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

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

Commission file number 0-15135

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.

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.

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.

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.

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

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

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

     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.”

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

     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

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

     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.

     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

     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.

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		$	—			$	—

		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		$	—			$	—

     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.

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	)

     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.

     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

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.

     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

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.

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.

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.

     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.

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,

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.

     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	%