10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

Or

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

Commission file number 0-15135

(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.)

5200 Paramount Parkway
Morrisville, North Carolina 27560
(Address and zip code of principal executive offices)

(919) 460-5500
(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 30, 2010, there were 68,457,251 shares of the registrant’s common stock, without par value, outstanding.

TEKELEC
TABLE OF CONTENTS
FORM 10-Q

	Page
Part I — Financial Information
Item 1. Financial Statements		2
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009		2
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2010 and 2009		3
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months ended June 30, 2010 and 2009		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2010 and 2009		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures about Market Risk		41
Item 4. Controls and Procedures		41
Part II — Other Information
Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 6. Exhibits		43
Signatures		44
Exhibits
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TEKELEC
Unaudited Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2010			2009
	(Thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	226,291		$	277,259
Trading securities, at fair value		—			81,788
Put right, at fair value		—			11,069
Accounts receivable, net		138,346			157,369
Inventories		28,246			23,353
Income taxes receivable		—			1,617
Deferred income taxes, current		44,354			66,758
Deferred costs and prepaid commissions		45,768			56,645
Prepaid expenses		6,319			7,007
Other current assets		5,846			1,943
Total current assets		495,170			684,808
Property and equipment, net		35,500			35,267
Deferred income tax assets, net, noncurrent		46,236			39,153
Other assets		1,328			1,661
Goodwill		134,119			42,102
Intangible assets, net		107,889			31,017
Total assets	$	820,242		$	834,008
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	32,952		$	28,114
Accrued expenses		19,639			25,372
Accrued compensation and related expenses		18,995			40,980
Current portion of deferred revenues		125,961			149,065
Income taxes payable, current		2,161			—
Total current liabilities		199,708			243,531
Deferred income tax liabilities, noncurrent		8,338			5,477
Long-term portion of deferred revenues		5,471			5,590
Other long-term liabilities		5,346			4,863
Total liabilities		218,863			259,461
Commitments and Contingencies (Note 9)
Shareholders’ equity:
Common stock, without par value, 200,000,000 shares authorized; 68,456,639 and 67,382,600 shares issued and outstanding, respectively		345,030			330,909
Retained earnings		264,960			241,820
Accumulated other comprehensive income (loss)		(8,611	)		1,818
Total shareholders’ equity		601,379			574,547
Total liabilities and shareholders’ equity	$	820,242		$	834,008

See notes to unaudited condensed consolidated financial statements.

2

TEKELEC
Unaudited Condensed Consolidated Statements of Operations

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Thousands, except per share data)
Revenues	$	109,507		$	114,183		$	225,498		$	230,841
Cost of sales:
Cost of goods sold		36,586			36,364			75,190			76,713
Amortization of intangible assets		3,967			1,515			5,500			3,032
Total cost of sales		40,553			37,879			80,690			79,745
Gross profit		68,954			76,304			144,808			151,096
Operating expenses:
Research and development		21,763			25,551			44,572			51,403
Sales and marketing		18,229			17,110			35,666			34,406
General and administrative		12,807			13,717			25,957			27,140
Amortization of intangible assets		1,021			315			1,251			633
Acquisition-related expenses		2,484			—			2,484			—
Total operating expenses		56,304			56,693			109,930			113,582
Income from operations		12,650			19,611			34,878			37,514
Other income (expense), net:
Interest income		127			264			269			634
Interest expense		(54	)		(57	)		(121	)		(112	)
Impairment of investment in privately held company		—			(2,758	)		—			(2,758	)
Gain on investments carried at fair value, net		38			321			118			1,435
Foreign currency loss, net and other		(1,025	)		(402	)		(2,125	)		(1,820	)
Total other expense, net		(914	)		(2,632	)		(1,859	)		(2,621	)
Income from operations before provision for income taxes		11,736			16,979			33,019			34,893
Provision for income taxes		2,314			7,226			9,879			12,775
Net income	$	9,422		$	9,753		$	23,140		$	22,118
Earnings per share:
Basic	$	0.14		$	0.15		$	0.34		$	0.33
Diluted		0.14			0.14			0.34			0.33
Weighted average number of shares outstanding:
Basic		68,374			66,744			68,005			66,514
Diluted		68,946			67,502			68,856			67,185

See notes to unaudited condensed consolidated financial statements.

3

TEKELEC
Unaudited Condensed Consolidated Statements of Comprehensive Income

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
	(Thousands)
Net income	$	9,422		$	9,753	$	23,140		$	22,118
Other comprehensive income (loss):
Foreign currency translation adjustments		(5,889	)		1,535		(10,429	)		431
Comprehensive income	$	3,533		$	11,288	$	12,711		$	22,549

See notes to unaudited condensed consolidated financial statements.

4

TEKELEC
Unaudited Condensed Consolidated Statements of Cash Flows

	Six Months Ended
	June 30,
	2010			2009
	(Thousands)
Cash flows from operating activities:
Net income	$	23,140		$	22,118
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of investment in privately-held company		—			2,758
Gain on investments carried at fair value, net		(118	)		(1,435	)
Provision for doubtful accounts and sales returns		244			185
Provision for warranty		(347	)		5,000
Inventory write downs		2,176			1,207
Loss on disposal of fixed assets		13			54
Depreciation		8,258			9,358
Amortization of intangible assets		6,751			3,665
Amortization, other		424			375
Deferred income taxes		4,080			5,877
Stock-based compensation		6,943			6,973
Excess tax benefits from stock-based compensation		(861	)		(544	)
Changes in operating assets and liabilities:
Accounts receivable		18,333			46,101
Inventories		(6,980	)		(8,168	)
Deferred costs		10,474			11,133
Prepaid expenses		568			1,175
Other current assets		(1,102	)		44
Accounts payable		(755	)		3,947
Accrued expenses		(5,525	)		(10,663	)
Accrued compensation and related expenses		(22,555	)		(14,219	)
Deferred revenues		(26,151	)		(43,858	)
Income taxes receivable		1,617			(777	)
Income taxes payable		2,608			(5,725	)
Total adjustments		(1,905	)		12,463
Net cash provided by operating activities — continuing operations		21,235			34,581
Net cash used in operating activities — discontinued operations		—			(184	)
Net cash provided by operating activities		21,235			34,397
Cash flows from investing activities:
Proceeds from sales and maturities of investments		92,975			5,500
Acquisition of Camiant and Blueslice, net of cash acquired		(161,953	)		—
Purchases of property and equipment		(7,523	)		(12,138	)
Net cash used in investing activities		(76,501	)		(6,638	)
Cash flows from financing activities:
Proceeds from issuances of common stock		9,863			5,987
Payments of net share-settled payroll taxes related to equity awards		(2,685	)		(1,660	)
Excess tax benefits from stock-based compensation		861			544
Net cash provided by financing activities		8,039			4,871
Effect of exchange rate changes on cash		(3,741	)		834
Net change in cash and cash equivalents		(50,968	)		33,464
Cash and cash equivalents, beginning of period		277,259			209,441
Cash and cash equivalents, end of period	$	226,291		$	242,905

See notes to unaudited condensed consolidated financial statements.

5

TEKELEC
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation and Changes in Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements include the accounts of Tekelec and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to the instructions for Form 10-Q and Article 10 of Regulation S-X.

     In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our consolidated financial condition and consolidated results of operations. The results of operations for the current interim period are not necessarily indicative of results for the current year. Certain prior period amounts have been reclassified in order to conform to the current period’s presentation.

     We operate under a thirteen-week calendar quarter. For financial statement presentation purposes, the reporting periods are referred to as ended on the last calendar day of the quarter. The accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2010 and 2009 are for the thirteen and twenty-six weeks ended July 2, 2010 and July 3, 2009, respectively.

     The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2009 and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

Revenue Recognition for Arrangements with Multiple Deliverables

     In September 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. As a result, these arrangements are accounted for in accordance with the new, “non-software” guidance for arrangements with multiple deliverables.

     The FASB also amended the accounting standards for revenue recognition for arrangements with multiple deliverables. The new authoritative guidance for arrangements with multiple deliverables requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. It also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (i) vendor-specific objective evidence (“VSOE”) if available; (ii) third-party evidence (“TPE”) if vendor-specific objective evidence is not available; and (iii) best estimated selling price (“BESP”) if neither vendor-specific nor third-party evidence is available. The new guidance eliminates the residual method of allocation for multiple-deliverable revenue arrangements which we used historically when we applied the software revenue recognition guidance to our multiple element arrangements.

     We elected to early adopt, as permitted, the new authoritative guidance on January 1, 2010, on a prospective basis for applicable transactions originating or materially modified after January 1, 2010. As substantially all of our telecommunications products include both tangible products and software elements that function together to deliver the tangible product’s essential functionality, the existing software revenue recognition guidance no longer applies to the majority of our transactions. The adoption of the new, non-software revenue recognition guidance did not have a material impact on the timing, pattern, or amount of revenue recognized in the second quarter and first half of 2010, primarily due to (i) a portion of second quarter and first half 2010 revenue being derived from the backlog of orders which were received prior to January 1, 2010 and therefore not falling under the new non-software revenue recognition guidance, and (ii) the new, non-software revenue recognition guidance not differing significantly from the software revenue recognition guidance when applied to acceptance based arrangements and

6

arrangements that are received and fulfilled within the same quarter. Based on currently available information, we anticipate that the impact of adopting this guidance on revenue recognition will not be material for our 2010 results. However, this assessment may change because such impacts depend on terms and conditions of arrangements in effect in those future periods.

     The new guidance does not generally change the units of accounting for our revenue transactions as most of our products and services qualify as separate units of accounting. Substantially all of our revenues are derived from sales or licensing of our (i) telecommunications products, (ii) professional services including installation, training, and consulting services, and (iii) warranty-related support, comprised of telephone support, repair and return of defective products, and product updates. Our customers generally purchase a combination of our products and services as part of a multiple deliverable arrangement, and many of our arrangements have both software and non-software components that function together to deliver the product’s essential functionality. Our arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.

     For substantially all of our arrangements, we defer warranty and professional services revenue, and recognize revenue for all products in an arrangement when persuasive evidence of an arrangement exists and delivery of the product has occurred, provided the fee is fixed or determinable, and collection is deemed probable as discussed in more detail below. In instances where final acceptance of the product is based on customer specific criteria, revenue is deferred until the earlier of the receipt of customer acceptance or the expiration of acceptance period. Warranty revenue is recognized ratably over the term of the standard warranty based on the number of days of warranty coverage during each period. Professional services revenue is typically recognized upon completion of the services for fixed-fee service arrangements, as these services are relatively short-term in nature (typically several weeks, or in limited cases, several months). For service arrangements that are billed on a time and materials basis, we recognize revenue as the services are performed.

     For transactions entered into prior to January 1, 2010 and not materially modified after that date, we recognize revenue based on the existing software revenue recognition guidance, historically referred to as SOP 97-2 “Software Revenue Recognition” (“SOP 97-2”). Under this guidance, the entire fee from the arrangement is required to be allocated to each respective element based on its relative selling price using VSOE. Sales of our products generally include at least a year of warranty coverage. Since we do not sell our products separately from this warranty coverage, and we rarely sell our products on a standalone basis, we are unable to establish VSOE for our telecommunications products. Accordingly, we utilize the residual method to allocate revenue to each of the elements of an arrangement. Under the residual method, we allocate the total fee in an arrangement first to the undelivered elements (typically professional services and warranty services) based on VSOE of those elements, and the remaining, or “residual” portion of the fee to the delivered elements (typically the product or products).

     For transactions entered into after January 1, 2010, we recognize revenue based on the new non-software revenue recognition guidance. We allocate consideration to each deliverable in an arrangement based on its relative selling price. We follow a hierarchy to allocate the selling price of VSOE, then TPE and finally BESP. Because we rarely sell our products on a stand-alone basis or without warranty coverage as discussed above, we are not able to establish VSOE for our telecommunications products. Additionally, we generally expect that we will not be able to establish TPE due to the nature of our products and the markets in which we compete. Accordingly, we expect the selling price of our proprietary hardware and software products to be based on our BESP. For third party off the shelf hardware products, we utilize TPE, as there is a well established market price for these products. We have established VSOE for our services and maintenance offerings and, therefore, we utilize VSOE for these elements.

     Since the adoption of the new guidance, we have primarily used the same information used to set pricing strategy to determine BESP. We have corroborated the BESP with our historical sales prices, the anticipated margin on the deliverable, the selling price and profit margin for similar deliverables and the characteristics of the varying geographical markets in which the deliverables are sold. We plan to analyze the selling prices used in our allocation of arrangement consideration at least semi-annually. Selling prices will be analyzed more frequently if a significant change in our business necessitates a more timely analysis.

     Each deliverable within our multiple deliverable revenue arrangements is accounted for as a separate unit of accounting under the new guidance if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis; and (ii) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We consider a deliverable to have standalone value if the item is sold separately by us

7

or another vendor or if the item could be resold by the customer. Further, our revenue arrangements generally do not include a general right of return relative to delivered products. Deliverables not meeting these criteria are combined with a deliverable that does meet that criterion. The appropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting.

     The following table shows the total revenue for the three and six months ended June 30, 2010 recognized according to the software and the new non-software revenue recognition guidance (in thousands):

	Three Months		Six Months
	Ended		Ended
	June 30, 2010		June 30, 2010
New non-software revenue recognition rules(1)	$	49,993	$	75,528
Existing software revenue recognition rules		59,514		149,970
Total	$	109,507	$	225,498

⁽¹⁾ For the reasons discussed above, the timing of the revenue recognized for the three and six months ending June 30, 2010 would not have been materially different if we had recorded it under the existing software revenue guidance.

     The following table shows the total deferred revenue as of June 30, 2010 accounted for according to the software and the new non-software revenue recognition guidance (in thousands):

	June 30,
	2010
New non-software revenue recognition rules	$	10,214
Existing software revenue recognition rules		121,218
Total	$	131,432

Fair Value Measurements and Disclosures

     In January 2010, the FASB issued Accounting Standards Update 2010-06 “Improving Disclosures about Fair Value Measurements.” This Update amends the authoritative guidance for fair value measurements and disclosures by adding new disclosure requirements with respect to transfers in and out of Levels 1 and 2 fair value measurements, as well as by requiring gross basis disclosures for purchases, sales, issuances, and settlements included in the reconciliation of Level 3 fair value measurements. This Update also amends the authoritative guidance by providing clarifications to existing disclosure requirements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Early adoption is permitted.

     We adopted this new guidance, including the guidance related to the disclosures about purchases, sales, issuances, and settlements in the roll forwards of activity in Level 3 fair value measurements, on January 1, 2010. The adoption of this guidance did not have a material impact on our financial position or results of operations.

Note 2 — Acquisitions

     In the second quarter of 2010 we completed the acquisition of Camiant, Inc. (“Camiant”) and Blueslice Networks, Inc. (“Blueslice”) for cash consideration of $127.0 million and $35.0 million, respectively, for an aggregate of $162.0 million. We have included the results of operation of these acquisitions in our consolidated results from the date of acquisition. Expenses associated with these acquisitions consist primarily of legal and professional fees and totaled $2.5 million during the three and six months ended June 30, 2010. These costs were expensed as incurred and are recorded separately in the accompanying unaudited consolidated statement of operations under the heading “Acquisition-related expenses.”

8

Acquisition of Camiant

     On May 7, 2010, we completed the acquisition of Camiant, a provider of real time policy control solutions, through a merger with our newly formed wholly-owned subsidiary after which Camiant was the surviving entity. Camiant’s multimedia policy solutions allow service providers to leverage and monetize their network investments by enabling them to allocate network resources and create services for subscriber preferences in such areas as quality of service and bandwidth utilization. The products are designed to enable service providers to dynamically manage their networks, prioritize traffic, and prevent network disruptions.

     Under the terms of the merger, we acquired 100% of Camiant’s stock, vested stock options and warrants for total cash consideration of $128.9 million, of which $12.5 million was placed into escrow with a third party escrow agent for fifteen months for the satisfaction of potential indemnification claims we have the right to make under the merger agreement. Total cash consideration, net of $2.0 million of cash acquired from Camiant, was $127.0 million.

     The fair values of the assets acquired and liabilities assumed were determined primarily using the income approach, which determines the fair value for the asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. Projected cash flows for each asset considered multiple factors, including current revenue from existing customers; analysis of expected revenue and attrition trends; reasonable contract renewal assumptions from the perspective of a marketplace participant; expected profit margins giving consideration to marketplace synergies; and required returns to contributory assets.

     The transaction resulted in recording identifiable intangible assets and goodwill at a fair value of $144.2 million as follows (in thousands):

Total consideration	$	128,933
Less: Camiant tangible net assets acquired		(11,882	)
Add: Deferred tax liability		27,121
Total fair value of Camiant intangible assets and goodwill	$	144,172

     The acquisition resulted in the recognition of a deferred tax liability of approximately $27.1 million related to accounting and tax basis differences in the acquired intangible assets. Additionally, in determining the purchase price allocation, liabilities were recorded for existing uncertain tax positions in the amount of $2.5 million and will be added to our annual tabular reconciliation.

     The tangible assets and liabilities acquired were as follows (in thousands):

Cash and investments	$	1,959
Accounts receivable(1)		1,862
Inventories		350
Prepaid expenses		330
Deferred tax asset		16,651
Deferred costs		655
Property and equipment, net		979
Other long term assets		22
Total tangible assets		22,808
Accounts payable and accrued expenses		(6,682	)
Deferred revenue		(4,244	)
Total liabilities		(10,926	)
Net tangible assets	$	11,882

⁽¹⁾ The gross contractual amount of accounts receivable was $2.3 million which approximated their fair value.

9

     The remaining purchase price was allocated among the Camiant intangible assets and goodwill acquired based on their estimated fair values determined as discussed above and was as follows (in thousands):

Amortizable intangible assets	$	69,190
In-process research and development		2,180
Goodwill		72,802
Total fair value of Camiant intangible assets and goodwill	$	144,172

     This purchase price allocation is preliminary as we are awaiting the receipt of certain information as a result of Camiant’s income tax return filings. We expect to finalize these matters in 2010, and any resulting adjustments may affect income tax related accounts, with the offset recorded in goodwill.

     Based on the purchase price allocation, $2.2 million of the purchase price represented research and development activities (“IPR&D”) that had not yet reached technological feasibility. IPR&D is considered an indefinite lived intangible asset until the completion or abandonment of the associated research and development efforts. Prior to completion or abandonment, we will not record amortization but will test for impairment in accordance with the authoritative guidance for intangibles and goodwill. Upon completion or abandonment, we will determine the useful life of the assets and record amortization expense over this useful life.

     The identifiable amortizable intangible assets created as a result of the acquisition will be amortized over their respective estimated useful lives as follows (i) existing technology, contract backlog, trademarks and trade names, and non-compete agreements amortized using the straight-line method, (ii) customer relationship intangible assets amortized using the greater of the straight line method or the estimated customer attrition rates:

			Estimated
			Weighted
	Asset		Average Life
	Amount		in Years
Existing technology	$	44,000		5
Customer relationships		13,000		5
Contract backlog		6,900		1.5
Non-compete agreements		4,090		2
Trademarks and trade names		1,200		3
	$	69,190		4.4

     Amortization expense related to the assets above was approximately $2.7 million for the three and six months ended June 30, 2010, of which $2.0 million was included in cost of sales and $0.7 million was included in operating expenses.

     As noted above, the primary asset acquired from Camiant was the core technology used in the policy management solution. In addition, we obtained the significant expertise of Camiant’s management and technical employees. These factors contributed to a purchase price in excess of fair market value of Camiant’s net tangible and intangible assets acquired, and, as a result, we have recorded goodwill in the amount of $72.8 million in connection with this transaction. The goodwill and the identifiable amortizable intangible assets are not deductible for income tax purposes as they contribute to the tax basis of our investment in Camiant.

Acquisition of Blueslice

     On May 5, 2010 we completed the acquisition of all issued and outstanding shares of capital stock of Blueslice, a provider of next generation subscriber data management solutions, through a share purchase agreement with Tekelec Canada Inc., our wholly-owned subsidiary, and the various owners of all of the issued and outstanding shares of capital stock of Blueslice. The aggregate purchase price of $35.0 million consisted of (i) aggregate cash of approximately $33.5 million paid to Blueslice stockholders and/or their designees, and (ii) the payment of indebtedness of Blueslice in the amount of $1.5 million. Upon the closing of the transaction, $5.0 million of this consideration was placed in escrow with a third party escrow agent for fifteen months for the satisfaction of potential indemnification claims we have the right to make under the share purchase agreement. Blueslice’s solution centralizes cross-domain subscriber information in a back-end database, supporting multiple

10

front-end applications, including our next-generation Home Location Register, Home Subscriber Server, SIP Application Server, and AAA Server.

     The fair values of the assets acquired and liabilities assumed were determined primarily using the income approach, which determines the fair value for the asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. Projected cash flows for each asset considered multiple factors, including current revenue from existing customers; analysis of expected revenue and attrition trends; reasonable contract renewal assumptions from the perspective of a marketplace participant; expected profit margins giving consideration to marketplace synergies; and required returns to contributory assets.

     The transaction resulted in recording intangible assets and goodwill at a fair value of $36.8 million as follows (in thousands):

Total consideration	$	34,979
Less: Blueslice tangible net assets acquired		(2,331	)
Add: Deferred tax liability		4,105
Total fair value of Blueslice intangible assets and goodwill	$	36,753

     The acquisition resulted in the recognition of a deferred tax liability of approximately $4.1 million related to accounting and tax basis differences in the acquired intangible assets. Additionally, in determining the purchase price allocation, liabilities were recorded for existing uncertain tax positions in the amount of $4.0 million and will be added to our annual tabular reconciliation.

     The tangible assets and liabilities acquired were as follows (in thousands):

Accounts receivable(1)	$	1,425
Inventories		14
Prepaid expenses and other current assets		2,525
Deferred tax asset		194
Deferred costs		276
Other current assets		52
Property and equipment, net		86
Other long term assets		9
Total tangible assets		4,581
Accounts payable and accrued expenses		(845	)
Deferred revenue		(1,405	)
Total liabilities		(2,250	)
Net tangible assets	$	2,331

⁽¹⁾ The gross contractual amount of accounts receivable was $1.5 million which approximated their fair value.

     The remaining purchase price was allocated among the Blueslice identifiable intangible assets and goodwill acquired based on their estimated fair values determined as discussed above and was as follows (in thousands):

Amortizable intangible assets	$	13,930
In-process research and development		730
Goodwill		22,093
Total fair value of Blueslice intangible assets and goodwill	$	36,753

     This purchase price allocation is preliminary as we are awaiting the receipt of certain information as a result of Blueslice income tax return filings. We expect to finalize these matters in 2010, and any resulting adjustments may affect income tax related accounts, with the offset recorded in goodwill.

11

     Based on the purchase price allocation, $0.7 million of the purchase price represented research and development activities (“IPR&D”) that had not yet reached technological feasibility and is considered an indefinite lived intangible asset accounted for as discussed above.

     The identifiable amortizable intangible assets created as a result of the acquisition will be amortized over their respective estimated useful lives as follows: (i) existing technology, contract backlog, trademarks and trade names, and non-compete agreements amortized using the straight-line method, (ii) customer relationship intangible assets amortized using the greater of the straight line method or the estimated customer attrition rates.

			Estimated
			Weighted
	Asset		Average Life
	Amount		in Years
Existing technology	$	11,900		5
Customer relationships		1,100		5
Contract backlog		600		1
Non-compete agreements		290		2
Trademarks and trade names		40		3
	$	13,930		4.8

     Amortization expense related to the assets above was approximately $0.6 million for the three months ended June 30, 2010, of which $0.5 million was included in cost of sales and $0.1 million included in operating expenses.

     As noted above, the primary asset acquired from Blueslice was the core technology used in the subscriber data management solution. In addition, we obtained the significant expertise of Blueslice’s technical employees, which we believe we will be able to leverage in maximizing the benefit of the acquired technology and in assisting us with the development of new technologies. These factors contributed to a purchase price in excess of the fair market value of Blueslice’s net tangible and intangible assets acquired, and, as a result, we have recorded goodwill in the amount of $22.1 million in connection with this transaction. The goodwill and the identifiable amortizable intangible assets are not deductible for income tax purposes as they contribute to the tax basis of our investment in Blueslice.

Select Pro-Forma Financial Information

     The following represents our unaudited condensed pro-forma financial results as if the acquisitions of Camiant and Blueslice had occurred as of the beginning of the earliest period presented. Unaudited condensed pro-forma results are based upon accounting estimates and judgments that we believe are reasonable. The condensed pro-forma results are not necessarily indicative of the actual results of our operations had the acquisitions occurred at the beginning of the periods presented, nor does it purport to represent the results of operations for future periods.

	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30, 2010		June 30, 2009		June 30, 2010		June 30, 2009
Revenues	$	111,234	$	121,156	$	233,964	$	239,812
Net Income	$	9,063	$	6,284	$	17,626	$	11,136
Basic earnings per share	$	0.13	$	0.09	$	0.26	$	0.17
Diluted earnings per share	$	0.13	$	0.09	$	0.26	$	0.17

12

     Our actual operating results for the three and six months ended June 30, 2010 included revenues and net loss from the acquired businesses as follows (in thousands):

	Three and Six Months Ended June 30, 2010
	Camiant			Blueslice			Total
Revenues	$	895		$	388		$	1,283
Net loss	$	(3,494	)	$	(1,623	)	$	(5,117	)

Cash and Stock-Based Compensation Expense Related to Acquisitions

     In connection with the acquisition of Camiant, we assumed unvested options to purchase Camiant’s stock, which were converted into the right to receive an aggregate cash amount of $5.2 million. These rights will vest quarterly according to the original terms and vesting schedules of the options, and contingent upon individual employees’ continued employment with us. Payments will be made quarterly in arrears until such time as the rights are fully vested, the majority of which will vest by the end of 2014.

     In connection with the acquisition of Blueslice, we (i) entered into agreements with certain Blueslice employees under which we agreed to pay an aggregate cash amount of $1.5 million based on each employee’s completion of individual integration milestones, and (ii) granted, performance-based restricted stock units, with an estimated fair value at the date of the grant of approximately $2.0 million, to certain Blueslice employees. The performance-based restricted stock units will be earned based on an individual employee’s achievement of individual integration milestones, and thereafter will vest in four equal annual installments based on an individual employee’s continued employment with us.

     The liability related to the above cash compensation arrangements is recorded under the “Accrued compensation and related expenses” heading in the accompanying unaudited condensed consolidated balance sheet.

     The following table shows the cash and equity compensation expense recognized in the three and six months ended June 30, 2010 related to the agreements discussed above:

	Three and Six
	Months Ended
	June 30, 2010
	(Thousands)
Camiant cash compensation expense in lieu of unvested options	$	605
Blueslice cash compensation expense		491
Blueslice stock-based compensation expense		134
	$	1,230

     We may be required to recognize future compensation expense pursuant to the above agreements of up to $7.4 million.

13

Note 3 — Restructuring and Other Costs

     The following table provides a summary of our restructuring activities and the remaining obligations as of June 30, 2010 (in thousands):

	Severance
	Costs and
	Related
	Benefits
Restructuring obligations, December 31, 2009	$	3,107
Cash payments		(1,098	)
Effect of exchange rate changes		(245	)
Restructuring obligations, June 30, 2010	$	1,764

     Restructuring obligations are included in “Accrued expenses” in the accompanying unaudited condensed consolidated balance sheets. We anticipate settling our remaining severance obligations during 2010. This is based on our current best estimate, which could change if actual activity differs from what is currently expected.

Note 4 – Fair Value of Financial Instruments

Recurring Measurements

     We measure certain financial assets and liabilities at fair value on a recurring basis. The fair value of our cash, cash equivalents, accounts receivable and accounts payable approximate their respective carrying amounts based on the liquidity and short-term nature of these instruments. The following table sets forth our financial instruments carried at fair value as of June 30, 2010 and December 31, 2009 (in thousands):

	Financial Instruments
	Carried at Fair Value
	June 30,		December 31,
	2010		2009
Assets:
Cash and cash equivalents	$	226,291	$	277,259
Trading securities		—		81,788
Put right		—		11,069
Total assets	$	226,291	$	370,116

     The fair value of our financial instruments as of June 30, 2010 is based on quoted prices in active markets for identical items and fall under Level 1 of the fair value hierarchy as defined in the authoritative guidance.

     The following tables set forth a summary of changes in the fair value of our Level 3 financial assets for the three and six months ended June 30, 2010 (in thousands):

	Financial Assets
	Auction Rate			Put
	Securities			Right
Balance, March 31, 2010	$	71,008		$	8,529
Transfers to Level 3		—			—
Purchases and receipts		—			—
Redemptions		(79,575	)		—
Realized gain on sales		—			—
Gains (losses) on securities held at period end or redeemed (1)		8,567			(8,529	)
Balance, June 30, 2010	$	—		$	—

14

	Level 3
	Financial Assets
	Auction Rate			Put
	Securities			Right
Balance, December 31, 2009	$	81,788		$	11,069
Transfers to Level 3		—			—
Purchases and receipts		—			—
Redemptions		(92,975	)		—
Realized gain on sales		—			—
Gains (losses) on securities held at period end or redeemed (1)		11,187			(11,069	)
Balance, June 30, 2010	$	—		$	—

⁽¹⁾ Included in Other income (expense), net in the accompanying unaudited consolidated condensed statements of operations.

     Trading Securities and Put Right

     As of December 31, 2009, we held $81.8 million of Auction Rate Securities (“ARS”) recorded at fair value, which represented a decline of $11.2 million below our cost basis, and an associated UBS Put right (the “Put right”), recorded at an estimated fair value of $11.1 million. Throughout the second quarter of 2010, as in previous quarters, issuers called certain securities which reduced the investment in our ARS portfolio. On June 30, 2010, we exercised our UBS Put right requiring UBS to purchase the remaining balance of our ARS portfolio at par value plus accrued interest. As a result of the issuer calls and exercise of the Put right, we received cash proceeds of $79.6 million during the quarter, resulting in the liquidation of our ARS portfolio.

   Derivative Instruments

     Our derivative instruments, primarily foreign currency forward contracts, are recognized as assets or liabilities at fair value. These forward contracts are not formally designated as hedges. The fair value of these contracts is based on market prices for comparable contracts. Our foreign currency forward contracts are structured to expire on the last day of each quarter, and we immediately enter into new contracts if necessary. Therefore, our derivative instruments outstanding at period end are outstanding less than one full day when the reporting period ends. Because of the short duration of these contracts, their fair value was not significant as of June 30, 2010 and December 31, 2009.

Nonrecurring Measurements

     We measure certain assets, accounted for under the cost method (such as our former investments in privately held companies), at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than temporarily impaired.

     During the second quarter of 2009, we recorded an impairment charge of $2.8 million related to our investment in a privately held company. This charge, which is included in “Other income (expense), net” represented the difference between our $15.0 million cost basis in this investment and its then estimated fair value of $12.2 million as of June 30, 2009, as we deemed the decline in the value of this asset to be other-than-temporary. In the fourth quarter of 2009, we sold our investment for its adjusted carrying value of $1.4 million.

     We measure the fair value of our nonfinancial assets and liabilities, including but not limited to, intangible assets, goodwill and restructuring obligations accounted for under the authoritative guidance for exit or disposal cost obligations. We perform our annual impairment test for intangible assets and goodwill on October 1^st of each fiscal year and more frequently upon the occurrence of certain events in accordance with the provisions of the authoritative guidance for intangible assets and goodwill. Nothing has come to our attention that would require us to perform this test in the first six months of 2010. Accordingly, as of June 30, 2010 we do not have any required non-recurring measurement disclosures for these nonfinancial assets.

15

Note 5 — Derivative Instruments and Hedging Activities

     We operate internationally and thus are exposed to potential adverse changes in currency exchange rates. We use derivative instruments (principally forward contracts to exchange foreign currency) as a means of reducing our exposure to foreign currency rate changes on receivables and other net monetary assets denominated in foreign currencies. The foreign currency forward contracts require us to exchange currencies at rates agreed upon at the contract’s inception. In addition to these foreign exchange contracts, certain of our customer contracts contain provisions that require our customers to assume the foreign currency exchange risk related to the applicable transactions. The objective of these contracts is to reduce or eliminate, and efficiently manage, the economic impact of currency exchange rate movements on our operating results as effectively as possible. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses on the related contracts.

     Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation. We do not designate our foreign currency exchange contracts as accounting hedges as defined by authoritative guidance for derivatives and hedging, and, accordingly, we adjust these contracts to fair value through operations (i.e., included in ”Other income (expense), net”). We do not hold or issue financial instruments for speculative or trading purposes.

     We continually monitor our exposure to fluctuations in foreign currency exchange rates. As we have expanded internationally, an increasing proportion of our revenues, costs and operating expenses are denominated in foreign currencies, resulting in an increase in our foreign currency exchange rate exposure. We enter into multiple forward contracts throughout a given month to mitigate our changing exposure to foreign currency exchange rate fluctuations principally related to receivables generated from sales denominated in foreign currencies and our remeasurements of international subsidiaries. Our exposure fluctuates as we generate new sales in foreign currencies and as existing receivables related to sales in foreign currencies are collected. Additionally, our exposure related to remeasurements of our subsidiaries’ financial statements fluctuates with the underlying activity in those entities. Our foreign currency forward contracts generally will have terms of one month or less and typically mature on the last day of any given period. We then immediately enter into new foreign currency forward contracts, if necessary.

     The following table shows the notional contract values in local currency and U.S. Dollars of the foreign exchange forward contracts outstanding as of June 30, 2010, grouped by the underlying foreign currency:

	Contracts Outstanding as of June 30, 2010
	In Local Currency			In US Dollars
Euros (“EUR”) (contracts to buy EUR/sell US$)	(EUR)	(24,058,000	)	$	(30,090,544	)
Indian rupees (“INR”) (contracts to sell INR/buy US$)	(INR)	406,713,000			8,642,435
Canadian dollars (“CAD”) (contracts to sell CAD/buy US$)	(CAD)	310,000			289,774
Singapore dollars (“SGD”) (contracts to sell SGD/buy US$)	(SGD)	645,000			464,831
Malaysian ringgits (“MYR”) (contracts to sell MYR/buy US)	(MYR)	5,849,000			1,799,360
Australian dollars (“AUD”) (contracts to sell AUD/buy US$)	(AUD)	603,000			505,616
Brazilian reais (“BRL”) (contracts to sell BRL/buy US$)	(BRL)	2,562,000			1,413,439
Total				$	(16,975,089	)

16

     The following tables show the average notional contract value in the underlying currency and U.S. Dollars of foreign exchange forward contracts outstanding during the three and six months ended June 30, 2010, grouped by the underlying foreign currency:

	Average Contracts Outstanding
	during the three months ended June 30, 2010
	In Local Currency			In US Dollars
Euros (“EUR”) (contracts to buy EUR/sell US$)	(EUR)	(25,825,868	)	$	(33,476,778	)
Indian rupees (“INR”) (contracts to sell INR/buy US$)	(INR)	419,272,725			9,180,141
British pound (“GBP”) (contracts to sell GBP/buy US$)	(GBP)	241,341			365,048
Singapore dollars (“SGD”) (contracts to sell SGD/buy US$)	(SGD)	673,000			481,018
Malaysian ringgits (“MYR”) (contracts to sell MYR/buy US$)	(MYR)	5,817,692			1,785,679
Australian dollars (“AUD”) (contracts to sell AUD/buy US$)	(AUD)	633,989			564,877
Canadian dollars (“CAD”) (contracts to sell CAD/buy US$)	(CAD)	83,692			82,929
Brazilian reais (“BRL”) (contracts to sell BRL/buy US$)	(BRL)	2,423,945			1,307,617
Total				$	(19,709,469	)

	Average Contracts Outstanding
	during the six months ended June 30, 2010
	In Local Currency			In US Dollars
Euros (“EUR”) (contracts to buy EUR/sell US$)	(EUR)	(25,621,536	)	$	(34,555,223	)
Indian rupees (“INR”) (contracts to sell INR/buy US$)	(INR)	414,279,399			8,981,621
British pound (“GBP”) (contracts to sell GBP/buy US$)	(GBP)	185,787			282,972
Singapore dollars (“SGD”) (contracts to sell SGD/buy US$)	(SGD)	344,661			239,195
Malaysian ringgits (“MYR”) (contracts to sell MYR/buy US$)	(MYR)	5,871,639			1,758,427
Australian dollars (“AUD”) (contracts to sell AUD/buy US$)	(AUD)	467,415			419,866
Canadian dollars (“CAD”) (contracts to sell CAD/buy US$)	(CAD)	825,787			780,282
Brazilian reais (“BRL”) (contracts to sell BRL/buy US$)	(BRL)	9,042,066			4,950,772
Total				$	(17,142,088	)

     As of June 30, 2010, all of our derivative instruments are maintained with Wells Fargo Bank and potentially subject us to a concentration of credit risk, which may result in credit related losses in the event of the bank’s nonperformance. We mitigate this risk by monitoring Wells Fargo’s credit ratings published by major rating firms (Fitch, Standard & Poor’s, and Moody’s). In addition, we monitor Wells Fargo’s Credit Default Swap spread on a quarterly basis to assess the bank’s default risk relative to its peers.

     As discussed above, our foreign currency forward contracts are structured to expire on the last day of the accounting period, and we immediately enter into new contracts if necessary. Therefore, our derivative instruments outstanding at period end are outstanding less than one full day when the reporting period ends, and, accordingly, their fair value was not significant as of June 30, 2010 and December 31, 2009.

17

     The tables below provide a summary of the effect of derivative instruments on the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009 (in thousands):

		Amount of Loss
		Recognized in Results
	Location of Loss	of Operations
Derivatives Not Designated	Recognized in Results	Three months ended June 30,
as Hedging Instruments	of Operations	2010			2009
Foreign currency forward contracts	Other income (expense), net	$	(2,650	)	$	(1,191	)
		Amount of Gain or (Loss)
		Recognized in Results
	Location of Gain or (Loss)	of Operations
Derivatives Not Designated	Recognized in Results	Six months ended June 30,
as Hedging Instruments	of Operations	2010			2009
Foreign currency forward contracts	Other income (expense), net	$	(5,066	)	$	172

     The above gains or losses on the derivative instruments are generally offset or partially offset by a corresponding foreign currency gain or loss on the underlying hedged transaction (e.g., customer accounts receivable). The gain or loss on both the derivative instrument and the corresponding hedged transaction are reflected in “Other income (expense), net” in the accompanying unaudited condensed consolidated statements of operations.

Note 6 — Financial Statement Details

Accounts Receivable, net

     Accounts receivable, net consists of the following (in thousands):

	June 30,		December 31,
	2010		2009
Accounts receivable	$	145,907	$	165,572
Less: Allowance for doubtful accounts and sales returns		7,561		8,203
	$	138,346	$	157,369

Inventories

     Inventories consist of the following (in thousands):

	June 30,		December 31,
	2010		2009
Raw materials	$	22,938	$	16,367
Work in process		—		132
Finished goods		5,308		6,854
Total inventories	$	28,246	$	23,353

18

Note 7 —Intangible Assets and Goodwill

Intangible Assets

     The following table represents the details of intangible assets (in thousands):

				Accumulated
June 30, 2010	Gross			Amortization			Net
Intangible assets with finite lives:
Purchased technology	$	98,620		$	(20,640	)	$	77,980
Customer relationships		19,830			(2,873	)		16,957
Contract backlog		7,500			(792	)		6,708
Non-compete agreements		4,380			(326	)		4,054
Trademarks and trade names		1,240			(61	)		1,179
Gross intangible assets with finite lives		131,570			(24,692	)		106,878
Effect of exchange rate changes		(2,624	)		725			(1,899	)
Total intangible assets with finite lives		128,946			(23,967	)		104,979
IPR&D, with indefinite lives		2,910			—			2,910
Total intangible assets	$	131,856		$	(23,967	)	$	107,889

			Accumulated
December 31, 2009	Gross		Amortization			Net
Intangible assets with finite lives:
Purchased technology	$	42,490	$	(15,933	)	$	26,557
Customer relationships		5,730		(2,009	)		3,721
Gross intangible assets with finite lives		48,220		(17,942	)		30,278
Effect of exchange rate changes		1,079		(340	)		739
Total intangible assets with finite lives		49,299		(18,282	)		31,017
Total intangible assets	$	49,299	$	(18,282	)	$	31,017

     Under recently revised accounting guidance for business combinations, IPR&D is capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment until completion of the underlying development. Upon the completion of the underlying development, the capitalized IPR&D asset will be amortized over its estimated useful life. Prior to the adoption of the revised accounting guidance, IPR&D was expensed upon acquisition.

     The estimated future amortization expense of purchased intangible assets with finite lives as of June 30, 2010 is as follows:

For the Years Ending December 31,
2010 (remaining six months)	$	13,999
2011		26,078
2012		20,572
2013		17,557
2014		17,221
Thereafter		9,552
Total	$	104,979

Goodwill

     As required by the authoritative guidance for intangibles and goodwill, we do not amortize our goodwill balances, but instead test our goodwill for impairment annually on October 1^st and more frequently upon the occurrence of certain events in accordance with the provisions of the authoritative guidance for intangibles and goodwill. As of June 30, 2010, no impairment losses were recognized with respect to goodwill.

19

     The changes in the carrying amount of goodwill for the six months ended June 30, 2010 are as follows (in thousands):

Balance at December 31, 2009	$	42,102
Addition due to the acquisition of Camiant		72,802
Addition due to the acquisition of Blueslice		22,093
Effect of exchange rate changes		(2,878	)
Balance at June 30, 2010	$	134,119

Note 8 — Income Taxes

     As part of the process of preparing our unaudited condensed consolidated financial statements, we are required to estimate our full-year income and the related income tax expense in each jurisdiction in which we operate. Changes in the geographical mix or estimated level of annual pretax income can impact our effective tax rate or income taxes as a percentage of pretax income (the “Effective Rate”). This process involves estimating our current tax liabilities in each jurisdiction in which we operate, including the impact, if any, of additional taxes resulting from tax examinations, as well as making judgments regarding the recoverability of deferred tax assets.

     Tax liabilities can involve complex issues and may require an extended period to resolve. To the extent that the recovery of deferred tax assets does not reach the threshold of “more likely than not” based on our estimate of future taxable income in each jurisdiction, a valuation allowance is established. While we have considered future taxable income and the existence of prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, we would charge to income an adjustment resulting from the establishment of a valuation allowance in the period such a determination was made.

     We conduct business globally, and as a result, one or more of our subsidiaries file income tax returns in various domestic and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world. During 2008, the Internal Revenue Service (“IRS”) completed an examination of tax years 2004 through 2006; therefore, our U.S. federal income tax returns for tax years prior to 2007 are generally no longer subject to adjustment. For our U.S. state tax returns, we are generally no longer subject to examination of tax years prior to 2007 in our primary state tax jurisdictions. Our foreign income tax returns are generally no longer subject to examination for tax periods 2003 and prior.

     With respect to tax years that remain open to federal, state and foreign examination, we believe that we have made adequate provision in the accompanying unaudited condensed consolidated financial statements for any potential adjustments the IRS or other taxing authority may propose with respect to income tax returns filed. We may, however, receive an assessment related to an audit of our U.S. federal, state or foreign income tax returns that exceeds amounts provided for by us. In the event of such an assessment, there exists the possibility of a material adverse impact on our results of operations for the period in which the matter is ultimately resolved or an unfavorable outcome is determined to be more likely than not to occur.

     For the three and six months ended June 30, 2010 our effective tax rate was 20% and 30%, respectively. The effective rate for the three months ended June 30, 2010 differs from the statutory rate of 35% primarily due to (i) a higher percentage of our projected income for the full year being derived from international locations with lower tax rates than the U.S., (ii) the cumulative effect of reducing our full year estimated effective tax rate as a result of the shift of income to lower tax jurisdictions discussed in item (i), and (iii) a discrete tax benefit of $1.0 million recognized as the result of certain amended state tax filings. These tax benefits were partially offset by (i) state income tax expense, (ii) tax expense resulting from employee stock option cancellations and the required tax treatment under the authoritative guidance for stock-based compensation as discussed in detail below, and (iii) tax expense resulting from nondeductible acquisition expenses incurred during the second quarter of 2010 in the acquisition of Camiant and Blueslice. For the six months ended June 30, 2010 the effective rate differs from the statutory rate of 35% primarily due to the international impact and discrete items discussed above.

     For the three and six months ended June 30, 2009, our effective tax rate was 43% and 37% respectively. The rate for the three months ended June 30, 2009 differs from the statutory rate of 35% primarily due to (i) the cumulative effect of increasing our full year estimated effective tax rate to approximately 37%, and (ii) establishment of a valuation allowance of $1.0 million for a deferred tax item created by the impairment of our

20

investment in a privately held company. The rate for the six months ended June 30, 2009 differs from the statutory rate of 35% primarily due to the establishment of the valuation allowance discussed above, offset by the recognition during the first quarter of 2009 of certain previously unrecognized tax benefits of approximately $0.9 million associated with the settlement of two state examinations for tax years 2004 through 2006.

     As a result of the acquisition of Camiant and Blueslice, liabilities were established in the amount of $6.5 million related to existing uncertain tax positions. These liabilities were recorded through purchase accounting and therefore impacted the level of goodwill recorded as a result of the transactions. These liabilities will be reflected in our annual tabular reconciliation for the fiscal year 2010.

     We no longer have a “pool of windfall tax benefits” as defined by the authoritative guidance for stock-based compensation. As a result, future cancellations or exercises that result in a tax deduction that is less than the related deferred tax asset recognized under the authoritative guidance will negatively impact our effective tax rate and increase its volatility, resulting in a reduction of our earnings. The authoritative guidance for stock compensation requires that the impact of such events be recorded as discrete items in the quarter in which the event occurs.

Note 9 — Commitments and Contingencies

Indemnities, Commitments and Guarantees

     In the normal course of our business, we provide certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities, commitments and guarantees include, among others, intellectual property indemnities to our customers in connection with the sale of our products and licensing of our technology, indemnities for liabilities associated with the infringement of other parties’ technology based upon our products and technology, guarantees of timely performance of our obligations, indemnities related to the reliability of our equipment, and indemnities to our directors and officers to the maximum extent permitted by law. The duration of these indemnities, commitments and guarantees varies, and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that we could be obligated to make. We have not recorded a liability for these indemnities, commitments or guarantees in the accompanying balance sheets because future payment is not probable.

     From time to time, various claims and litigation are asserted or commenced against us arising from or related to contractual matters, intellectual property matters, product warranties and personnel and employment disputes. As to such claims and litigation, we can give no assurance that we will prevail. However, we currently do not believe that the ultimate outcome of any pending matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

21

Note 10 — Stock-Based Compensation

Stock-Based Compensation Expense

     Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009 is as follows (in thousands):

	Option and
	SAR Grants
	and Stock
	Purchase
Income Statement Classifications	Rights		RSUs		Total
Three months ended June 30, 2010
Cost of goods sold	$	78	$	235	$	313
Research and development		69		330		399
Sales and marketing		120		750		870
General and administrative		152		1,913		2,065
Total	$	419	$	3,228	$	3,647
Three months ended June 30, 2009
Cost of goods sold	$	85	$	187	$	272
Research and development		244		266		510
Sales and marketing		177		619		796
General and administrative		579		1,504		2,083
Total	$	1,085	$	2,576	$	3,661

	Option and
	SAR Grants
	and Stock
	Purchase
Income Statement Classifications	Rights		RSUs		Total
Six months ended June 30, 2010
Cost of goods sold	$	155	$	510	$	665
Research and development		144		596		740
Sales and marketing		218		1,461		1,679
General and administrative		673		3,186		3,859
Total	$	1,190	$	5,753	$	6,943
Six months ended June 30, 2009
Cost of goods sold	$	224	$	274	$	498
Research and development		522		525		1,047
Sales and marketing		406		1,130		1,536
General and administrative		1,251		2,641		3,892
Total	$	2,403	$	4,570	$	6,973

     Stock-based compensation expense was recorded net of estimated forfeitures for the three and six months ended June 30, 2010 and 2009 such that expense was recorded only for those stock-based awards that are expected to vest.

Note 11 — Operating Segment Information

     We consider ourselves to be in a single reportable segment under the authoritative guidance for segment reporting, specifically the development and sale of signaling and session management telecommunications and related value added applications and services.

22

Enterprise-Wide Disclosures

     The following table sets forth, for the periods indicated, revenues from external customers by our principal product lines (in thousands):

	For the Three Months Ended
	June 30,
	2010		2009
Product revenues:
Eagle, number portability, and other session management products	$	68,319	$	73,548
Performance management products		6,570		4,942
Total product revenues		74,889		78,490
Warranty revenues		21,691		20,814
Professional and other services revenues		12,927		14,879
Total revenues	$	109,507	$	114,183

	For the Six Months Ended
	June 30,
	2010		2009
Product revenues:
Eagle, number portability, and other session management products	$	134,433	$	143,124
Performance management products		16,995		15,064
Total product revenues		151,428		158,188
Warranty revenues		40,693		42,081
Professional and other services revenues		33,377		30,572
Total revenues	$	225,498	$	230,841

	Revenues from External Customers
	By Geographic Region
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
United States	$	45,055	$	50,648	$	80,623	$	87,403
International		64,452		63,535		144,875		143,438
Total revenues from external customers	$	109,507	$	114,183	$	225,498	$	230,841

     For the three months ended June 30, 2010, sales to AT&T and Verizon represented 14% and 12% of our revenues, respectively. For the three months ended June 30, 2009, sales to AT&T and Deutsche Telecom AG Group each represented 15% of our revenues.

     For the six months ended June 30, 2010, sales to AT&T represented 14% of our revenues. For the six months ended June 30, 2009, sales to Carso Global Telecom represented 14% of our revenues, and sales to AT&T represented 13% of our revenues.

     For the three and six months ended June 30, 2010, revenues from India accounted for 14% and 12% of our revenues, respectively. For the three and six months ended June 30, 2009, revenues from India accounted for 12% and 7% of our revenues, respectively.

23

     The following table sets forth, for the periods indicated, our long-lived assets including net property and equipment, and other assets by geographic region (in thousands):

	Long-Lived Assets
	By Geographic Region
	June 30,		December 31,
	2010		2009
United States	$	29,599	$	29,587
Other		7,229		7,341
Total long-lived assets	$	36,828	$	36,928

Note 12 — 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 months ended June 30, 2010 and 2009 (in thousands, except per share amounts):

	Income from
	Operations		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
For the Three Months Ended June 30, 2010:
Basic income from operations per share	$	9,422		68,374	$	0.14
Effect of dilutive securities		—		572
Diluted income from operations per share	$	9,422		68,946	$	0.14
For the Three Months Ended June 30, 2009:
Basic income from operations per share	$	9,753		66,744	$	0.15
Effect of dilutive securities		—		758
Diluted income from operations per share	$	9,753		67,502	$	0.14
For the Six Months Ended June 30, 2010:
Basic income from operations per share	$	23,140		68,005	$	0.34
Effect of dilutive securities		—		851
Diluted income from operations per share	$	23,140		68,856	$	0.34
For the Six Months Ended June 30, 2009:
Basic income from operations per share	$	22,118		66,514	$	0.33
Effect of dilutive securities		—		671
Diluted income from operations per share	$	22,118		67,185	$	0.33

     The computation of diluted earnings per share excludes unexercised stock options, and unvested restricted stock units that are anti-dilutive. The following common stock equivalents were excluded from the earnings per share computation, as their inclusion would have been anti-dilutive (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Weighted average number of stock options and SARs excluded due to the exercise price exceeding the average fair value of our common stock during the period		3,679		5,235		3,806		5,801

     There were no transactions subsequent to June 30, 2010, which, had they occurred prior to the end of our second quarter, would have changed materially the number of shares in the basic or diluted earnings per share computations.

24

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

     The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2009. Historical results and percentage relationships among any amounts in the unaudited condensed consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.

Overview of Our Business and Products

     We are a leading global provider of communication network software and systems that enable our customers to effectively and efficiently deliver an array of communications services including voice, text messaging, and broadband data services. Our customers predominantly include mobile (or wireless) and fixed (or wireline) service providers (collectively, “service providers”), including many of the largest service providers in the world. Our software and systems are designed to enable our customers to optimize their network efficiency, ensure quality of service and quality of experience, establish network, service and subscriber policies, create unified subscriber identities, and capture additional revenue opportunities. Our systems generally provide high performance capabilities such as high transaction rates, reliability and routing intelligence, and are designed to enable our customers to address the scalability and complexity issues inherent in the implementation of all-IP networks. Our solutions are comprised of software elements from our portfolio of proprietary software that is increasingly integrated with commercially available hardware, operating systems and database technologies. By taking advantage of advances in technology, like multi-core processors, virtualization software and browser-based cloud computing, our software and systems deliver significant processing power, flexibility, and in-memory storage. We believe that our solutions are cost effective for our customers and enable them to provide value to their subscribers.

     We derive our revenues primarily from the sale or license of these network systems and software applications and related professional services (for example, installation and training services) and customer support services, including customer post-warranty services. Payment terms for contracts with our customers are negotiated with each customer and are based on a variety of factors, including the customer’s credit standing and our history with the customer. As we continue to expand internationally, we expect that our billing and payment terms may lengthen, as a higher percentage of our billing and/or payment terms may be tied to the achievement of milestones, such as shipment, installation and customer acceptance.

     Our corporate headquarters are located in Morrisville, North Carolina, with research and development facilities, sales offices and customer support facilities located throughout the world.

Internal Control and Corporate Governance

     We consider our internal control over financial reporting a high priority and continually review all aspects of and make improvements in our internal control. Our executive management is committed to ensuring that our internal control over financial reporting is complete, effective and appropriately documented. In the course of our evaluation of our internal control, we seek to identify material errors or control problems and to confirm that the appropriate corrective actions, including process improvements, are being undertaken. We also seek to deal with any control matters in this evaluation, and in each case if a problem is identified, we consider what revision, improvement or correction to make in accordance with our ongoing procedures. Our continued objective is to maintain our internal control as a set of dynamic systems that change (including improvements and corrections) as conditions warrant.

     In addition to striving to maintain an effective system of internal control over financial reporting, we also strive to follow the highest ethical and professional standards in measuring and reporting our financial performance. Specifically, we have adopted a code of conduct for all of our employees and directors that requires a high level of professionalism and ethical behavior. We believe that our accounting policies are prudent and provide a clear view of our financial performance. We utilize our internal audit function to help ensure that we follow these accounting policies and to independently test our internal control. Further, our Disclosure Committee,

25

composed primarily of senior financial and legal personnel, helps ensure the completeness and accuracy of the reporting of our financial results and our other disclosures. In performing its duties, the Disclosure Committee consults with and obtains relevant information from key functional areas such as operations, finance, customer service and sales, including the utilization of an internal certification process that solicits responses from these functional areas. Prior to the release of our financial results, key members of our management review our operating results and significant accounting policies and estimates with our Audit Committee, which consists solely of independent members of our Board of Directors.

Operating Environment and Key Factors Impacting our Results

     Although economic conditions are generally improving around the world, we believe telecommunication service providers have been and will continue to be cautious in their spending for the foreseeable future. This is particularly the case in certain emerging markets, as these markets continue to be disproportionately affected by the current economic conditions.

     Despite these weak economic conditions, we continue to see progress with our next-generation product portfolio, which we define as our performance management, session management applications on Eagle XG, mobile messaging, policy control, and subscriber data management products. As of June 30, 2010, on a trailing twelve months basis, orders for these products have grown by nearly 40% to $86.8 million and now represent over 50% of our sales pipeline for the remainder of 2010. We recognize that these products have a longer sales cycle than our Eagle 5 products and our expectations are tempered as a result.

     Despite this progress with our next generation product portfolio, the growth in these products did not offset the decline in our Eagle 5 related products, as orders for this product line continued to experience year-over-year declines on a quarterly, year-to-date, and trailing twelve months basis. Accordingly, the weakness in Eagle 5 related product orders more than offset the growth in our next generation products, resulting in a year-over-year decline in total orders of 31% during the current quarter and 25% on a year-to-date basis. The decline in Eagle 5 related product orders was particularly pronounced in the emerging markets and Western Europe, which are down in aggregate by nearly 50% in the first half of 2010. The decline in emerging markets and Western Europe was partially offset by continued strength in North America, where orders were up 15% year-over-year during the first half of 2010.

     In order to understand the trends within our Eagle 5 business, we believe it is important to understand the varying dynamics across geographical regions, particularly between developed and emerging markets. With respect to developed markets, such as North America and Western Europe, we believe our customers are increasing their focus on investing in their next-generation networks, such as Long-Term Evolution (“LTE”). While this shift negatively impacts our Eagle 5 business, it continues to create opportunities for our next generation products. With respect to our Eagle 5 products, we believe customers have and will continue to limit their investments to only meet their current needs.

     With respect to certain emerging markets, such as the Middle East and Africa, we believe the year-over-year decline in orders is due in part to the continued cautiousness in spending resulting from the current economic conditions. In addition, orders in Brazil and India are down substantially year-over-year during the first half of 2010. With respect to Brazil, we believe the decline is primarily due to approximately $25.0 million of 2009 orders that we do not expect to repeat. With respect to India, our second largest market overall and our largest emerging market, orders are down by over 50% year-over-year. A significant portion of this decline is due to the ongoing implementation of security regulations by the Indian government, and these regulations continue to be revised and updated. While we began to see a return of order flow during the second quarter, these new regulations continue to negatively impact orders. In addition, the timing of number portability purchases in 2009, coupled with the continued delay by the Indian government of the actual implementation of the number portability mandate, currently expected in late 2010 or early 2011, resulted in the delay of Eagle 5 extension orders previously expected in mid 2010. Further, as we have previously discussed, a series of security regulations were implemented by the Indian government in 2010, which caused delays in our orders from Indian customers. While we began to see a return of order flow during the second quarter, these new regulations continue to negatively impact orders. We are reviewing the most recent security-related regulations imposed by the Indian government, and although the impacts of such regulations on our operations and order flows is uncertain, we expect improved order flow in the second half of 2010.

     We are also continuing to experience a shift in the timing of customer orders, such that a substantial majority of orders were obtained in the last weeks of each of the quarters during 2009 and in the first half of 2010. We anticipate that this trend may continue and, accordingly, we may continue to experience volatility in our quarterly orders, revenues and earnings going forward.

26

     In the second quarter of 2010, our revenues declined by 4% from $114.2 million to $109.5 million as compared to the second quarter of 2009, and on a year-to-date basis, our revenues declined by 2%, from $230.8 million in the first half of 2009 to $225.5 million in the first half of 2010. Historically, a substantial portion of our revenues were derived from existing backlog, and trends in our orders have not been reflected in our revenues in the same period. However, given the recent declines in our orders and resulting backlog, our revenues are beginning to be negatively impacted by the recent trend in orders. Our revenues and operating results may become more sensitive to, and more closely follow recent order trends in the future if our existing backlog continues to decline as a result of several sequential periods with lower than anticipated orders.

     Foreign currency fluctuations had a negative year-over-year impact on second quarter and year-to-date 2010 revenues of approximately $4.0 million and $2.0 million, respectively. Including this impact, our operating results during the second quarter and year-to-date 2010 were negatively impacted by approximately $3.0 million due to year-over-year foreign currency fluctuations.

Summary of Operating Results and Key Financial Metrics

     The following is a summary of our performance relative to certain key financial metrics for our operations as of and for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 (in thousands, except earnings per share):

	Three Months Ended June 30,				Year-Over-Year Change
	2010		2009
Statement of operations statistics:
Orders	$	72,068	$	104,701	$	(32,633	)	(31	)%
Revenues	$	109,507	$	114,183	$	(4,676	)	(4	)%
Operating income	$	12,650	$	19,611	$	(6,961	)	(35	)%
Diluted earnings per share	$	0.14	$	0.14	$	—		—	%
Cash flows from operations for continuing operations	$	6,359	$	12,758	$	(6,399	)	(50	)%
	Six Months Ended June 30,
	2010		2009
Statement of operations statistics:
Orders	$	128,792	$	172,655	$	(43,863	)	(25	)%
Revenues	$	225,498	$	230,841	$	(5,343	)	(2	)%
Operating income	$	34,878	$	37,514	$	(2,636	)	(7	)%
Diluted earnings per share	$	0.34	$	0.33	$	0.01		2	%
Cash flows from operations for continuing operations	$	21,235	$	34,581	$	(13,346	)	(39	)%
	June 30,		December 31,
	2010		2009
Balance sheet statistics:
Cash and cash equivalents and short-term investments	$	226,291	$	370,116	$	(143,825	)	(39	)%
Accounts receivable, net	$	138,346	$	157,369	$	(19,023	)	(12	)%
Backlog	$	271,641	$	373,639	$	(101,998	)	(27	)%
Deferred revenue	$	131,432	$	154,655	$	(23,223	)	(15	)%
Working capital	$	295,462	$	441,277	$	(145,815	)	(33	)%
Shareholders’ equity	$	601,379	$	574,547	$	26,832		5	%

     Orders decreased by 31% to $72.1 million in the second quarter of 2010 from $104.7 million in the second quarter of 2009, and decreased by 25% to $128.8 million for the six months ended June 30, 2010 from $172.7 million for the same period in 2009. The year-over-year declines are primarily due to the reasons discussed above.

     Revenues decreased on a quarter-over-quarter and year-over-year basis, to $109.5 million and $225.5 million in the second quarter and first half of 2010, respectively, from $114.2 million and $230.8 million in the second quarter and first half of 2009, respectively. As mentioned previously, our revenues have been negatively impacted by the recent trend in orders for our Eagle 5 products and the resulting lower backlog.

27

     Operating Income decreased by $7.0 million from $19.6 million in the second quarter of 2009 to $12.7 million in the second quarter of 2010, primarily due to a reduction in revenues of $4.7 million and an increase in amortization expense of $2.5 million as a result of the additions of intangible assets following acquisitions of Camiant, Inc. (“Camiant”) and Blueslice Networks Inc. (“Blueslice”) completed in the second quarter of 2010. Partially offsetting these items was a decrease in incentive compensation in line with lower orders and operating performance as compared to our incentive targets for the period.

     For the six months ended June 30, 2010, operating income decreased by $2.6 million from $37.5 million for the six months ended June 30, 2009 to $34.9 million for the six months ended June 30, 2010. The year-over-year decrease was primarily due to the reasons discussed above, partially offset by a reduction of incentive compensation in line with lower orders and operating performance as compared to our incentive targets for the period, as well as our emphasis on cost controls.

     Diluted Earnings per Share remained comparable at $0.14 per share in the second quarter of 2010 and 2009, and at $0.34 per share in 2010 and $0.33 per share in 2009 on a year-to-date basis, primarily due to the decreases in operating income during the three and six months ended June 30, 2010 discussed above being offset by lower income tax expense, as well as first half 2009 including an impairment charge of $2.8 million related to investments in privately held company recorded during the second quarter of 2009.

     Cash Flow from Operations decreased during the three and six months ended June 30, 2010, primarily as a result of lower accounts receivable cash collections in the first half of 2010 as compared to the first half of 2009, resulting from a year-over-year decline in orders and associated billing activity.

     Cash and Cash Equivalents and Short Term Investments decreased during the six months ended June 30, 2010 by $143.8 million, or 39%, primarily due to the acquisitions of Camiant and Blueslice for total net cash consideration of $162.0 million. These cash outflows were partially offset by cash flows from operating activities of $21.2 million.

     Accounts Receivable decreased by $19.0 million during the six months ended June 30, 2010 to $138.3 million primarily due to lower billings as a result of lower orders.

     Backlog decreased by $102.0 million, or 27%, from December 31, 2009 to June 30, 2010, primarily due to lower orders resulting in a reduction in backlog during the first half of 2010. Additionally, the negative impact of foreign exchange fluctuations (primarily related to the Euro) resulted in a $13.3 million decrease in backlog.

     Deferred Revenue decreased by $23.2 million, or 15%, from $154.7 million as of December 31, 2009 to $131.4 million as of June 30, 2010, primarily due to the decline in our orders and billings in the first half of 2010, as discussed above.

     Working Capital decreased by $145.8 million, or 33%, from $441.3 million as of December 31, 2009 to $295.5 million as of June 30, 2010, primarily due to the reduction in our cash balances as a result of acquiring Camiant and Blueslice in the second quarter of 2010 for total net cash consideration of $162.0 million, partially offset by cash inflow from operating activities of $21.2 million.

     Shareholders’ Equity increased by $26.8 million in the six months ended June 30, 2010 from $574.6 million as of December 31, 2009 to $601.4 million as of June 30, 2010, primarily due to net income of $23.1 million for the period and $9.9 million of proceeds from the issuance of common stock pursuant to the exercise of employee stock options and purchase under our employee stock purchase plan, offset by foreign currency translation adjustments of $10.4 million.

Results of Operations

Revenues

     As discussed further in Note 1 to the accompanying unaudited condensed consolidated financial statements and in “Recent Accounting Pronouncements” below, in the first quarter of 2010 we adopted new accounting guidance with respect to revenue recognition for arrangements with multiple deliverables. These new revenue recognition rules only apply to transactions entered into and pre-existing arrangements materially modified subsequent to adoption. As substantially all of our telecommunications products include both tangible products

28

and software elements that function together to deliver the tangible product’s essential functionality, the existing software revenue recognition guidance will no longer apply to the majority of our arrangements.

     The adoption of the new, non-software revenue recognition guidance did not have a material impact on the timing, pattern, or amount of revenue recognized in the second quarter and first half of 2010, primarily due to (i) a portion of second quarter and first half 2010 revenue being derived from the backlog of orders which were received prior to January 1, 2010 and therefore not falling under the new non-software revenue recognition guidance, and (ii) the new, non-software revenue recognition guidance not differing significantly from the software revenue recognition guidance when applied to acceptance based arrangements and arrangements that are received and fulfilled within the same quarter. In the three and six months ended June 30, 2010, we recognized $50.0 million and $75.5 million of revenue, respectively, under the new non-software revenue recognition guidance, and we had $10.2 million of deferred revenue under such rules at June 30, 2010. Our June 30, 2010 backlog included an additional $41.0 million of unbilled orders recorded under the new guidance. Based on the currently available information, we anticipate that the effect of adopting this guidance on future periods will not be material. However, this assessment may change as the impact depends on the substance of arrangements entered into or materially modified in future periods.

     Revenues decreased by 4% to $109.5 million in the second quarter of 2010 from $114.2 million in the second quarter of 2009. On a year-to-date basis, revenue decreased by 2% to $225.5 million for the six months ended June 30, 2010 as compared to $230.8 million for the six months ended June 30, 2009. Foreign currency fluctuations had a negative year-over-year impact on second quarter and year-to-date 2010 revenues of approximately $4.0 million and $2.0 million, respectively. The following discussion provides a more detailed analysis of changes in revenues by product line.

Revenues by Product Line

     In order to provide a better understanding of the year-over-year changes and the underlying trends in our revenues, we have provided a discussion of revenues from each of our product lines. Revenues from each of our product lines for the three and six months ended June, 30 2010 and 2009 are as follows (in thousands, except percentages):

	For the Three Months Ended
	June 30,				Change
	2010		2009		2009 to 2010
Product revenues:
Eagle, number portability, and other session management products	$	68,319	$	73,548	$	(5,229	)	(7	)%
Performance management products		6,570		4,942		1,628		33	%
Total product revenues		74,889		78,490		(3,601	)	(5	)%
Warranty revenues		21,691		20,814		877		4	%
Professional and other services revenues		12,927		14,879		(1,952	)	(13	)%
Total revenues	$	109,507	$	114,183	$	(4,676	)	(4	)%

	For the Six Months Ended
	June 30,				Change
	2010		2009		2009 to 2010
Product revenues:
Eagle, number portability, and other session management products	$	134,433	$	143,124	$	(8,691	)	(6	)%
Performance management products		16,995		15,064		1,931		13	%
Total product revenues		151,428		158,188		(6,760	)	(4	)%
Warranty revenues		40,693		42,081		(1,388	)	(3	)%
Professional and other services revenues		33,377		30,572		2,805		9	%
Total revenues	$	225,498	$	230,841	$	(5,343	)	(2	)%

     Product Revenues

     Our product revenues decreased by $3.6 million, or 5%, in the second quarter of 2010 compared to the second quarter of 2009 due to the decrease in Eagle 5, number portability, and other session management products revenues. This decrease was primarily due to the decline in sales of our Eagle 5 product line

29

outpacing the growth in sales of our newer Eagle XG and other session management products. Partially offsetting this decrease was an increase in performance management products revenues following our new software releases and the continued progress we have made in gaining customer acceptances of our next generation carrier grade Linux products.

     Product revenues for the first six months of 2010 decreased by $6.8 million, or 4%, as compared to the same period in 2009, primarily due to the overall decrease in Eagle 5 revenues as discussed above, as well as lower international revenues as a result of the timing of completion of a number of large acceptance based projects in South America during the first quarter of 2009. From a product mix perspective, we continue to expect a year-over-year growth in orders and revenues from our Eagle XG, performance management and mobile messaging products, and a decline in orders and revenues for our Eagle 5 product line. With the addition of the policy management and subscriber data management products obtained in our acquisitions of Camiant and Blueslice, we expect our next generation products to represent an increasing percentage of our overall orders and revenues.

     Worldwide, our product revenues have been impacted by a variety of factors in addition to those discussed above, including: (i) industry consolidation resulting in delay and/or decline in our customer orders; (ii) competitive pricing pressure, particularly with respect to our Eagle 5 product line; (iii) the pricing of our SIGTRAN-based products, which are typically at a significantly lower price per equivalent link or unit of throughput than our traditional SS7-based products, resulting in reductions in our order value and revenues; (iv) the ability to sell our next generation products, such as performance management, Eagle XG, policy management, subscriber data management, and mobile messaging, to our existing customer base and (v) the amount of signaling traffic generated on our customers’ networks, impacting our volume of orders. We derive the majority of our product revenues from wireless operators, and wireless networks generate significantly more signaling traffic than wireline networks. As a result, these networks require significantly more signaling infrastructure than wireline networks. Signaling traffic on our wireless customers’ networks may be impacted by several factors, including growth in the number of subscribers, the number of calls made per subscriber, roaming and the use of additional features, such as text messaging.

     Warranty Revenues

     Warranty revenues include revenues from (i) our standard warranty coverage, which is typically provided at no charge for the first year but is allocated a portion of the arrangement fee in accordance with the authoritative guidance for revenue recognition and (ii) our extended warranty offerings. After the first year warranty, our customers typically purchase warranty services for periods of up to a year in advance, which we reflect in deferred revenues. We recognize the revenue associated with our warranty services ratably over the term of the warranty arrangement based on the number of days the contract is outstanding during the period.

     Warranty revenues increased by 4% in the second quarter of 2010 as compared to the second quarter of 2009. This increase was primarily due to the increase in our extended warranty revenues primarily due to (i) the timing of order renewals, and (ii) the expansion of the maintenance base as a result of our recent acquisitions. Partially offsetting the above increase was a decrease in the standard warranty revenues, principally due to the timing of revenue recognition related to the initial warranty term that accompanied the product sale.

     On a year-to-date basis, warranty revenues decreased by 3% in the first six months of 2010 as compared to the same period of 2009, primarily as a result of a decrease in the standard warranty revenues for the reasons discussed above and to a lesser extent, pricing pressure from our customers related to our extended warranty offering as they try to reduce their operating expenses.

     The timing of recognition of our warranty revenues may be impacted by, among other factors: (i) delays in receiving purchase orders from our customers; (ii) the inability to recognize any revenue, including revenue associated with first year warranty, until the delivery of all product deliverables associated with an order is complete; and (iii) receipt of cash payments from the customer in cases where the customer is deemed a credit risk.

     Professional and Other Services Revenues

     Professional and other services revenues primarily consist of installation services, database migration and training services. Substantially all of our professional service arrangements are billed on a fixed-fee basis.

30

We typically recognize the revenue related to our fixed-fee service arrangements upon completion of the services, as these services are relatively short-term in nature (typically several weeks, or in limited cases, several months). Our professional and other services are typically initiated and provided to the customer within a three to nine month period after the shipment of the product, with the timing depending on, among other factors, the customer’s schedule and site availability.

     Professional and other services revenues for the second quarter of 2010 decreased by $2.0 million, or 13%, as compared to the second quarter of 2009, primarily due to a decrease in service related revenues in Europe associated with the completion of Eagle projects in the second quarter of 2009, which was partially offset by growth in services associated with performance management products.

     On a year-to-date basis, professional and other services revenues increased by $2.8 million, or 9%, in the first half of 2010 as compared to the same period of 2009. The increase is primarily attributable to the recognition of revenue for a number of projects in Europe across our product portfolio that included large service components in the first quarter of 2010 as compared to the mix of deliverables in the first quarter of 2009. Also contributing to the increase is an increase in professional services revenue associated with performance management products, which typically require a higher level of services than our Eagle 5 related products.

     Regardless of the mix of products purchased, new customers require a greater amount of installation, training and other professional services at the initial stages of deployment of our products. As our customers gain more knowledge of our products, the follow-on orders generally do not require the same levels of services and training, as our customers tend to either: (i) perform the services themselves; (ii) require limited services, such as installation only; or (iii) require no services, and, in particular, no database migration or training services.

Cost of Sales

     In order to better understand our cost structure, we analyze and present our costs and expenses in the categories discussed below:

     Cost of goods sold

     Cost of goods sold includes: (i) materials, labor, and overhead costs incurred internally and paid to contract manufacturers to produce our products; (ii) personnel and other costs incurred to install our products; and (iii) customer service costs to provide continuing support to our customers under our warranty offerings. Cost of goods sold in dollars and as a percentage of revenues for the three and six months ended June 30, 2010 and 2009 were as follows (in thousands, except percentages):

	For the Three Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
Cost of good sold	$	36,586		$	36,364		$	222		1	%
Revenues		109,507			114,183			(4,676	)	(4	)%
Cost of good sold as a percentage of revenues		33	%		32	%
	For the Six Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
Cost of good sold	$	75,190		$	76,713		$	(1,523	)	(2	)%
Revenues		225,498			230,841			(5,343	)	(2	)%
Cost of good sold as a percentage of revenues		33	%		33	%

     Cost of goods sold increased slightly in both absolute dollars and as a percentage of revenues in the three months ended June 30, 2010 as compared to the same period in 2009. Cost of goods sold for the second quarter of 2009 included a warranty charge associated with a Class A warranty event related to our performance management product line of $5.0 million, or 4% of revenues. Thus, cost of goods sold excluding this charge increased $5.2 million in 2010. The increase in terms of absolute dollars and as a percentage of revenue was primarily attributable to a higher percentage of our revenues being derived from emerging markets, particularly India, which

31

are typically at lower gross margins. Partially offsetting this increase was lower incentive compensation resulting from lower orders and operating performance as compared to our incentive targets for the period.

     For the six months ended June 30, 2010 our cost of goods sold decreased by 2% in absolute dollars and remained comparable as a percentage of revenues as compared to the same period in 2009. As mentioned previously, cost of goods sold during the first half of 2009 included a $5.0 million warranty charge, representing 2% of 2009 year-to-date revenues. Excluding the impact of this charge, cost of goods sold increased by $3.5 million during the six months ended June 30, 2010, with the increase principally due to a higher percentage of our revenues being derived from emerging markets, particularly India, partially offset by (i) a proportionate decline in cost in line with the decline in revenues and (ii) lower incentive compensation resulting from lower orders and operating performance as compared to our incentive targets for the period.

     As we continue to expand our international presence, our cost of goods sold as a percentage of revenues may be negatively impacted as the result of our decision to develop new sales channels and customer relationships in new markets, and also due to price competition. Further, many of our next generation products are initial system sales, which are typically at lower gross margins than our corporate average. However, as we seed these products in our installed base, the follow on orders in many cases will be software only and therefore at margins significantly above our corporate average. In addition, changes in the following factors may also affect margins: product mix; competition; customer discounts; supply and demand conditions in the electronic components industry; internal and outsourced manufacturing capabilities and efficiencies; foreign currency fluctuations; pricing pressure as we expand internationally; and general economic conditions.

Amortization of Intangible Assets

     Amortization of intangible assets for the three and six months ended June 30, 2010 and 2009 was as follows (in thousands):

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Amortization of intangible assets related to:
Camiant	$	1,954	$	—	$	1,954	$	—
mBalance		858		916		1,789		1,843
Steleus		482		483		965		965
Blueslice		556		—		556		—
iptelorg		109		116		228		224
Other		8		—		8		—
Total	$	3,967	$	1,515	$	5,500	$	3,032

32

Research and Development Expenses

     Research and development expenses include costs associated with the development of new products, enhancements of existing products and quality assurance activities. These costs consist primarily of employee salaries and benefits, occupancy costs, consulting costs and the cost of development equipment and supplies. The following sets forth our research and development expenses in dollars and as a percentage of revenues for the three and six months ended June 30, 2010 and 2009 (in thousands, except percentages):

	For the Three Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
Research and development	$	21,763		$	25,551		$	(3,788	)	(15)	%
Percentage of revenues		20	%		22	%
	For the Six Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
Research and development	$	44,572		$	51,403		$	(6,831	)	(13)	%
Percentage of revenues		20	%		22	%

     The following is a summary of the year-over-year fluctuations in our research and development expenses during the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009 (in thousands):

	Three Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2009 to 2010			2009 to 2010
Increase (decrease) in:
Salaries, benefits and incentive compensation	$	(2,080	)	$	(3,642	)
Stock-based compensation		(112	)		(308	)
Integration-related compensation		(32	)		(179	)
Consulting and professional services		(1,099	)		(1,974	)
Facilities and depreciation		(586	)		(877	)
Other		121			149
Total	$	(3,788	)	$	(6,831	)

     The decrease in research and development expenses, both on a quarter-over-quarter and year-over year basis, was principally due to decreased expenses related to our employees, consulting services, and facilities and depreciation. In particular, salaries, benefits and incentive compensation decreased as a result of lower incentive compensation recorded in the first half of 2010 resulting from lower orders and operating performance as compared to our incentive targets. Also affecting our research and development expenses across all categories was a reduction in our spending as a result of (i) completing many of the International Telecommunication Union and local feature development projects necessary to win new Eagle 5 customers in international markets, and (ii) our continued efforts to obtain better efficiencies across our research and development activities. In particular, we are beginning to see reductions in personnel and consulting costs associated with our Eagle 5 development efforts, as we shift resources to our next generation products. Further, we have been able to reduce our depreciation expense as a result of (i) our focus on deploying newer technologies that allowed us to centralize and share our development equipment, and (ii) lower capital expenditures required to support the development efforts of our next generation products, as they are compatible with off the shelf hardware versus our Eagle 5 platform, which is on proprietary hardware.

     Partially offsetting these decreases in research and development costs is a $2.1 million increase for the three and six months ended June 30, 2010 associated with our recent acquisitions, principally within salaries, benefits and incentive compensation category.

33

Sales and Marketing Expenses

     Sales and marketing expenses consist primarily of costs associated with our sales force and marketing personnel, including: (i) salaries, commissions and related costs; (ii) outside contract personnel; (iii) facilities costs; (iv) advertising and other marketing costs, such as tradeshows; and (v) travel and other costs. The following table sets forth our sales and marketing expenses in dollars and as a percentage of revenues for the three and six months ended June 30, 2010 and 2009 (in thousands, except percentages):

	For the Three Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
Sales and marketing expenses	$	18,229		$	17,110		$	1,119	7	%
Percentage of revenues		17	%		15	%
	For the Six Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
Sales and marketing expenses	$	35,666		$	34,406		$	1,260	4	%
Percentage of revenues		16	%		15	%

     The following is a summary of the year-over-year fluctuation in our sales and marketing expenses during the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009 (in thousands):

	Three Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2009 to 2010			2009 to 2010
Increase (decrease) in:
Salaries, benefits and incentive compensation	$	74		$	410
Stock-based compensation		74			143
Integration-related compensation		493			493
Sales commissions		(346	)		(856	)
Marketing and advertising		223			(103	)
Travel		284			1,021
Other		317			152
Total	$	1,119		$	1,260

     The increase in sales and marketing expenses in the second quarter and first half of 2010 as compared to the same periods of 2009 was primarily attributable to additional sales and marketing related personnel costs associated with the recent acquisitions of Camiant and Blueslice. Specifically, our sales and marketing costs increased by $1.8 million during the second quarter and six months ended June 30, 2010 as a result of these acquisitions. Included in this increase is integration-related compensation of $0.5 million associated with certain employees of Camiant and Blueslice receiving cash compensation in lieu of stock options that were not assumed as part of the acquisitions, along with certain stay-on and integration related bonuses. Also, impacting our sales and marketing expenses were increases in our travel and employee related expenses as a result of increased customer oriented activities. Partially offsetting these increases were (i) lower incentive compensation recorded in the first half of 2010 resulting from lower orders and operating performance as compared to our incentive targets, and (ii) decreased sales commissions, primarily due to lower revenues. We expect the size of our sales and marketing workforce and related expenses will continue to vary to a greater degree in response to our orders than to revenues.

General and Administrative Expenses

     General and administrative expenses are composed primarily of costs associated with our executive and administrative personnel (e.g., legal, business development, finance, information technology and human resources personnel) and consist of: (i) salaries and related compensation costs; (ii) consulting and other professional

34

services (e.g., litigtion and other outside counsel fees, and audit fees); (iii) facilities and insurance costs; and (iv) travel and other costs. The following table sets forth our general and administrative expenses in dollars and as a percentage of revenues for the three and six months ended June 30, 2010 and 2009 (in thousands, except percentages):

	For the Three Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
General and administrative expenses	$	12,807		$	13,717		$	(910	)	(7)	%
Percentage of revenues		12	%		12	%
	For the Six Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
General and administrative expenses	$	25,957		$	27,140		$	(1,183	)	(4)	%
Percentage of revenues		12	%		12	%

     The following is a summary of the year-over-year fluctuation in our general and administrative expenses during the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009 (in thousands):

	Three Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2009 to 2010			2009 to 2010
Increase (decrease) in:
Salaries, benefits and incentive compensation	$	(1,104	)	$	(1,150	)
Stock-based compensation		(18	)		(33	)
Integration-related compensation		349			349
Consulting and professional services		249			163
Facilities and depreciation		(118	)		(77	)
Bad debt expense		(379	)		(475	)
Other		111			40
Total	$	(910	)	$	(1,183	)

     The decrease in general and administrative expenses in the first quarter and first half of 2010 was primarily due to a reduction in employee related costs and a reduction in bad debt expense. Our employee related costs decreased as a result of (i) reduced incentive compensation recorded in the first half of 2010 resulting from lower orders and operating performance as compared to our incentive targets for the period, and (ii) realizing the benefits our cost control initiatives. Bad debt expense was lower in 2010 due to our collection efforts and lower overall orders and revenues, and the resulting accounts receivable balances. Partially offsetting these decreases were increases of approximately $0.8 million associated with the addition of Camiant and Blueslice employees to our management team. Included in this increase is $0.3 million associated with certain employees of Camiant and Blueslice receiving cash compensation in lieu of stock options that were not assumed as part of the acquisitions, along with certain stay-on and integration related bonuses.

35

Amortization of Intangible Assets

     As a result of our acquisitions, we have recorded various intangible assets including trademarks, customer relationships and non-compete agreements. Amortization of intangible assets related to our acquisitions is as follows (in thousands):

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Camiant	$	736	$	—	$	736	$	—
mBalance		212		226		442		455
Blueslice		73		—		73		—
Steleus		—		89		—		178
Total	$	1,021	$	315	$	1,251	$	633

     In the second quarter of 2010, amortization of intangible assets increased by $0.7 million, primarily due to the increase in our intangible assets as a result of acquiring Camiant and Blueslice in the second quarter of 2010, offset by a reduction due to having fully amortized the intangibles related to Steleus in 2009.

Other Income and Expense

     For the three and six months ended June 30, 2010 and 2009, other income and expenses were as follows (in thousands, except percentages):

	For the Three Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
Interest income	$	127		$	264		$	(137	)	(52	)%
Interest expense		(54	)		(57	)		3		(5	)%
Impairment of investment in privately held company		—			(2,758	)		2,758		(100	)%
Gain on investments carried at fair value, net		38			321			(283	)	(88	)%
Foreign currency loss, net and other		(1,025	)		(402	)		(623	)	155	%
Other income (expense), net	$	(914	)	$	(2,632	)	$	1,718		(65	)%

	For the Six Months Ended
	June 30,						Change
	2010			2009			2009 to 2010
Interest income	$	269		$	634		$	(365	)	(58	)%
Interest expense		(121	)		(112	)		(9	)	8	%
Impairment of investment in privately held company		—			(2,758	)		2,758		(100	)%
Gain on investments carried at fair value, net		118			1,435			(1,317	)	(92	)%
Foreign currency loss, net and other		(2,125	)		(1,820	)		(305	)	17	%
Other income (expense), net	$	(1,859	)	$	(2,621	)	$	762		(29	)%

     Interest Income and Expense. Interest income decreased during the three and six months ended June 30, 2010 due to (i) a shift during 2009 from higher yielding investments into lower yielding cash and cash equivalents as we sought to reduce our exposure to the credit and liquidity crisis in the financial markets, and (ii) our purchase of Camiant and Blueslice in May 2010 for approximately $162.0 million and the resulting reduction of our interest bearing cash balances.

     Impairment of investment in privately held company. During the second quarter of 2009, we recorded an impairment charge of $2.8 million related to our investment in a privately held company. This charge represented the difference between our $15.0 million cost basis in this investment and its then estimated fair value of $12.2 million as of June 30, 2009 as we deemed the decline in the value of this asset to be other-than-temporary.

36

     Gain on investments carried at fair value, net. Gain on investments carried at fair value, net represents the net gain resulting from changes in the fair value of our ARS portfolio and the related Put right. Our ARS portfolio was classified as trading securities and, accordingly, changes in its fair value were recorded in the corresponding period earnings (i.e., “marked to market”). The UBS Put right was recorded at fair value in accordance with the provisions of the authoritative guidance for investments, and changes in the fair value were also recorded in the corresponding period earnings. We exercised the Put right on June 30, 2010, requiring UBS to purchase our remaining ARS portfolio at par value plus accrued interest.

     Foreign currency loss, net and other. Foreign currency loss, net and other for the three and six months ended June 30, 2010 and 2009 consists primarily of (i) the net cost of our hedging program related to foreign currency risk, including the gains and losses on forward contracts on foreign currency exchange rates used to hedge our exposure to foreign currency risks, (ii) foreign currency gains and losses associated with the underlying hedged item (principally accounts receivable), and (iii) remeasurement adjustments from consolidating our international subsidiaries. As we expand our international business further, we will continue to enter into a greater number of transactions denominated in currencies other than the U.S. Dollar and will be exposed to greater risk related to exchange rate foreign currency fluctuations and translation adjustments.

Provision for Income Taxes

     The income tax provisions for the three months ended June 30, 2010 and 2009 were approximately $2.3 million and $7.2 million, respectively, resulting in income tax expense as a percentage of pre-tax income, or an effective tax rate, of 20% and 43%, respectively. The income tax provisions for the six months ended June 30, 2010 and 2009 were approximately $9.9 million and $12.8 million, resulting in income tax expense as a percentage of pre-tax income, or an effective tax rate, of 30% and 37% respectively.

     The differences in the effective rates for the three and six months ended June 30, 2010, as compared to the same periods in 2009, are primarily due to (i) a higher percentage of our projected income for the full year being derived from international locations with lower tax rates than the U.S., (ii) the cumulative effect of reducing our full year estimated effective tax rate as a result of the shift of income to lower tax jurisdictions discussed in item (i), and (iii) the establishment of a valuation allowance of $1.0 million in the second quarter of 2009 for a deferred tax item resulting from the impairment of our investment in a privately held company. Additionally, we did not reflect a benefit for the U.S. federal research and development tax credit as part of our anticipated annual effective rate for the second quarter of 2010 because the U.S. Congress had not extended this tax credit as of June 30, 2010. A benefit of this credit was reflected in the projected annual effective rate as of the end of the second quarter of 2009. A cumulative benefit resulting from this credit will be recognized in the quarter, if any, in which the U.S. Congress enacts the related legislation. Please refer to Note 8 of the accompanying unaudited condensed consolidated financial statements for a discussion of the reconciliations of our effective tax rates for the three and six months ended June 30, 2010 and 2009 to the statutory rate of 35%.

     We no longer have a “pool of windfall tax benefits” as defined by the authoritative guidance for stock-based compensation. As a result, future cancellations or exercises that result in a tax deduction that is less than the related deferred tax asset recognized under the authoritative guidance will negatively impact our effective tax rate and increase its volatility, resulting in a reduction of our earnings. The authoritative guidance for stock compensation requires that the impact of such events be recorded as discrete items in the quarter in which the event occurs.

Liquidity and Capital Resources

Overview

     We derive our liquidity and capital resources primarily from our cash flows from operations and from our working capital. Our working capital decreased by $145.8 million, from $441.3 million as of December 31, 2009 to $295.5 million as of June 30, 2010, primarily due to the reduction in our cash balances from the acquisition of Camiant and Blueslice in the second quarter of 2010 for total net cash consideration of $162.0 million. This decrease in working capital was partially offset by cash inflow from operating activities of $21.2 million. The significant components of our working capital are liquid assets such as cash and cash equivalents and accounts receivable, and deferred costs and commissions, reduced by trade accounts payable, accrued expenses, accrued compensation and related expenses, and the current portion of deferred revenues.

37

     We have a line of credit facility of $50.0 million and a letter of credit facility of $10.0 million with Wells Fargo Bank, National Association that was originally with Wachovia Bank, National Association. The line of credit is unsecured except for our pledge of 65% of the outstanding stock of certain subsidiaries, while the letter of credit facility requires certain levels of cash collateral for outstanding letters of credit. There were no outstanding borrowings under the line of credit facility at either June 30, 2010 or 2009. As of June 30, 2010, there were approximately $0.5 million of borrowings outstanding under the letter of credit facility, all of which were fully collateralized by us.

     We also utilized a letter of credit facility in the maximum amount of $5.0 million with Wells Fargo which also required cash collateral. This letter of credit facility expired on December 31, 2009 and can no longer be used to issue new letters of credit. As of June 30, 2010, there were letters of credit of approximately $1.4 million outstanding under this facility, all of which were fully collateralized by us.

     As of December 31, 2009, we held $81.8 million of ARS recorded at fair value, which represented a decline of $11.2 million below our cost basis, and associated UBS Put right, at an estimated fair value of $11.1 million. Throughout the second quarter of 2010, as in previous quarters, issuers called certain securities which reduced the investment in our ARS portfolio. On June 30, 2010, we exercised our UBS Put right requiring UBS to purchase the remaining balance of our ARS portfolio at par value plus accrued interest. As a result of the issuer calls and our exercising the UBS Put right, we received cash proceeds of $79.6 million during the quarter, which liquidated our ARS portfolio.

     We believe that our current working capital position, available line of credit and anticipated cash flow from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for at least the next 12 months. Additionally, we believe these resources allow us to continue to invest in further development of our technology and, when necessary or appropriate, make selective acquisitions to continue to strengthen our product portfolio. Our liquidity could be negatively impacted by a decrease in revenues resulting from a decline in demand for our products or a reduction of capital expenditures by our customers.

Cash Flows

     As discussed above, one of the primary sources of our liquidity is our ability to generate positive cash flows from operations. The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities:

Cash Flows from Operating Activities

     Net cash provided by operating activities from continuing operations was $21.2 million and $34.6 million for the six months ended June 30, 2010 and 2009, respectively. The decrease in our cash flows from continuing operations was primarily the result of lower cash collections of accounts receivable in the first half of 2010 as compared to the first half of 2009, resulting from year-over-year decline in orders and associated billing activity.

     Our cash flows from continuing operations were primarily derived from (i) our earnings from ongoing operations prior to non-cash expenses such as stock-based compensation, depreciation, amortization, bad debt, write-downs of inventory, warranty reserve charges, and deferred income taxes, and (ii) changes in our working capital, which are primarily composed of changes in accounts receivable, inventories, deferred revenue and associated deferred costs, accounts payable, accrued expenses and accrued payroll and related expenses.

     We currently anticipate that we will continue to operate our business with positive cash flows from operations. Our ability to meet these expectations depends on our ability to achieve positive earnings. Our ability to generate future cash flows from operations could be negatively impacted by a decrease in demand for our products, which are subject to technological changes and increasing competition, or a reduction of capital expenditures by our customers should they continue to remain cautious with their spending despite generally improving economic conditions, among other factors.

Cash Flows from Investing Activities

     Net cash used in investing activities was ($76.5) million and ($6.6) million for the six months ended June 30, 2010 and 2009, respectively. Our cash flows from investing activities primarily relate to (i) purchases and sales of investments, (ii) strategic acquisitions, and (iii) purchases of property and equipment.

38

     In the first half of 2010, acquisition related net cash outflows were $162.0 million for the purchase of Camiant and Blueslice. Our investment in property and equipment was $7.5 million. Offsetting these investing cash outflows was $93.0 million in proceeds from calls and the exercise of our UBS Put right discussed previously.

     For the six months ended June 30, 2009, our investing activities consisted of property and equipment purchases of $12.1 million, offset in part by the call of $5.5 million of ARS by the issuers.

     We continue to closely monitor our capital expenditures, while making strategic investments in the development of our existing products and the replacement of certain older computer and information technology infrastructure to meet the needs of our workforce. Accordingly, we expect our total capital expenditures to be between $18.0 million and $20.0 million for 2010.

Cash Flows from Financing Activities

     Net cash provided by financing activities was $8.0 million and $4.9 million for the six months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010, our financing activities primarily consisted of proceeds of $10.7 million from net issuances of common stock pursuant to the exercise of employee stock options and purchase under our employee stock purchase plan, including the excess tax benefit on those exercises, partially offset by $2.7 million of employee withholding tax payments made as a result of net share settlements of equity awards.

     For the six months ended June 30, 2009, our financing activities consisted primarily of the proceeds of $6.5 million from the issuance of common stock pursuant to the exercise of employee stock options and purchases under our employee stock purchase plan, including the excess tax benefit on those exercises, partially offset by $1.7 million of employee withholding tax payments made as a result of net share settlements of equity awards.

Critical Accounting Policies and Estimates

     For information about our critical accounting policies and estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2009 Form 10-K. In addition, please refer to Note 1 of the accompanying unaudited condensed consolidated financial statements for information regarding our adoption of new revenue recognition guidance.

Recent Accounting Pronouncements

Revenue Recognition for Arrangements with Multiple Deliverables

     In September 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. As a result, these arrangements are accounted for in accordance with the new, “non-software” guidance for arrangements with multiple deliverables.

     The FASB also amended the accounting standards for revenue recognition for arrangements with multiple deliverables. The new authoritative guidance for arrangements with multiple deliverables requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. It also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (i) vendor-specific objective evidence (“VSOE”) if available; (ii) third-party evidence (“TPE”) if vendor-specific objective evidence is not available; and (iii) best estimated selling price (“BESP”) if neither vendor-specific nor third-party evidence is available. The new guidance eliminates the residual method of allocation for multiple-deliverable revenue arrangements which we used historically when we applied the software revenue recognition guidance to our multiple element arrangements.

     We elected to early adopt, as permitted, the new authoritative guidance on January 1, 2010, on a prospective basis for applicable transactions originating or materially modified after January 1, 2010. As substantially all of our telecommunications products include both tangible products and software elements that function together to deliver the tangible product’s essential functionality, the existing software revenue recognition guidance no longer applies to the majority of our transactions. The adoption of the new, non-software revenue recognition guidance did not have a material impact on the timing, pattern, or amount of revenue recognized in the second quarter and

39

first half of 2010, primarily due to (i) a portion of second quarter and first half 2010 revenue being derived from the backlog of orders which were received prior to January 1, 2010 and therefore not falling under the new non-software revenue recognition guidance, and (ii) the new, non-software revenue recognition guidance not differing significantly from the software revenue recognition guidance when applied to acceptance based arrangements and arrangements that are received and fulfilled within the same quarter. Based on currently available information, we anticipate that the impact of adopting this guidance on revenue recognition will not be material for our 2010 results. However, this assessment may change because such impacts depend on terms and conditions of arrangements in effect in those future periods.

     Please refer to Note 1 to the accompanying unaudited condensed consolidated financial statements for additional information about this new revenue recognition guidance.

Fair Value Measurements and Disclosures

     In January 2010, the FASB issued Accounting Standards Update 2010-06 “Improving Disclosures about Fair Value Measurements”. This Update amends the authoritative guidance for fair value measurements and disclosures by adding new disclosure requirements with respect to transfers in and out of Levels 1 and 2 fair value measurements, as well as by requiring gross basis disclosures for purchases, sales, issuances, and settlements included in the reconciliation of Level 3 fair value measurements. This Update also amends the authoritative guidance by providing clarifications to existing disclosure requirements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Early adoption is permitted.

     We adopted this new guidance, including the guidance related to the disclosures about purchases, sales, issuances, and settlements in the roll forwards of activity in Level 3 fair value measurements, on January 1, 2010. The adoption of this guidance did not have a material impact on our financial position or results of operations.

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

     The statements that are not historical facts contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “will,” “intend,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and variations of these words and similar expressions are sometimes used to identify forward-looking statements. These statements reflect the current belief, expectations, estimates, forecasts or intent of our management and are subject to and involve certain risks and uncertainties. There can be no assurance that our actual future performance will meet management’s expectations. As discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 and our other filings with the SEC, our future operating results are difficult to predict and subject to significant fluctuations. Factors that may cause future results to differ materially from management’s current expectations include, among others:

• the effect of the recent economic crisis on overall spending by our customers, including increasing pressure from our customers for us to lower prices for our products and warranty services, further changes in general economic conditions, such as debt crises in European countries, and other unexpected changes in economic, social, or political conditions in the countries in which we operate;

• the continued decline in sales of our Eagle 5 related products;

• risks related to our international sales, markets and operations, including among others, import regulations, limited intellectual property protection, including protection of our software source code, increased costs and potential liabilities related to compliance with current and future security provisions in customer contracts and regulations, and security restrictions and access requirements imposed by governments, including in particular the government of India;

• access to credit markets by our customers and the impact of tightening credit on capital spending;

• exposure to increased bad debt expense and product and service disputes as a result of general economic conditions and the uncertain credit markets worldwide;

• our ability to gain the benefits we anticipate from our acquisitions, including our acquisitions of Camiant and Blueslice, including expected sales of new products and synergies between the companies’ products and operations;

40

• our ability to successfully integrate the businesses we acquire, including Camiant and Blueslice;

• continuing financial weakness in the telecommunications equipment sector, resulting in pricing pressure on our products and services, as certain of our competitors reduce their prices, lengthen their payment terms and enter into terms and conditions that are generally less favorable to them;

• the effect on our customers and our sales and operations of security restrictions related to telecommunications equipment imposed by governments, including the risk that source code escrows required by such government requirements could be released to our competitors;

• the timely development and introduction of new products and services, our product mix and the geographic mix of our revenues and the associated impact on gross margins and operating expenses;

• market acceptance and delivery of our new products and technologies, and the effect of any product that fails to meet one customer’s expectations on the sale of that or any other products to that or other customers;

• our ability to compete with other manufacturers that have lower cost bases than ours and/or are partially supported by foreign government subsidies or employ unfair trade practices;

• the risk that continued service provider consolidation or outsourcing of network maintenance and operations functions will insert a potential competitor between Tekelec and its customers and/or erode our level of service to such service providers and/or negatively affect our margins;

• uncertainties related to the timing of revenue recognition due to the increasing percentage of international and new customers in our backlog;

• the risk that our financial results for the full year 2010 will not meet our expectations;

• the timing of significant orders and shipments, the timing of revenue recognition under the residual method of accounting as well as new non-software revenue recognition guidance adopted in the first quarter of 2010, and the lengthy sales cycles for our products;

• the availability and success or failure of advantageous strategic and vendor relationships;

• litigation, including patent-related litigation, and regulatory matters and the costs and expenses associated therewith;

• the ability of carriers to utilize excess capacity of signaling infrastructure and related products in their networks, the capital spending patterns of customers, and our dependence on wireless customers for a significant percentage and growth of our revenues; and

• other risks described in this Form 10-Q and in our Form 10-K for 2009 and in our other Securities and Exchange Commission filings.

     Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. Actual results may differ materially from those expressed or implied in such forward-looking statements. We do not assume any responsibility for updating or revising these forward-looking statements. Undue emphasis or reliance should not be placed on any forward-looking statements contained herein or made elsewhere by or on behalf of us.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our 2009 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2009 other than as discussed in Note 4 “Fair Value of Financial Instruments” to the accompanying unaudited condensed consolidated financial statements and under the caption “Critical Accounting Policies and Estimates” in Part I, Item 2 of this Form 10-Q.

41

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     Based on our management’s evaluation (with the participation of our Chief Executive Officer and Chief Financial Officer), as of the end of the quarter covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective in that they provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

     There was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

     Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     There have been no material developments in the description of material legal proceedings as reported in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 1A. Risk Factors

     There have been no material changes from the risk factors as previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.

42

Item 6. Exhibits

Exhibit		Description
	2.1	Agreement and Plan of Merger dated as of May 5, 2010, by and among the Registrant, Camiant, Inc., SPAN Corp., Inc. and Steven Van Beaver, as representative of the stockholders of Camiant, Inc. (schedules to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish a copy of any such schedule supplementally to the Commission upon request)(1)
	2.2	Share Purchase Agreement dated as of May 5, 2010, by and among the Registrant, Tekelec Canada Inc., Stephan Ouaknine, Edie Ledany, Winvest Inc., 9129-2144 Québec Inc., 9129-2136 Québec Inc., Michael Rosenthal, John Grobstein, 171033 Canada Inc., 171036 Canada Inc., Capital Brinvest Inc. and Positron Inc. (schedules to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish a copy of any such schedule supplementally to the Commission upon request)(1)
	10.1	Amendment No. 1 to Officer Severance Plan effective May 14, 2010(2)
	10.2	Sixth Amendment, dated as of May 3, 2010, to Credit Agreement dated as of October 2, 2008 by and among Tekelec, Tekelec International, SPRL, the lenders from time to time parties thereto, and Wells Fargo Bank, N.A. (as successor to Wachovia Bank, National Association), as Administrative Agent, Swingline Lender, Issuing Lender and Lender(2)
	31.1	Certification of Chief Executive Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
	31.2	Certification of Chief Financial Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
	32.1	Certifications of Chief Executive Officer and Chief Financial Officer of Tekelec pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)

(1)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-15135) dated May 5, 2010, as filed with the Commission on May 6, 2010.
(2)	Filed herewith.

43

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
Date: August 5, 2010	/s/ FRANCO PLASTINA
	Franco Plastina
	President and Chief Executive Officer
Date: August 5, 2010	/s/ GREGORY S. RUSH
	Gregory S. Rush
	Senior Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)
Date: August 5, 2010	/s/ PAUL J. ARMSTRONG
	Paul J. Armstrong
	Vice President and Corporate Controller

44

EXHIBIT INDEX

Exhibit No.		Description
	10.1	Amendment No. 1 to Officer Severance Plan effective May 14, 2010
	10.2	Sixth Amendment, dated as of May 3, 2010, to Credit Agreement dated as of October 2, 2008 by and among Tekelec, Tekelec International, SPRL, the lenders from time to time parties thereto, and Wells Fargo Bank, N.A. (as successor to Wachovia Bank, National Association), as Administrative Agent, Swingline Lender, Issuing Lender and Lender
	31.1	Certification of Chief Executive Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Chief Financial Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Certifications of Chief Executive Officer and Chief Financial Officer of Tekelec pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-10.1

Exhibit 10.1

AMENDMENT NO. 1
TO
TEKELEC 2007 OFFICER SEVERANCE PLAN

     Effective as of May 14, 2010, Section 6(h) of the Tekelec 2007 Officer Severance Plan is hereby amended and restated to read in its entirety as follows:

          (h) 280G Modified Cap. In the event that any payment or benefits of any type by Tekelec to or for the benefit of an Eligible Officer, whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise, would exceed the statutory limit under Code Section 280G and result in an excise tax imposed on the Eligible Officer by Code Section 4999 (or any similar tax that may hereafter be imposed), then such Eligible Officer shall receive, subject to the conditions of this Plan and in full satisfaction of his or her rights under this Plan, (A) such payment and benefits, or (B) an amount equal to the product of 2.99 and the Eligible Officer’s “base amount” (as defined in Code Section 280G), whichever yields the highest after-tax benefit to the Eligible Officer. In the event the benefit described under the foregoing Section 6(h)(B) yields the highest after-tax benefit, such amount shall be paid in a lump sum, less all applicable withholding taxes, ten days after the effective date of the Agreement required under Section 5 of this Plan; however, if the terminated Eligible Officer is a Specified Employee, payment shall be made in a lump sum, with interest accruing at a reasonable rate of interest from the Eligible Officer’s Termination Date, on the first day of the seventh month immediately following the Termination Date to the extent necessary for the Eligible Officer to avoid adverse tax consequences under Code Section 409A. In the event the requirements of Section 5 of this Plan are waived, the phrase “effective date of the Agreement” in this Section 6(h) shall be replaced with “Termination Date.”

Dated: May 14, 2010

EX-10.2

Exhibit 10.2

SIXTH AMENDMENT AND LIMITED CONSENT TO CREDIT AGREEMENT

     THIS SIXTH AMENDMENT AND LIMITED CONSENT TO CREDIT AGREEMENT (this “Amendment”) is made and entered into as of May 3, 2010 by and between TEKELEC, a California corporation (the “U.S. Borrower”), TEKELEC INTERNATIONAL, SPRL, a societe privee a responsabilité limitée organized under the laws of the Kingdom of Belgium (the “Belgian Borrower”, and together with the U.S. Borrower, each a “Borrower” and collectively, the “Borrowers”), the lenders who are or may become a party to this Agreement (collectively, the “Lenders”) and WELLS FARGO BANK, N.A. (successor by merger to Wachovia Bank, National Association), a national banking association, as Administrative Agent for the Lenders (the “Administrative Agent”).

STATEMENT OF PURPOSE

     The Lenders have extended certain credit facilities to the Borrowers pursuant to the Credit Agreement, dated October 2, 2008 by and among the Borrowers, the Lenders and the Administrative Agent (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”).

     WHEREAS, the Borrowers have requested, among other things, that: (i) the Lenders consent to the acquisition (the “Camiant Acquisition”) by Borrowers of Camiant, Inc., a Delaware corporation, and its subsidiaries (collectively, “Camiant”) pursuant to the terms set forth in that certain Term Sheet dated March 22, 2010 (the “Camiant Term Sheet”); (ii) the Lenders consent to the acquisition (the “Blueslice Acquisition” and together with the Camiant Acquisition, the “Acquisitions”) by Borrowers of Blueslice Networks Inc., a Canadian corporation, and its subsidiaries (collectively, “Blueslice”) pursuant to the terms set forth in that certain Term Sheet dated April 6, 2010 (the “Blueslice Term Sheet”) and (iii) the Lenders amend certain provisions of the Credit Agreement as set forth herein; and

          WHEREAS, the Lenders and the Administrative Agent are, subject to the terms and conditions set forth herein, willing to grant the consents and amendments requested by the Borrowers as hereinafter set forth.

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

     1. Capitalized Terms. All capitalized terms used and not defined herein shall have the meanings assigned thereto in the Credit Agreement.

     2. Amendments. Pursuant to Section 14.2 of the Credit Agreement and effective in accordance with Section 4 hereof, the Lenders hereby agree as follows:

     (a) Section 1.01 of the Credit Agreement shall be amended by deleting subsection (e) in the definition of “Permitted Acquisition” and substituting in lieu therof the following new subsection (e) to read as follows:

     “(e) the Borrower Agent shall have obtained the prior written consent of the Administrative Agent and the Required Lenders prior to the consummation of such acquisition if either of the following conditions exist: (i) the Permitted Acquisition Consideration for any such acquisition (or series of related acquisitions), together with all other acquisitions consummated during the preceding four fiscal quarters exceeds $100,000,000 in the aggregate, or (ii) the Permitted Acquisition Consideration for any such acquisition (or series of related acquisitions), as calculated in the Officer’s Compliance Certificate required to be delivered to the Administrative Agent pursuant to subsection (b) above, both prior to and after such acquisition shall cause the Borrowers’ Consolidated Tangible Net Worth to be less than the sum of (A) $200,000,000 plus (B) an amount equal to fifty percent (50%) of the cumulative Consolidated Net Income occurring after January 1, 2011.

     Notwithstanding any of the foregoing, in the event that the purchase price for any acquisition by any Credit Party is paid with the Capital Stock of the U. S. Borrower, clause (e) shall not apply to such Permitted Acquisition.”

     (b) Section 11.6 of the Credit Agreement shall be amended by deleting subsections (c) and (d) in their entirety and substituting, in lieu thereof, the following new subsection (c) to read as follows:

     “(c) the U.S. Borrower may declare or pay cash dividends upon its Capital Stock and/or repurchase shares of its Capital Stock, provided that (i) no Default or Event of Default shall have occurred or be continuing (prior to and immediately after the declaration and payment of such cash dividend and/or repurchase), (ii) the Borrowers shall be in pro forma compliance with the covenants set forth in Article X (prior to and immediately after the declaration and payment of such cash dividend and/or repurchase) and (iii) the U.S. Borrower maintains, prior to and immediately after such cash dividend and/or repurchase, a Consolidated Tangible Net Worth greater than or equal to the sum of (A) $200,000,000 plus (B) an amount equal to fifty percent (50%) of the cumulative Consolidated Net Income occurring after January 1, 2011.

     3. Limited Consent. The parties hereto acknowledge and agree that as of the Sixth Amendment Effective Date and so long as the Borrowers comply with the terms and conditions set forth in the definition of Permitted Acquisitions (other than subsection (e) of such definition) and the Credit Agreement, the Administrative Agent and Lenders shall be deemed to have consented to the Acquisitions. For the avoidance of doubt, the Acquisitions shall be deemed permitted separately under the Credit Agreement and shall not be included in the calculations going forward under subsection (e) (i) of the Permitted Acquisition definition.

     4. Conditions to Effectiveness. Upon satisfaction of each of the following conditions, this Amendment shall be deemed to be effective as of the date above stated (the “Sixth Amendment Effective Date”):

          (a) The Administrative Agent shall have received an executed original of this Amendment by each Borrower and the Lenders; and

2

          (b) The receipt by the Administrative Agent of any other documents or instruments reasonably requested by the Administrative Agent in connection with the execution of this Amendment.

     5. Limited Effect of Amendment. Except as expressly modified herein, the Credit Agreement and the Loan Documents shall continue to be, and shall remain, in full force and effect. Except as expressly set forth herein, this Amendment shall not be deemed (a) to be a waiver of, or consent to, or a modification or amendment of, any other term or condition of the Credit Agreement or any other Loan Document or (b) to prejudice any other right or remedies which the Administrative Agent or the Lenders may now have or may have in the future under or in connection with the Credit Agreement or the other Loan Documents or any of the instruments or agreements referred to therein, as the same may be amended, restated or otherwise modified from time to time. On and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder,” “hereof” or words of like import referring to the Credit Agreement, and each reference in the Credit Agreement, the Notes and each of the other Loan Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of lie import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Amendment. This Amendment constitutes a “Loan Document” as defined in the Credit Agreement.

     6. Representations and Warranties. After giving effect to the amendments set forth herein, each Borrower hereby certifies that (a) each of the representations and warranties set forth in the Credit Agreement and the other Loan Documents is true and correct in all material respects as of the Sixth Amendment Effective Date as if fully set forth herein (except for any representation and warranty made as of an earlier date, which representation and warranty shall remain true and correct as of such earlier date) and (b) no Default or Event of Default has occurred and is continuing as of the Sixth Amendment Effective Date.

     7. Release. For and in consideration of the agreements of the Administrative Agent and the other Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Borrowers hereby forever release and discharge the Administrative Agent and the Lenders, each of their respective officers, directors, employees, agents, affiliates, representatives, successors and assigns (collectively, the “Released Parties”) from any and all claims, causes of actions, damages and liabilities of any nature whatsoever, known or unknown, which the Borrowers ever had, now has or might hereafter have against one or more of the Released Parties which relates, directly or indirectly, to the Loan Documents or the transactions relating thereto (collectively “Claim”), to the extent that any such Claim shall be based in whole or in part upon facts, circumstances, actions or events existing on or prior to the date hereof.

     8. Covenant Not to Sue. The Borrowers, on behalf of themselves and their successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably, covenant and agree with and in favor of each Released Party that they will not sue (at law, in equity, in any regulatory proceeding or otherwise) any Released Party on the basis of any Claim released, remised and discharged by the Borrowers pursuant to Section 7 above. If the Borrowers or any of their respective successors, assigns or other legal representatives, or any Loan Party, or its respective successors, assigns, and other legal representatives violates the

3

foregoing covenant, each of the Borrowers, for itself and its respective successors, assigns and legal representatives, agrees to pay, in addition to such other damages as any Released Party may sustain as a result of such violation, all reasonable attorneys’ fees and costs incurred by any Released Party as a result of such violation.

     9. Miscellaneous.

          (a) Governing Law. This Amendment shall be governed by, construed and enforced in accordance with the laws of the State of New York.

          (b) Entire Agreement. This Amendment is the entire agreement, and supersedes any prior agreements and contemporaneous oral agreements, of the parties concerning its subject matter. In the event there is a conflict or inconsistency between this Amendment and the Credit Agreement, the terms of this Amendment shall control.

          (c) Successors and Assigns. This Amendment shall be binding on and inure to the benefit of the parties and their beneficiaries, successors and assigns.

          (d) Further Assurances. The parties hereto shall execute and deliver such additional documents and take such additional action as may be necessary or desirable to effectuate the provisions and purposes of this Amendment.

          (e) Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of which taken together constitute one and the same agreement.

          (f) Obligation to Pay Fees/Costs. The Borrowers acknowledge that Section 14.3(a) of the Credit Agreement requires that Borrowers pay all reasonable outstanding fees and out-of-pocket charges and other expenses of the Administrative Agent for the preparation of this Amendment, including, without limitation, all outstanding K&L Gates LLP legal fees.

          (g) Facsimile Transmission. A facsimile, telecopy or other reproduction of this Amendment may be executed by one or more parties hereto, and an executed copy of this Amendment may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any party hereto, all parties hereto agree to execute an original of this Amendment as well as any facsimile, telecopy or other reproduction hereof.

[Signature Pages To Follow]

4

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date and year first above written.

TEKELEC, as Borrower and Borrower Agent
By:	/s/ Stuart H. Kupinsky
	Name:	Stuart H. Kupinsky
	Title:	SVP - Corporate Affairs, General Counsel, & Secretary
TEKELEC INTERNATIONAL, SPRL, as Borrower
By:	/s/ Stuart H. Kupinsky
	Name:	Stuart H. Kupinsky
	Title:	Manager

[Tekelec Sixth Amendment to Credit Agreement]

AGENTS AND LENDERS: WELLS FARGO BANK, N.A., as Administrative Agent, Swingline Lender, Issuing Lender and Lender
By:	/s/ Michael Paysley
	Name:	Michael Paysley
	Title:	Sr Vice President

[Tekelec Sixth Amendment to Credit Agreement]

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer of Tekelec pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Franco Plastina, certify that:

     1. I have reviewed this Quarterly Report on Form 10-Q of Tekelec;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ FRANCO PLASTINA
	Franco Plastina
	President and Chief Executive Officer
Date: August 5, 2010

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer of Tekelec pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Gregory S. Rush, certify that:

     1. I have reviewed this Quarterly Report on Form 10-Q of Tekelec;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ GREGORY S. RUSH

Gregory S. Rush

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: August 5 , 2010

EX-32.1

Exhibit 32.1

Certifications of Chief Executive Officer and Chief Financial Officer of Tekelec pursuant to
Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

     In connection with the Quarterly Report of Tekelec (the “Company”) on Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Franco Plastina, President and Chief Executive Officer of the Company, and Gregory S. Rush, Senior Vice President and Chief Financial Officer of the Company, certify, to the best of our knowledge, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 5, 2010	/s/ FRANCO PLASTINA
	Franco Plastina
	President and Chief Executive Officer
Date: August 5, 2010	/s/ GREGORY S. RUSH
	Gregory S. Rush
	Senior Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)