Tekelec Announces Q3 2007 Results

Tekelec (NASDAQ: TKLC), a leading developer of high-performance network applications for next-generation fixed, mobile and packet networks, today announced its results for the three and nine months ended September 30, 2007. Results of the Company’s Switching Solutions Group ("SSG”) for the three and nine months ended September 30, 2007 and 2006 and the results of the IEX contact center ("IEX”) business unit for the three and nine months ended September 30, 2006 are included in the results from discontinued operations. Results from Continuing Operations Revenue from continuing operations for the third quarter of 2007 was $97.8 million, down 27% compared to $134.3 million for the third quarter of 2006. For the third quarter of 2007, the Company had orders of $109.2 million, up 22% compared to $89.4 million for the third quarter of 2006, resulting in a book to bill ratio of 1.12 for the quarter. Backlog as of September 30, 2007 was $346.1 million up from $334.7 million as of June 30, 2007. On a GAAP basis, the Company reported income from continuing operations for the third quarter of 2007 of $10.1 million, or $0.14 per diluted share, compared to income from continuing operations of $20.1 million, or $0.28 per diluted share, for the third quarter of 2006. On a Non-GAAP basis, net income from continuing operations for the third quarter of 2007 was $13.8 million, or $0.18 per diluted share, compared to net income from continuing operations of $23.0 million, or $0.32 per diluted share, for the third quarter of 2006. Please refer to the attached financial statement schedules for a reconciliation of the Company's GAAP operating results to its Non-GAAP operating results. Revenue from continuing operations for the first nine months of 2007 was $316.6 million, compared to $318.2 million for the first nine months of 2006. For the first nine months of 2007, the Company had orders from continuing operations of $273.0 million, up 6% compared to $257.6 million for the first nine months of 2006. On a GAAP basis, the Company reported income from continuing operations for the first nine months of 2007 of $16.8 million, or $0.24 per diluted share, compared to income from continuing operations of $25.5 million, or $0.37 per diluted share, for the first nine months of 2006. On a Non-GAAP basis, net income from continuing operations for the first nine months of 2007 was $33.4 million, or $0.45 per diluted share, compared to net income from continuing operations of $36.8 million, or $0.52 per diluted share, for the first nine months of 2006. Please refer to the attached financial statement schedules for a reconciliation of the Company's GAAP operating results to its Non-GAAP operating results. Frank Plastina, president and chief executive officer of Tekelec, stated, "We are pleased with our operating results for the quarter, with strong gross margins, operating margins and earnings, coupled with solid orders growth in the September quarter resulting in a book to bill ratio greater than one. We again leave the quarter with a strong balance sheet and continue to expand our global footprint, evidenced by six new international customers this quarter.” Results from Discontinued Operations The Company completed the sale of its SSG business to GENBAND Inc. on April 21, 2007 and the results of the operations of SSG have been presented as a discontinued operation in the three and nine months ended September 30, 2007 and 2006. In addition, the Company completed the sale of the IEX contact center business to NICE Systems, Inc. on July 6, 2006 and the operations of IEX have been presented as a discontinued operation in the three and nine months ended September 30, 2006. On a GAAP basis, net income from discontinued operations in the third quarter of 2007 was $2.4 million, or $0.03 per diluted share, compared to net income from discontinued operations of $69.2 million, or $0.93 per diluted share, in the third quarter of 2006, which included the gain on the sale of the IEX contact center business. On a GAAP basis, the loss from discontinued operations, including a loss on the sale of SSG, for the first nine months of 2007 was $62.6 million, or $0.88 loss per diluted share, compared to net income from discontinued operations of $61.8 million, or $0.83 per diluted share, for the first nine months of 2006. Consolidated Results On a GAAP basis, consolidated net income for the three months ended September 30, 2007 was $12.5 million, or $0.17 per diluted share, compared to consolidated net income for the three months ended September 30, 2006 of $89.3 million, or $1.21 per diluted share. On a GAAP basis, the consolidated net loss for the nine months ended September 30, 2007 was $45.7 million, or $0.64 loss per diluted share, compared to consolidated net income for the nine months ended September 30, 2006 of $87.3 million, or $1.19 per diluted share. Balance Sheet Results As of September 30, 2007, the Company's consolidated cash, cash equivalents and short-term investments totaled $431.0 million, down from $464.8 million at June 30, 2007. Deferred revenues from continuing operations were $153.1 million at September 30, 2007, compared to $158.8 million at June 30, 2007. Stock Repurchase Plan As previously announced, Tekelec’s board of directors approved a stock repurchase program utilizing a Rule 10b5-1 plan that authorizes the company to repurchase up to $50 million worth of the company's common stock. The timing, duration, and actual number of shares repurchased will depend on a variety of factors, including price, regulatory requirements, and other market conditions. The Company may terminate the repurchase program at any time. As of October 25, 2007 the Company had repurchased approximately 2.5 million shares at a total cost of approximately $30.8 million. Conference Call Tekelec has scheduled a conference call for Tuesday, October 30, 2007 for management to discuss third quarter 2007 results. The Company also plans to provide on its web site immediately prior to the call both GAAP and Non-GAAP financial measures (including GAAP reconciliations) for the third quarter and to discuss during this call certain forward looking information concerning the Company’s prospects for 2007. "Live" Webcast and Replay Tekelec will host a live webcast of its conference call on Tuesday, October 30, 2007, at 8:00 a.m. EDT. To access the webcast, visit Tekelec's web site located at www.tekelec.com, enter the Investor Relations section and click on the webcast icon. A webcast replay will be available at approximately 10:45 a.m. on October 30th and for 90 days thereafter. Telephone Replay A telephone replay of the call will also be available for one week after the live webcast by calling either (800) 642-1687 or (706) 645-9291, and entering the conference ID #20617822 Non-GAAP Information Certain Non-GAAP financial measures are included in this press release, including a full Non-GAAP statement of operations. In the calculation of these measures, Tekelec generally excludes certain items such as amortization of acquired intangibles, restructuring and other charges, non-cash stock-based compensation charges, and unusual, non-recurring gains and charges. Tekelec believes that excluding such items provides investors and management with a representation of the Company's core operating performance and with information useful in assessing its prospects for the future and underlying trends in Tekelec’s operating expenditures and continuing operations. Management uses such Non-GAAP measures and the Non-GAAP statements of operations to (i) evaluate financial results, (ii) manage the Company’s operations, and (iii) establish operational goals. Further, each of the individual Non-GAAP measures within the Non-GAAP statement of operations and the Non-GAAP statement of operations itself are utilized by the Company’s management and board of directors to determine incentive compensation and evaluate key trends within the business. In addition, since the Company has historically reported Non-GAAP measures to the investment community, the Company believes the inclusion of this information provides consistency in our financial reporting. The attachments to this release provide a reconciliation of each of the Non-GAAP measures, including those included in the full Non-GAAP statement of operations, referred to in this release to the most directly comparable GAAP measure. The Non-GAAP financial measures are not meant to be considered a substitute for the corresponding GAAP financial measures. FORWARD-LOOKING STATEMENTS Certain statements made in this press release are forward looking, reflect the Company's current intent, belief or expectations and involve certain risks and uncertainties. The Company's actual future performance may not meet the Company's expectations. As discussed in the Company's Quarterly Reports on Form 10-Q for the 2007 first quarter (the "Q1 2007 Form 10-Q”), Quarterly Reports on Form 10-Q for the 2007 second quarter (the "Q2 2007 Form 10-Q”), its Annual Report on Form 10-K for 2006 (the "2006 Form 10-K”) and its other filings with the Securities and Exchange Commission (the "Commission”), the Company's future operating results are difficult to predict and subject to significant fluctuations. Factors that may cause future results to differ materially from the Company's current expectations, in addition to those identified in the Company’s 2006 Form 10-K, the Q1 2007 Form 10-Q, the Q2 2007 Form 10-Q and its other filings with the Commission, include, among others, the risk that the Company will not realize all the benefits of its restructuring activities; the risk that the sales cycle will lengthen as customers evaluate current technology and anticipate technology shifts; delays in new product introduction and execution related to new technology and slower than anticipated customer orders related to such products; the risk that continued service provider consolidation will require additional review of capital expenditures and lengthen their procurement cycle; and the uncertainties related to the timing of revenue recognition due to the increasing percentage of international and new customer orders in the Company’s backlog. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. About Tekelec Tekelec is a high-performance network applications company that is enabling the transition to IP Multimedia Subsystem (IMS) networks for service providers around the globe. With its experience at the intersection of network applications and session control, Tekelec creates highly efficient platforms for managing media and delivering network solutions. Corporate headquarters are in Morrisville, N.C., U.S.A. in the Research Triangle Park area, with research and development facilities and sales offices throughout the world. For more information, please visit www.tekelec.com. TEKELEC UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS       Three Months Ended Sept. 30, Nine Months Ended Sept. 30,         2007   2006   2007   2006         (Thousands, except per share data)   Revenues $ 97,797 $ 134,297 $ 316,574 $ 318,247 Cost of sales: Cost of goods sold 33,367 49,274 132,043 119,296 Amortization of purchased technology 587   586   1,766   1,760   Total cost of sales 33,954   49,860   133,809   121,056   Gross profit 63,843   84,437   182,765   197,191   Operating expenses: Research and development 22,762 20,838 69,033 57,940 Sales and marketing 16,662 18,706 53,636 55,643 General and administrative 12,354 16,180 40,148 46,299 Restructuring and other 2,291 (12 ) 4,802 2,070 Amortization of intangible assets 46   460   140   1,404   Total operating expenses 54,115   56,172   167,759   163,356   Income (loss) from operations 9,728 28,265 15,006 33,835 Other income (expense), net: Interest income 4,411 3,554 12,706 7,081 Interest expense (903 ) (1,000 ) (2,754 ) (2,781 ) Gain on sale of investments - - 223 1,793 Other income, net (1,144 ) (496 ) (2,988 ) (847 ) Total other income, net 2,364   2,058   7,187   5,246   Income from continuing operations before  provision for income taxes 12,092 30,323 22,193 39,081 Provision for income taxes 2,033   10,258   5,361   13,591   Income from continuing operations 10,059 20,065 16,832 25,490 Income (loss) on sale of discontinued operations, net of taxes 2,444   69,197   (62,575 ) 61,813   Net Income (loss) $ 12,503   $ 89,262   $ (45,743 ) $ 87,303     Earnings per share from continuing operations: Basic $ 0.14 $ 0.30 $ 0.24 $ 0.38 Diluted 0.14 0.28 0.24 0.37   Earnings (loss) per share from discontinued operations: Basic $ 0.03 $ 1.03 $ (0.90 ) $ 0.92 Diluted 0.03 0.93 (0.88 ) 0.83   Earnings (loss) per share: Basic $ 0.18 $ 1.33 $ (0.65 ) $ 1.30 Diluted 0.17 1.21 (0.64 ) 1.19   Weighted average number of shares outstanding-continuing operations: Basic 70,830 67,283 69,894 67,016 Diluted 77,829 74,414 70,956 74,524   Weighted average number of shares outstanding: Basic 70,830 67,283 69,894 67,016 Diluted 77,829 74,414 70,956 74,524 TEKELEC UNAUDITED NON-GAAP(1) STATEMENTS OF OPERATIONS FOR CONTINUING OPERATIONS       Three Months Ended Sept. 30, Nine Months Ended Sept. 30,         2007   2006 2007   2006         (Thousands, except per share data)   Revenues $ 97,797 $ 134,297 $ 316,574 $ 318,247 Cost of sales: Cost of goods sold 33,002 48,684 125,755 117,413 Gross profit 64,795 85,613 190,819 200,834 Research and development 22,272 19,628 66,826 54,119 Sales and marketing 15,803 17,433 50,967 51,611 General and administrative 10,708 14,104 33,514 40,140 Total operating expenses 48,783 51,165 151,307 145,870 Income from operations 16,012 34,448 39,512 54,964 Interest and other income, net 2,364 2,058 7,187 3,453 Income from continuing operations before provision for income taxes 18,376 36,506 46,699 58,417 Provision for income taxes (2) 4,615 13,507 13,320 21,613 Net income from continuing operations $ 13,761 $ 22,999 $ 33,379 $ 36,804   Earnings per share: Basic $ 0.19 $ 0.34 $ 0.48 $ 0.55 Diluted 0.18 0.32 0.45 0.52   Earnings per share weighted average number of shares outstanding: Basic 70,830 67,283 69,894 67,016 Diluted 77,829 74,414 77,317 74,524   Notes to Unaudited Non-GAAP Statements of Operations for Continuing Operations:   (1) Please refer to the attached reconciliations of the GAAP Statements of Operations to the above Non-GAAP Statements of Operations.   (2) The above Non-GAAP Statements of Operations assume effective income tax rates of 25% and 37% for the three months ended September 30, 2007 and 2006, respectively. The above Non-GAAP Statements of Operations assume effective income tax rates of 29% and 37% for the nine months ended September 30, 2007 and 2006, respectively. TEKELEC UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS     Sept. 30,   Dec. 31, 2007 2006 (Thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 52,428 $ 45,329 Short-term investments, at fair value 378,585 379,045   Total cash, cash equivalents and short-term investments 431,013 424,374 Accounts receivable, net 109,826 133,050 Inventories 22,000 25,739 Income taxes receivable 25,402 14,665 Deferred income taxes 20,632 27,671 Deferred costs and prepaid commissions 49,691 55,110 Prepaid expenses and other current assets 11,801 26,133 Receivable from GenBand 408 - Assets of discontinued operations - 118,341   Total current assets 670,773 825,083 Property and equipment, net 32,674 36,398 Investments in privately-held companies 18,553 7,322 Deferred income taxes, net 81,819 51,496 Other assets 1,275 2,539 Goodwill 26,876 26,876 Intangible assets, net 17,644 19,543   Total assets $ 849,614 $ 969,257     LIABILITIES AND SHAREHOLDERS’ EQUITY   Current liabilities: Trade accounts payable $ 19,814 $ 27,316 Accrued expenses 44,109 55,665 Accrued payroll and related expenses 20,317 28,733 Current portion of deferred revenues 142,262 189,994 Convertible debt 125,000 - Liabilities associated with SSG 6,852 - Liabilities of discontinued operations - 40,991   Total current liabilities 358,354 342,699   Deferred income taxes 1,331 1,481 Long-term portion of deferred revenues 10,850 5,836 Long-term convertible debt - 125,000 Other long-term liabilities 6,046 -   Total liabilities 376,581 475,016     Commitments and Contingencies   Shareholders’ equity: Common stock, without par value, 200,000,000 shares authorized; 69,822,574 and 68,728,986 shares issued and outstanding, respectively 345,570 322,620 Retained earnings 125,979 171,722 Accumulated other comprehensive income (loss) 1,484 (101 ) Total shareholders’ equity 473,033 494,241   Total liabilities and shareholders’ equity $ 849,614 $ 969,257   TEKELEC UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     Nine Months ended Sept. 30, 2007 2006 (Thousands) Cash flows from operating activities: Net income (loss) $ (45,743 ) $ 87,303 Adjustments to reconcile net income (loss) to net cash provided by operating activities:   Income (loss) from discontinued operations 62,575 (61,813 ) Gain on sale of investments (223 ) (1,793 ) Provision for (recoveries of) doubtful accounts and returns (65 ) 457 Inventory write downs 8,626 4,092 Depreciation 11,524 8,981 Amortization of intangibles 1,899 3,166 Amortization, other 1,325 3,016 Deferred income taxes 2,647 (9,069 ) Stock-based compensation 12,086 15,343 Excess tax benefits from stock-based compensation (4,172 ) (448 ) Changes in operating assets and liabilities, net of business disposal: Accounts receivable 22,755 (22,181 ) Inventories (3,224 ) (10,187 ) Deferred costs 5,419 3,224 Prepaid expenses and other current assets 14,309 (6,154 ) Trade accounts payable (7,243 ) 5,211 Income taxes receivable 9,127 (21,953 ) Accrued expenses (13,193 ) 161 Accrued payroll and related expenses (9,241 ) (3,004 ) Deferred revenues (42,450 ) 17,204   Total adjustments 72,481   (75,747 ) Net cash provided by operating activities - continuing operations 26,738 11,556 Net cash used in operating activities - discontinued operations (18,565 ) (2,040 ) Net cash provided by operating activities 8,173   9,516     Cash flows from investing activities: Proceeds from sales and maturities of investments 487,399 656,743 Purchases of investments (486,912 ) (862,441 ) Purchases of property and equipment (13,916 ) (14,137 ) Change in other assets 175   1,455   Net cash used in investing activities - continuing operations (13,254 ) (218,380 ) Net cash used in (provided by) investing activities - discontinued operations (3,241 ) 191,240   Net cash used in investing activities (16,495 ) (27,140 )   Cash flows from financing activities: Payments on notes payable - (96 ) Payments for repurchase of common stock (19,699 ) - Proceeds from issuance of common stock 29,421 10,781 Excess tax benefits from stock-based compensation 4,172   448   Net cash provided by financing activities 13,894   11,133     Effect of exchange rate changes on cash 1,527   249   Net change in cash and cash equivalents 7,099 (6,242 ) Cash and cash equivalents, beginning of period 45,329   52,069   Cash and cash equivalents, end of period 52,428 45,827 Less cash and cash equivalents of discontinued operations -   645   Cash and cash equivalents of continuing operations at end of period $ 52,428   $ 45,182   TEKELEC UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME           Three Months Ended Sept. 30, 2007   (Thousands, except per share data)     GAAP Continuing Operations Adjustments Non-GAAP Continuing Operations   Revenues $ 97,797 $ - $ 97,797 Cost of sales: Cost of goods sold 33,367 (365 ) (1 ) 33,002 Amortization of purchased technology     587     (587 ) (2 )   - Total cost of sales     33,954     (952 )     33,002 Gross profit     63,843     952       64,795 Operating Expenses: Research and development 22,762 (490 ) (1 ) 22,272 Sales and marketing 16,662 (859 ) (1 ) 15,803 General and administrative 12,354 (1,646 ) (1 ) 10,708 Restructuring and other 2,291 (2,291 ) (3 ) - Amortization of intangible assets     46     (46 ) (2 )   - Total operating expenses     54,115     (5,332 )     48,783 Income from operations     9,728     6,284       16,012 Interest and other income, net     2,364     -       2,364 Income from continuing operations before provision for income taxes     12,092     6,284       18,376 Provision for income taxes     2,033     2,582   (4 )   4,615 Income from continuing operations     10,059     3,702       13,761 Loss from discontinued operations, net of taxes     2,444     (2,444 ) (5 )   - Net income   $ 12,503   $ 1,258     $ 13,761   Earnings per share from continuing operations: Basic $ 0.14 $ 0.19 Diluted (6) 0.14 0.18   Earnings per share: Basic $ 0.18 $ 0.19 Diluted (6) 0.17 0.18     Weighted average number of shares outstanding: Basic 70,830 70,830 Diluted (6) 77,829 77,829   (1) The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock appreciation rights granted under our equity incentive plans and stock purchase rights granted under our employee stock purchase plan.   (2) The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.   (3) The adjustment represents the eliminations of the costs associated with our restructuring activities.   (4) The adjustment represents the income tax effect of footnotes (1), (2) and (3) in order to reflect our Non-GAAP effective tax rate of 25%.   (5) The adjustment represents the elimination of the results of our discontinued operations.   (6) For the three months ended September 30, 2007, the calculations of diluted earnings per share include a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the "if-converted" method. TEKELEC UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME           Nine Months Ended Sept. 30, 2007   (Thousands, except per share data)     GAAP Continuing Operations Adjustments Non-GAAP Continuing Operations   Revenues $ 316,574 $ - $ 316,574 Cost of sales: Cost of goods sold 132,043 (1,288 ) (1 ) 125,755 (5,000 ) (2 ) Amortization of purchased technology     1,766       (1,766 ) (3 )   - Total cost of sales     133,809       (8,054 )     125,755 Gross profit     182,765       8,054       190,819 Operating Expenses: Research and development 69,033 (2,207 ) (1 ) 66,826 Sales and marketing 53,636 (2,669 ) (1 ) 50,967 General and administrative 40,148 (5,922 ) (1 ) 33,514 (712 ) (4 ) Restructuring and other 4,802 (4,802 ) (5 ) - Amortization of intangible assets     140       (140 ) (3 )   - Total operating expenses     167,759       (16,452 )     151,307 Income from operations     15,006       24,506       39,512 Interest and other income, net     7,187       -       7,187 Income from continuing operations before provision for income taxes     22,193       24,506       46,699 Provision for income taxes     5,361       7,959   (6 )   13,320 Income from continuing operations     16,832       16,547       33,379 Loss from discontinued operations, net of taxes     (62,575 )     62,575   (7 )   - Net income (loss)   $ (45,743 )   $ 79,122     $ 33,379   Earnings per share from continuing operations: Basic $ 0.24 $ 0.48 Diluted (8) 0.24 0.45   Earnings (loss) per share: Basic $ (0.65 ) $ 0.48 Diluted (8) (0.64 ) 0.45     Weighted average number of shares outstanding: Basic 69,894 69,894 Diluted (8) 70,956 77,317   (1) The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock appreciation rights granted under our equity incentive plans and stock purchase rights granted under our employee stock purchase plan.   (2) The adjustments represent the charge associated with product credits issued to Bouygues Telecom, S.A. as part of our settlement of the Bouygues litigation.   (3) The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.   (4) The adjustment represents legal expenses incurred to settle the Bouygues litigation.   (5) This adjustment represents the elimination of the costs associated with our restructuring activities.   (6) The adjustment represents the income tax effect of footnotes (1), (2), (3), (4) and (5) in order to reflect our Non-GAAP effective tax rate of 29%.   (7) The adjustment represents the elimination of the results of our discontinued operations.   (8) For the nine months ended September 30, 2007, the calculations of diluted earnings per share related to GAAP Continuing Operations exclude a potential add-back to net income of $1,743,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the "if-converted" method as the effect of including such amounts is anti-dilutive. The calculation of diluted earnings per share related to Non-GAAP Continuing Operations includes the add-back to net income of $1,743,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the "if-converted" method. TEKELEC UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME           Three Months Ended Sept. 30, 2006   (Thousands, except per share data)     GAAP Continuing Operations Adjustments Non-GAAP Continuing Operations   Revenues $ 134,297 $ - $ 134,297 Cost of sales: Cost of goods sold 49,274 (590 ) (1 ) 48,684 Amortization of purchased technology     586       (586 ) (2 )   - Total cost of sales     49,860       (1,176 )     48,684 Gross profit     84,437       1,176       85,613 Operating Expenses: Research and development 20,838 (1,210 ) (1 ) 19,628 Sales and marketing 18,706 (1,273 ) (1 ) 17,433 General and administrative 16,180 (2,076 ) (1 ) 14,104 Restructuring and other (12 ) 12 (3 ) - Amortization of intangible assets     460       (460 ) (2 )   - Total operating expenses     56,172       (5,007 )     51,165 Income from operations     28,265       6,183       34,448 Interest and other income, net     2,058       -       2,058 Income from continuing  operations before provision for income taxes     30,323       6,183       36,506 Provision for income taxes     10,258       3,249   (4 )   13,507 Income from continuing operations     20,065       2,934       22,999 Income from discontinued operations, net of taxes     69,197       (69,197 ) (5 )   - Net income   $ 89,262     $ (66,263 )   $ 22,999   Earnings per share from continuing operations: Basic $ 0.30 $ 0.34 Diluted (6) 0.28 0.32   Earnings per share: Basic $ 1.33 $ 0.34 Diluted (6) 1.21 0.32     Weighted average number of shares outstanding: Basic 67,283 67,283 Diluted (6) 74,414 74,414   (1) The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock appreciation rights granted under our equity incentive plans and stock purchase rights granted under our employee stock purchase plan.   (2) The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.   (3) The adjustment represents changes in estimates relating to our 2006 Restructuring.   (4) The adjustment represents the income tax effect of footnotes (1), (2) and (3) in order to reflect our non-GAAP effective tax rate of 37%.   (5) The adjustment represents the elimination of the results of our discontinued operations.   (6) For the three months ended September 30, 2006, the calculations of diluted earnings per share include the potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the "if-converted" method. TEKELEC UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME               Nine Months Ended Sept. 30, 2006     (Thousands, except per share data)     GAAP Continuing Operations Adjustments Non-GAAP Continuing Operations   Revenues $ 318,247 $ - $ 318,247 Cost of sales: Cost of goods sold 119,296 (1,883 ) (1 ) 117,413 Amortization of purchased technology     1,760     (1,760 ) (2 )   - Total cost of sales     121,056     (3,643 )     117,413 Gross profit     197,191     3,643       200,834 Operating Expenses: Research and development 57,940 (3,821 ) (1 ) 54,119 Sales and marketing 55,643 (4,032 ) (1 ) 51,611 General and administrative 46,299 (5,607 ) (1 ) 40,140 (342 ) (3 ) (210 ) (4 ) Restructuring and other 2,070 (2,070 ) (5 ) - Amortization of intangible assets     1,404     (1,404 ) (2 )   - Total operating expenses     163,356     (17,486 )     145,870 Income from operations     33,835     21,129       54,964 Interest and other income, net     5,246     (1,793 ) (6 )   3,453 Income from continuing operations before provision for income taxes     39,081     19,336       58,417 Provision for income taxes     13,591     8,022   (7 )   21,613 Income from continuing operations     25,490     11,314       36,804 Income from discontinued operations, net of taxes     61,813     (61,813 ) (8 )   - Net Income   $ 87,303   $ (50,499 )   $ 36,804   Earnings per share from continuing operations: Basic $ 0.38 $ 0.55 Diluted (9) 0.37 0.52   Earnings per share: Basic $ 1.30 $ 0.55 Diluted (9) 1.19 0.52     Weighted average number of shares outstanding: Basic 67,016 67,016 Diluted (9) 74,524 74,524   (1) The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock appreciation rights granted under our equity incentive plans and stock purchase rights granted under our employee stock purchase plan.   (2) The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.   (3) The adjustment represents legal expenses incurred to settle the IEX vs. Blue Pumpkin litigation.   (4) The adjustment represents costs associated with the restatement of our consolidated financial statements.   (5) The adjustment represents restructuring and other costs related to our 2006 restructuring and changes in estimates relating to the restructuring of our manufacturing and corporate headquarters relocations in 2005 and 2004.   (6) The adjustment represents the gain recognized related to our receipt of shares of Alcatel-Lucent upon release from escrow.   (7) The adjustment represents the income tax effect of footnotes (1), (2), (3), (4),(5) and (6) in order to reflect our Non-GAAP effective tax rate of 37%.   (8) The adjustment represents the elimination of the results our discontinued operations.   (9) For the nine months ended September 30, 2006, the calculations of diluted earnings per share include the potential add-back to net income of $1,743,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the "if-converted" method.