 44,274,005 445,724
Daniel L. Brenner 44,372,215 347,514
Michael L. Margolis 44,277,205 442,524
Howard Oringer 44,367,886 351,843
Jon F. Rager 44,272,176 447,553
</TABLE>

(c) At the Annual Meeting, the shareholders approved, with 32,959,583
votes cast in favor and 11,685,169 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 by 2,800,000. There were 74,977
abstentions and no broker nonvotes with respect to this matter.

(d) At the Annual Meeting, with 44,661,437 votes cast in favor, the
shareholders ratified the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the year ending December 31, 2000.
27,953 votes were cast against such ratification, and there were 30,339
abstentions with respect to this matter.

ITEM 5. OTHER INFORMATION

Notice of any shareholder proposal to be presented at the Company's Annual
Meeting of Shareholders to be held in 2001 that is not submitted to the Company
pursuant to SEC Rule 14a-8 will be considered untimely if not received by the
Company on or before December 1, 2000.

27
<PAGE>

PART II -- OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Bonus Plan for the year ended December 31, 2000

10.2 Employment Offer Letter dated May 22, 2000 between the Registrant
and Paul J. Pucino

27.1 Financial Data Schedule (provided for the information of the
Securities and Exchange Commission only)

No reports on Form 8-K were filed by the Registrant during the
quarter ended June 30, 2000.

28
<PAGE>

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, 2000
/s/ Michael L. Margolis
--------------------------------
Michael L. Margolis
President and Chief Executive
Officer
(Duly authorized officer)

/s/ Paul J. Pucino
--------------------------------
Paul J. Pucino
Chief Financial Officer and
Vice President
(Principal financial and chief
accounting officer)

29
<PAGE>

INDEX TO EXHIBITS

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------

10.1 Bonus Plan for the year ended December 31, 2000

10.2 Employment Offer Letter dated May 22, 2000
between the Registrant and Paul J. Pucino

27.1 Financial Data Schedule (provided for the
information of the Securities and Exchange
Commission only.)