FORM 10-Q

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ERjovX8e4eEH+Ve3fSf2hz7hYTZ8rnFjvCTWezmQgDFQTl7rIUMVGsav6ojeKDp6 mhYO/ksvoiGaf3hCu3GzuA== 0001193125-03-078963.txt : 20031113 0001193125-03-078963.hdr.sgml : 20031113 20031112215319 ACCESSION NUMBER: 0001193125-03-078963 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELLIUM INC CENTRAL INDEX KEY: 0001101680 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 223509099 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-32743 FILM NUMBER: 03995689 BUSINESS ADDRESS: STREET 1: 2 CRESCENT PLACE CITY: OCEANPORT STATE: NJ ZIP: 07757 10-Q 1 d10q.htm FORM 10-Q FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003.

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

FOR THE TRANSITION PERIOD FROM TO .

Commission File Number: 000-32743

TELLIUM, INC.

(Exact name of Registrant as specified in its charter)

Delaware

22-3509099

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2 Crescent Place

Oceanport, New Jersey 07757-0901

(Address of Principal Executive Offices) (Zip Code)

(732) 923-4100

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No ¨

As of September 30, 2003, there were 116,901,954 shares outstanding of the registrant’s common stock, par value $0.001 per share.

TELLIUM, INC.

INDEX

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	3

	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and September 30, 2002 and for the Nine Months Ended September 30, 2003 and September 30, 2002	4

	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2003	5

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and September 30, 2002	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 2.	Changes in Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Submission of Matters to a Vote of Security Holders	29

Item 5.	Other Information	29

Item 6.	Exhibits and Reports on Form 8-K	29

Signatures		31

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited).

TELLIUM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	December 31, 2002			September 30, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	171,019,242		$	140,914,409
Accounts receivable		12,938			15,133,392
Inventories		13,744,549			9,193,943
Prepaid expenses and other current assets		2,289,880			2,643,899

Total current assets		187,066,609			167,885,643
Property and equipment—net		40,533,504			24,368,026
Other assets		753,657			748,773

Total assets	$	228,353,770		$	193,002,442

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$	2,977,881		$	5,585,709
Accrued expenses and other current liabilities		21,922,749			13,158,363
Current portion of notes payable		—			1,732,094
Current portion of capital lease obligations		72,687			62,689
Bank line of credit		8,000,000			8,000,000

Total current liabilities		32,973,317			28,538,855
Long-term portion of notes payable		540,000			—
Long term portion of capital lease obligations		51,827			7,521
Other long-term liabilities		376,256			317,074

Total liabilities		33,941,400			28,863,450

Commitments and contingencies
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value, 25,000,000 shares authorized as of December 31, 2002 and September 30, 2003, 0 issued and outstanding as of December 31, 2002 and September 30, 2003		—			—
Common stock, $0.001 par value, 900,000,000 shares authorized, 116,494,448 and 124,310,249 issued as of December 31, 2002 and September 30, 2003, and 114,044,447 and 116,901,954 legally outstanding as of December 31, 2002 and September 30, 2003		116,495			124,311
Additional paid-in capital		1,008,592,465			1,026,586,700
Accumulated deficit		(779,931,974	)		(844,434,195	)
Deferred employee compensation		(20,424,253	)		(4,599,161	)
Common stock in treasury, at cost, 17,073,851 and 16,301,351 shares as of December 31, 2002 and September 30, 2003		(13,940,363	)		(13,538,663	)

Total stockholders’ equity		194,412,370			164,138,992

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	228,353,770		$	193,002,442

See Notes to Condensed Consolidated Financial Statements.

TELLIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2003			2002			2003
REVENUE	$	1,946,874		$	4,913,104		$	59,080,882		$	25,168,269
Non-cash charges related to equity issuances		495,702			—			36,651,557			—

REVENUE, net of non-cash charges related to equity issuances		1,451,172			4,913,104			22,429,325			25,168,269
COST OF REVENUE		14,238,292			4,840,356			71,335,808			20,049,259

Gross profit		(12,787,120	)		72,748			(48,906,483	)		5,119,010

OPERATING EXPENSES:
Research and development, excluding stock-based compensation		7,801,870			5,921,240			35,568,853			17,365,309
Sales and marketing, excluding stock-based compensation		3,341,152			1,759,574			15,044,517			6,111,038
General and administrative, excluding stock-based compensation		7,511,920			5,972,393			23,374,729			17,706,051
Amortization of intangible assets and goodwill		136,467			—			6,931,956			—
Stock-based compensation expense		83,138,716			3,609,054			106,151,071			25,232,580
Impairment of goodwill		—			—			58,433,967			—
Restructuring and impairment of long-lived assets		—			(1,865,000	)		64,535,388			5,527,310

Total operating expenses		101,930,125			15,397,261			310,040,481			71,942,288

OPERATING LOSS		(114,717,245	)		(15,324,513	)		(358,946,964	)		(66,823,278	)

OTHER INCOME (EXPENSE):
Other income (expense) – net		(3,363	)		9,842			(7,449	)		1,036,342
Interest income		858,303			415,120			3,330,447			1,475,444
Interest expense		(130,219	)		(24,029	)		(637,262	)		(190,729	)

Total other income		724,721			400,933			2,685,736			2,321,057

NET LOSS	$	(113,992,524	)	$	(14,923,580	)	$	(356,261,228	)	$	(64,502,221	)

BASIC AND DILUTED LOSS PER SHARE	$	(1.15	)	$	(0.14	)	$	(3.41	)	$	(0.64	)

BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING		99,294,044			103,050,272			104,539,391			100,803,587

STOCK-BASED COMPENSATION EXPENSE
Cost of revenue	$	7,154,531		$	675,857		$	10,089,318		$	5,254,638
Research and development		48,628,985			734,892			63,679,884			4,719,346
Sales and marketing		15,854,233			1,270,019			21,132,167			9,734,285
General and administrative		18,655,498			1,604,143			21,339,020			10,778,949
Restructuring		—			—			1,445,696			—

	$	90,293,247		$	4,284,911		$	117,686,085		$	30,487,218

See Notes to Condensed Consolidated Financial Statements.

TELLIUM, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

	Common Stock			Treasury Stock						Additional Paid- in Capital
	Shares	Amount		Shares			Amount			Additional Paid- in Capital
JANUARY 1, 2003	116,494,448	$	116,495		17,073,851	(1)	$	(13,940,363	)	$	1,008,592,465
Issuance of common stock	1,719,333		1,719		—			—			242,978
Exercise of stock options and warrants	6,096,468		6,097		—			—			3,490,831
Forfeiture of unvested stock options	—		—		—			—			(486,711	)
Deferred compensation	—		—		—			—			14,370,677
Amortization of deferred compensation	—		—		—			—			—
Warrant and option cost	—		—		—			—			376,460
Repurchase of restricted stock	—		—		(772,500	)		401,700			—
Net loss	—		—		—			—			—

SEPTEMBER 30, 2003	124,310,249	$	124,311		16,301,351		$	(13,538,663	)	$	1,026,586,700

				Accumulated Deficit			Deferred Compensation			Stockholders’ Equity
JANUARY 1, 2003				$	(779,931,974	)	$	(20,424,253	)	$	194,412,370
Issuance of common stock					—			—			244,697
Exercise of stock options and warrants					—			—			3,496,928
Forfeiture of unvested stock options					—			471,583			(15,128	)
Deferred compensation					—			(14,370,677	)		—
Amortization of deferred compensation					—			29,724,186			29,724,186
Warrant and option cost					—			—			376,460
Repurchase of restricted stock					—			—			401,700
Net loss					(64,502,221	)		—			(64,502,221	)

SEPTEMBER 30, 2003				$	(844,434,195	)	$	(4,599,161	)	$	164,138,992

(1)	Of these shares, 8,943,056 are legally outstanding shares of common stock, which have been treated as treasury stock for financial statement purposes.

See Notes to Condensed Consolidated Financial Statements.

TELLIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2002			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(356,261,228	)	$	(64,502,221	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		23,783,063			14,567,348
Write down of impaired assets		157,983,967			656,156
Provision for doubtful accounts		690,029			—
Amortization of deferred compensation expense		89,469,783			29,709,058
Amortization of deferred warrant cost		7,851,557			—
Warrant and option cost related to third parties		27,734,572			778,160
Changes in assets and liabilities:
Decrease in due from stockholder		802,623			—
Decrease (increase) in accounts receivable		23,541,419			(15,120,454	)
Decrease in inventories		20,569,605			5,559,654
Decrease (increase) in prepaid expenses and other current assets		203,083			(354,019	)
Decrease in other assets		521,055			4,884
Increase (decrease) in accounts payable		(7,599,518	)		2,607,828
Decrease in accrued expenses and other current liabilities		(14,176,224	)		(8,764,585	)
Increase (decrease) in other long-term liabilities		112,024			(59,182	)

Net cash used in operating activities		(24,774,190	)		(34,917,173	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(5,658,406	)		(67,075	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and line of credit borrowings		(515,859	)		(740,791	)
Principal payments on capital lease obligations		(76,418	)		(54,304	)
Proceeds from short-term borrowings		—			1,932,885
Repurchase of warrants		(5,500,000	)		—
Issuance of common stock		1,045,227			3,741,625

Net cash provided by (used in) financing activities		(5,047,050	)		4,879,415

NET DECREASE IN CASH AND CASH EQUIVALENTS		(35,479,646	)		(30,104,833	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		218,708,074			171,019,242

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	183,228,428		$	140,914,409

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	637,262		$	190,729

See Notes to Condensed Consolidated Financial Statements.

TELLIUM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

The continued deteriorating conditions in the telecommunications industry has hindered our ability to secure additional customers and has caused current customers’ purchases to decline. As a result, on January 9, 2003, we announced a business restructuring plan designed to decrease our operating expenses. During the first quarter of 2003, we recorded a restructuring charge of approximately $6.7 million associated with a workforce reduction of approximately 130 employees. These charges included approximately $3.2 million for severance and extended benefits and $3.5 million for the consolidation of excess facilities, resulting in non-cancelable lease costs.

We also completed an assessment of the current carrying value of fixed assets on our balance sheet during the first quarter of 2003. Our analysis resulted in a write off of approximately $0.7 million related to these assets, which were idled as a result of our restructuring and for which management has a committed plan of disposal.

On July 28, 2003, Tellium and Zhone Technologies, Inc. (“Zhone”) announced that they had entered into a definitive merger agreement.

Under the terms of the agreement, the security holders of Zhone would receive 60% of the combined company’s outstanding fully-converted shares at closing and the security holders of Tellium would continue to hold the remaining 40% of the combined company’s outstanding fully-converted shares as of closing. The exact number of shares Tellium will issue will depend on Tellium’s fully-converted shares outstanding immediately prior to closing. The proposed stock-for-stock transaction is intended to qualify as tax-free to the stockholders of Tellium and Zhone.

The transaction is subject to the approval of each company’s security holders, regulatory review, as well as other customary closing conditions. The transaction is expected to close on or about November 13, 2003 or as soon thereafter as is practicable.

The accompanying unaudited condensed consolidated financial statements included herein for Tellium have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, the condensed consolidated financial statements included in this report reflect all normal recurring adjustments which we consider necessary for the fair presentation of the results of operations for the interim periods covered and of our financial position at the date of the interim balance sheet. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results to be expected for the entire year. These statements should be read in conjunction with the financial statements and related footnotes for the year ended December 31, 2002, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Equity-Based Compensation—Prior to 2003, we accounted for stock-based employee compensation arrangements under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25) and related interpretations. Effective January 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” We selected the prospective method of adoption described in SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All other old grants will continue to be accounted for under the intrinsic value provision of APB No. 25. We recorded approximately $26.2 million of stock-based compensation for new grants accounted for under SFAS No. 123. The remaining $4.6 million of stock-based compensation recorded in the nine months ended September 30, 2003 related to options granted prior to January 1, 2003.

Had we elected to recognize compensation expense for stock options according to SFAS No. 123 since our inception, based on the fair value at the grant dates of the awards, net loss and net loss per share would have been as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2003			2002			2003
Net loss, as reported	$	(113,992,524	)	$	(14,923,580	)	$	(356,261,231	)	$	(64,502,221	)
Add: Stock-based employee compensation expense included in reported net income		62,488,290			443,133			89,489,989			3,855,648
Deduct: Stock-based employee compensation determined under fair value methods for all awards granted since May 8, 1997 (inception) through December 31, 2002		(3,246,104	)		(900,228	)		(44,819,684	)		(4,575,768	)

Pro forma net loss	$	(54,750,338	)	$	(15,380,675	)	$	(311,590,926	)	$	(65,222,341	)

Net loss per basic and diluted share:
As reported	$	(1.15	)	$	(0.14	)	$	(3.41	)	$	(0.64	)
Pro forma		(0.55	)		(0.15	)		(2.98	)		(0.65	)

The weighted average fair value of our stock options was calculated using the Black-Scholes Model with the following weighted average assumptions used for grants: no dividend yield; risk free interest rates between 1.19% and of 6.25%; expected volatility of 0% (80% for grants issued during and after September 2000); and expected lives of one to four years. The weighted average fair value of options granted during the three months ended September 30, 2002 and 2003 and the nine months ended September 30, 2002 and 2003 was $0.50, $0.52, $1.42 and $0.20 per share, respectively.

Net Loss Per Share—Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Weighted average common shares outstanding for purposes of computing basic net loss per share excludes the unvested portion of restricted stock. For the three months and nine months ended September 30, 2003, 9,908,495 vested shares of restricted stock were treated as treasury stock for the calculation of weighted average common shares outstanding as a result of the accounting for the Management Incentive Compensation Program. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potentially dilutive common shares outstanding during the period, if dilutive. Potentially dilutive common shares are composed of the incremental common shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants, using the treasury stock method. Due to our net loss, the effect of potentially dilutive common shares is anti-dilutive; therefore, basic and diluted net loss per share are the same. For the three months ended September 30, 2002 and 2003 and the nine months ended September 30, 2002 and 2003, potentially dilutive shares of 107,533, 3,450,402, 2,736,484 and 2,318,448, respectively, were excluded from the diluted weighted average shares outstanding calculation.

Recent Financial Accounting Pronouncements—In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. Management does not expect that the adoption of this standard will have a material effect on Tellium’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Management does not expect that the adoption of this standard will have a material effect on Tellium’s financial position or results of operations.

3.	RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS

On June 24, 2002, in response to deteriorating conditions in the telecommunications industry, we announced a business restructuring plan designed to decrease our operating expenses. We recorded a restructuring charge of approximately $12.8 million associated with a workforce reduction and the consolidation of excess facilities, resulting in non-cancelable lease costs and write down of certain leasehold improvements.

Continued deteriorating conditions in the telecommunications industry have contributed to our inability to secure additional customers and caused purchases by current customers to decline. On January 9, 2003, in response to these conditions, we announced a business restructuring plan designed to decrease our operating expenses. We recorded a restructuring charge of approximately $6.7 million associated with a workforce reduction and the consolidation of excess facilities, resulting in non-cancelable lease costs.

During the first quarter, we recorded a charge of approximately $3.5 million related to the consolidation of facilities. We ceased use of our West Long Branch, NJ facility during the quarter ended March 31, 2003. The remaining facilities balance of approximately $6.0 million as of September 30, 2003 is related to the net lease expense of non-cancelable leases, which will be paid over the respective lease terms through the year 2007.

The following displays the activity and balances of the restructuring reserve account for the nine months ended September 30, 2003:

	Workforce Reduction			Facility Consolidation			Total
Initial reserve recorded during 2002	$	6,335,388		$	6,500,000		$	12,835,388
Non-cash reduction		(1,445,696	)		(2,250,000	)		(3,695,696	)
Cash reductions		(4,046,864	)		(386,172	)		(4,433,036	)

Restructuring liability as of December 31, 2002		842,828			3,863,828			4,706,656

Additional reserve recorded		3,163,802			3,572,352			6,736,154
Cash reductions		(3,893,711	)		(1,422,073	)		(5,315,784	)
Reversal—See Note 10		—			(1,865,000	)		—

Restructuring liability as of September 30, 2003	$	112,919		$	4,149,107		$	4,262,026

In addition, during the first quarter of 2003, we wrote down net property, plant, and equipment by approximately $0.7 million. This charge covers assets idled by restructuring for which we have a committed disposal plan.

4.	INVENTORIES

Inventories consist of the following:

	December 31, 2002		September 30, 2003
Raw materials	$	4,925,646	$	2,830,094
Work-in-process		5,758,245		982,928
Finished goods		3,060,658		5,380,921

	$	13,744,549	$	9,193,943

5.	PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	December 31, 2002		September 30, 2003
Equipment	$	55,148,597		52,633,594
Furniture and fixtures		6,275,526		6,277,574
Acquired software		9,931,912		10,039,358
Leasehold improvements		7,140,801		7,143,822
Construction in progress		79,458		—

		78,576,294		76,094,348
Less accumulated depreciation and amortization		38,042,790		51,726,322

Property, plant and equipment—Net	$	40,533,504	$	24,368,026


6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

	December 31, 2002		September 30, 2003
Accrued professional fees	$	2,623,266	$	2,015,920
Accrued compensation and related expenses		8,896,443		2,851,107
Deferred revenue		660,609		979,728
Warranty reserve		3,190,000		1,966,000
Restructuring reserve		4,706,656		4,262,026
Other		1,845,775		1,083,582

	$	21,922,749	$	13,158,363


Changes in accrued product warranty expenses during the nine months ended September 30, 2003 were as follows:

			2003
Balance as of January 1			$	3,190,000
Add: Product warranties issued during the year				1,215,000
Deduct: Reductions in product liability for payments made				(2,439,000	)

Balance as of September 30			$	1,966,000

7.	STOCKHOLDERS’ EQUITY

Changes to Management Incentive Compensation Program

On various dates between April and June 2000, we loaned funds to members of our management team on a full-recourse basis to enable them to exercise previously granted stock options with average exercise prices of $2.14 per share. Individuals receiving loans included executive officers, vice presidents, and other employees. Upon exercise of the stock options, each of these individuals received restricted stock that vested over four years, and pledged the restricted shares to secure payment of their loans to us, which generally become due in full in April through June 2005. Our stock price has fallen substantially below $2.14 per share, causing these loans to be under-collateralized while the individuals remain personally liable for payment on the loans when they come due.

This circumstance posed personal financial problems for the individuals involved and undercut the intended incentivizing effect of the restricted stock program. In an effort to restructure our management incentive arrangements, in July 2002, our board of directors authorized changes to this restricted stock and management loan program for the 12 participating individuals (then consisting of three executive officers—Messrs. Carr, Bala, and Losch, five vice presidents, three other employees, and one former vice president). These changes included our repurchase of the shares of restricted stock and related reduction of the loans, modifications of the terms of the remaining loans and establishment of new incentive compensation arrangements which would include a bonus program applicable in the event of a change of control and providing for bonuses in an amount sufficient to repay, on an after-tax basis, the then remaining balance of the loans.

We attempted to implement these board-approved changes, and in late July 2002 repurchase agreements and other implementing documents were signed. However, certain problems arose in the implementation of the changes and the board subsequently determined that the documented changes did not reflect its intentions and the scope of what it had authorized and that we should not go forward with changes in the restricted stock and loan program at that time. Accordingly, the board determined that it should not ratify and approve the implementing documents that had been executed and that the documents and the transactions provided for by them were void and unenforceable against us. The board also determined to continue to consider changes to our management incentive compensation arrangements, including the management loan arrangements. As previously disclosed, Tellium was not aware of what position the executives who signed implementing agreements in July 2002 would take with respect to the board’s action to void those agreements and was, therefore, unable to assess at that time whether those developments would have a material adverse effect on us.

During January 2003, our board of directors approved a set of changes to our management compensation arrangements, including changes in the restricted stock and loan program for the individuals involved in that program, other than with respect to our executive officers. The board concluded that the existing arrangements, which were based largely on the restricted stock and related loans, were not providing proper incentives to our management. The changes approved by the board affected 15 continuing and former non-executive senior managers, 12 of whom owed us approximately $13.6 million, including interest, secured by approximately 5.8 million shares of restricted stock. Based on the actions described above, despite the fact that the loans remained legally outstanding, accounting standards required that these notes, originally recourse notes, be treated as non-recourse in our financial statements.

As of May 13, 2003, all of the continuing and former non-executive senior managers participating in the program had executed agreements incorporating the

board-approved changes to the program, including a general release and waiver of all claims against us relating to his or her employment, including without limitation, any claims relating to the agreements signed by these individuals in July 2002. In addition, we have taken the following actions in accordance with the terms of these agreements:

•

We repurchased approximately 5.0 million shares of restricted stock held by eight non-executive senior managers and one former non-executive senior manager (all of whom have outstanding loans) and their affiliates. We paid $0.63 per share for the vested shares (the average of the daily closing prices of our common stock during the month prior to the approval of the changes by the board, December 2002) and approximately $2.14 per share, plus accrued interest, for the unvested shares (the approximate contractual price at which we had the right to repurchase unvested shares under our original agreements with these individuals). We applied all proceeds from our repurchases of restricted stock, of approximately $5.6 million, toward the respective individual’s outstanding loan.

•

We forgave the remaining loan balances of these eight non-executive senior managers and one former non-executive senior manager and made a payment in May 2003 of cash bonuses in the approximate aggregate amount of $5.2 million to assist in satisfying the tax liability associated with the loan forgiveness. The eight non-executive senior managers must repay the cash bonuses if they resign from employment with us for other than good reason or are dismissed for cause before January 1, 2005. The loan forgiveness and cash bonuses are in lieu of any other bonuses or incentive compensation payments for 2002 and 2003. We forgave the remaining loans owed to us by three former non-executive senior managers, but none of these individuals received cash bonuses to assist with their tax liability.

•

We received executed non-competition agreements from all of the employees receiving loan forgiveness. The non-competes will expire one year after the termination of employment.

In connection with the approval of these changes to the outstanding loans, the board also approved the cancellation of stock options to purchase approximately 2.7 million shares of our common stock held by 11 non-executive senior managers, including three non-executive senior managers who did not have loans, and re-issuance of new stock options to purchase approximately 5.3 million shares of our common stock. The exercise price of the stock options cancelled was substantially above the current market price of our common stock. In May 2003, we cancelled the stock options to purchase approximately 2.9 million shares of our common stock and issued new options with an exercise price of $0.63 per share (the average of the daily closing prices of our common stock during the month prior to the approval of the changes by the board, December 2002). The offer to cancel and reissue these stock options was made during the quarter ended March 31, 2003. We accounted for this offer in accordance with the provisions of SFAS No. 123, and charges related to this offer are included in the approximately $25.9 million of stock-based compensation recorded for new grants for the nine months ended September 30, 2003.

The board’s primary basis for approving these changes to the program was to stabilize and retain a core group of our managers in the wake of the major reductions in force that we have implemented and to restore incentives for their future performance. The board determined among other things that elimination of the loans would help address morale and productivity issues affecting the continuing non-executive senior managers and that the re-pricing of the stock options held by our non-executive senior managers would realign their equity incentives with future shareholder value.

None of our executive officers with restricted stock and related loans, Messrs. Carr, Bala, and Losch, were offered the share repurchase, loan forgiveness, and cash bonus program discussed above. Consequently, these executives currently hold approximately 7.8 million shares of restricted stock of Tellium which secure recourse loans owed to us with an approximate balance of principal and accrued interest at October 31, 2003 of $21.7 million. An additional 1.6 million shares also serve as collateral to secure these loans and are held by donees of these executives.

We have entered into a merger agreement with Zhone Technologies, Inc, which, upon completion, will result in a change of control as defined in the July 2002 agreements. At the time discussions regarding the merger commenced, this matter was still under consideration by our board. No changes in the loan and restricted stock arrangements between Tellium and these individuals have subsequently been made and no changes are intended to be made before completion of the merger. We are not in a position to assess the effect that these circumstances could have on us (or the combined company upon completion of the merger), but the effect could be material. If the implementing documents were given effect as executed, then, upon a change of control (including upon consummation of the merger):

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We (or the combined company) could be obligated to pay bonuses to these executives and to extend the maturity of their management loans. We may not be able to deduct these payments for income tax purposes.

•

Depending on the circumstances prevailing at the time and on the interpretation of the documents, the aggregate amount of the bonuses could be up to $56 million, including approximately $22 million, representing the aggregate outstanding principal and interest due on the loans, and approximately $34 million, representing the aggregate amount of income and excise tax incurred by the executives associated with the bonus.

•

After repayment of the loans in full, it is anticipated that (i) the net cash outlay by Tellium (or the combined company) would equal the amount paid in respect of the executive’s taxes, which could be up to approximately $34 million, (ii) the net cash received by the executives would be zero, and (iii) the shares held as collateral would be released to the executives free of any encumbrance associated with the management loans.

We believe that the agreements signed in July 2002 are void and unenforceable against us and intend to vigorously defend any attempt to enforce these agreements.

In addition, in March 2003, the board authorized the cancellation of approximately 3.2 million stock options held by our executive officers with exercise prices substantially above the current trading value of our common stock. At the same time, the board authorized the reissuance of approximately 2.2 million stock options at an exercise price of $0.54 per share to our chief operating officer, chief financial officer, and chief technology officer and 1.2 million shares of zero-priced restricted stock to our chief executive officer.

Stock Option Exchange Offer

On August 1, 2002, we commenced an offer to exchange outstanding employee stock options having an exercise price of $2.14 or more per share in return for a combination of share awards for shares of common stock and new stock options to purchase shares of common stock. The exchange offer expired on September 4, 2002. Pursuant to the exchange offer, we accepted for exchange options to purchase 13,479,441 shares of common stock, representing approximately 91% of the options that were eligible to be tendered in the offer. On September 5, 2002, we issued 1,347,962 share awards of common stock, and on March 7, 2003, we granted 9,102,333 options to purchase common stock at an exercise price of $0.55 per share. The options vest from the original grant date of the options tendered in accordance with the vesting schedule of the original option grant.

8.	NOTES PAYABLE

On June 16, 2003, we obtained a $1.9 million bank loan from A.I. Credit Corporation. The loan is secured by a letter of credit from Bank of America, N.A. and bears interest at a rate of 4.77% per annum. Principal and interest are payable in monthly installments from July 17, 2003 through February 17, 2004.

9.	LEGAL PROCEEDINGS

In late July 2002, Corning Incorporated filed a Demand for Arbitration arising out of a dispute in connection with our October 2000 merger with Astarte Fiber Networks, Inc. Corning alleges that Astarte and Tellium, as successor-in-interest to Astarte, fraudulently induced Corning to enter into a contract, breached that contract, and breached warranties presented in that contract. The Demand for Arbitration was subsequently amended to add a claim for unjust enrichment. Corning seeks an award of $38 million, plus expenses and interest. We have filed a response with the American Arbitration Association that we are not a proper party to the dispute. A third party to the Demand has also responded to the American Arbitration Association that we are not relevant to the dispute. The arbiters have been empanelled, and a preliminary hearing was held on February 27, 2003. At the preliminary hearing, we made a motion to dismiss the suit against us for failure to state a viable claim as to Tellium, and the arbiters set a briefing schedule on the motion. The parties completed briefing on July 18, 2003. On September 17, 2003, the arbiters denied our motion to dismiss, with a suggestion that Tellium refile its motion on the close of discovery. The parties have also commenced some discovery, including requests for documents, written interrogatories, and depositions. On October 28, 2003, Tellium commenced in the United States District Court for the Southern District of New York an action for a declaratory judgment that Tellium is not a proper party to the arbitration. Tellium’s action seeks to have the arbitration stayed and Corning enjoined from pursuing arbitration any further against Tellium. It is too early in the dispute process to determine what impact, if any, this dispute will have upon our business, financial condition, or results of operations. We intend to vigorously defend the claims made in any legal proceedings that may result and pursue any possible counterclaims against Corning, Astarte, and other parties associated with the claims.

On various dates between approximately December 10, 2002 and February 27, 2003, eight class-action securities complaints were filed against Tellium in the United States District Court, District of New Jersey. These complaints allege, among other things, that Tellium and its then-current directors and executive officers and its underwriter violated the Securities Act of 1933 by making false and misleading statements preceding our initial public offering and in our registration statement prospectus relating to the securities offered in the initial public offering. The complaints further allege that these parties violated the Securities and Exchange Act of 1934 by acting recklessly or intentionally in making the alleged misstatements. The actions seek damages in an unspecified amount, including compensatory damages, costs, and expenses incurred in connection with the actions and equitable relief as may be permitted by law or equity. On August 4, 2003, we filed a motion to dismiss these actions. It is too early in the legal process to determine what impact, if any, these suits will have upon our business, financial condition, or results of operations. We intend to vigorously defend the claims made in these actions, which have been consolidated.

On January 8, 2003 and January 27, 2003, two shareholder derivative complaints were filed on behalf of Tellium in the Superior Court of New Jersey. These complaints were made by plaintiffs who purport to be Tellium shareholders on behalf of Tellium, alleging, among other things, that Tellium directors breached their fiduciary duties to the company by engaging in stock transactions with individuals associated with Qwest, and in making materially misleading statements regarding our relationship with Qwest. The actions seek damages in an unspecified amount, including imposition of a constructive trust in favor of Tellium for the amount of profits allegedly received through stock sales, disgorgement of proceeds in connection with the stock option exercises, damages allegedly sustained by Tellium in connection with alleged breaches of fiduciary duties, costs, and expenses incurred in connection with the actions. These cases have been stayed by the court pending the resolution of motions to dismiss in the above-referenced federal court securities actions. It is too early in the legal process to determine what impact, if any, these suits will have upon our business, financial condition, or results of operations. We intend to vigorously defend the claims made in these actions, which have been consolidated.

The Denver, Colorado regional office of the SEC is conducting two investigations titled In the Matter of Qwest Communications International, Inc. and In the Matter of Issuers Related to Qwest. The first of these investigations does not involve any allegation of wrongful conduct on the part of Tellium. In connection with the second investigation, the SEC is examining various transactions and business relationships involving Qwest and eleven companies having a vendor relationship with Qwest, including Tellium. This investigation, insofar as it relates to us, appears to focus generally on whether our transactions and relationships with Qwest were appropriately disclosed in our public filings and other public statements. In addition, the United States Attorney in Denver is conducting an investigation involving Qwest, including Qwest’s relationships with certain of its vendors, including Tellium. In connection with that investigation, the U.S. Attorney has sought documents and information from us and has sought interviews and/or grand jury testimony from persons associated or formerly associated with us, including certain of our officers. The U.S. Attorney has indicated that, while aspects of its investigation are in an early stage, neither we nor any of our current or former officers or employees is a target of the investigation. We are cooperating fully with these investigations. We are not able, at this time, to say when the SEC and/or U.S. Attorney investigations will be completed and resolved, or what the ultimate outcome with respect to Tellium will be. These investigations could result in substantial costs and a diversion of management’s attention and may have a material and adverse effect on our business, financial condition, and results of operations.

As previously disclosed, Tellium and 185 Monmouth Parkway Associates, L.P. filed complaints and other documents against each other asserting claims arising out of certain real property lease agreements between Tellium and 185 Monmouth pursuant to which Tellium leased certain real property in West Long Branch, New Jersey. Tellium’s suit also asserted claims against other related entities concerning property leased in Oceanport, New Jersey. On November 12, 2003, the parties to the above litigations reached an out-of-court settlement in which Tellium has agreed to pay approximately $2.5 million to settle (i) all of the claims asserted in connection with the complaints and other documents filed in the Superior Court of New Jersey, Monmouth County and (ii) all of the claims that may arise or have arisen from the real property leases for the West Long Branch, New Jersey, properties, with the exception of contingent obligations under certain lease provisions requiring indemnification of the landlord for personal injury claims accruing during the lease periods and compliance with environmental statutes and other laws. The settlement agreement also provides for releases of all parties named in the lawsuits for all claims that were or could have been raised in the litigations or with respect to the West Long Branch leases.

10.

SUBSEQUENT EVENTS

On November 3, 2003, the Company announced that its board of directors had unanimously approved a one-for-four reverse stock split of the company’s outstanding common stock. The reverse stock split was approved by the Tellium stockholders at the annual meeting of stockholders on May 21, 2003. As a result of the reverse stock split, every four shares of Tellium common stock will be exchanged for one share of Tellium common stock. Consummation of the reverse stock split is subject to stockholder approval of the proposed merger between the company and Zhone Technologies, Inc. and will be effective immediately prior to the closing of the merger. The company currently anticipates that the reverse stock split and the merger will be effective on November 13, 2003, or as soon thereafter as is practicable, after each company holds a special meeting of its stockholders to approve the merger.

As a result of the settlement with 185 Monmouth Parkway Associates and other parties described in Note 9 above, the company has reversed approximately $1.9 million of a reserve related to the non-cancelable lease to its statement of operations in the quarter ended September 30, 2003. The reserve was initially recorded as part of the company’s January 2003 restructuring plan.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis addresses the financial condition of Tellium and its subsidiaries as of September 30, 2003 compared with December 31, 2002, and our results of operations for the three months and nine months ended September 30, 2003 compared with the same period last year, respectively. You should read this discussion and analysis along with our unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this report, and in conjunction with our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2002.

Certain matters discussed in this Form 10-Q are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on our current expectations, forecasts, and assumptions. These forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to be materially different from the results expressed or implied by the forward-looking statements. The forward-looking statements in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. We consider all statements regarding anticipated or future matters, including any statements using forward-looking words such as “anticipate”, “believe”, “could”, “estimate”, “intend”, “may”, “should”, “will”, “would”, “projects”, “expects”, “plans”, or other similar words, to be forward-looking statements. Other factors which could materially affect such forward-looking statements or which cause our actual results to differ from estimates or projections contained in the forward-looking statements can be found under the heading “Risk Factors” of this Form 10-Q. Shareholders, potential investors, and other readers are urged to consider these factors, among others, carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements.

Overview

We design, develop, and market high-speed, high-capacity, intelligent optical switching solutions that enable network service providers to quickly and cost-effectively deliver new high-speed services. Our products include highly reliable hardware, standards-based operating software, and integrated network planning and network management tools designed to deliver intelligent optical switching for public telecommunications networks.

On July 28, 2003, Tellium and Zhone Technologies, Inc. (“Zhone”) announced that they had entered into a definitive merger agreement.

Our revenue declined significantly in fiscal 2002 because of deteriorating conditions in the telecommunications industry, which have caused a rapid and significant decrease in capital spending by telecommunications service providers, including our customers. These unfavorable economic conditions have contributed to our inability to secure additional customers and caused purchases by current customers to significantly decline. Service providers have no longer been able to continue to fund aggressive deployments of equipment, including our products, within their networks. As a result, we have reduced our expectations for future growth in revenue and cash flows. In addition, our stock price continued to decline significantly during 2002 and into 2003. For the foreseeable future, we expect to continue to face a market that is both reduced in size and more difficult to predict and plan for.

On June 24, 2002, in response to these severe economic conditions, we announced a business restructuring plan designed to decrease our operating expenses. We recorded a restructuring charge of approximately $12.8 million associated with a workforce reduction of approximately 200 employees and the consolidation of excess facilities, resulting in non-cancelable lease costs and write down of certain leasehold improvements. On January 9, 2003, we announced a second business restructuring plan to better align ongoing operating costs with industry conditions. We recorded a restructuring charge of approximately $6.7 million in January 2003 for the consolidation of excess facilities, resulting in non-cancelable lease costs and for severance and extended benefits associated with a reduction of our workforce by approximately 130 employees. Together, these restructurings resulted in a reduction in our work force of about 330 employees and restructuring charges of approximately $19.5 million. In addition to normal attrition, the two restructurings contributed significantly to a reduction in our workforce from 544 as of January 1, 2002 to 167 as of September 30, 2003. While the reduction of employees has affected all areas of our business operations, we expect that the restructurings will better align ongoing operating costs with industry conditions.

We have purchase contracts with the following three customers: Cable & Wireless Global Networks Limited, Dynegy Connect, L.P., an affiliate of Dynegy Global Communications, and Qwest Communications Corporation. The three contracts were signed in 1999 and 2000. While the Dynegy, Qwest, and Cable & Wireless contracts originally had a total revenue expectation of $1 billion over the contract periods, we realized only limited revenue in 2002 and no revenue in the first half of 2003 from Dynegy and Qwest. We realized revenues under the Cable & Wireless contract for the first time in the first quarter of 2003. We do not expect to generate significant revenue from our customers for the balance of the contract periods compared to previous forecasts. We also had a contract with Lockheed Martin that we announced in April 2002. All obligations under this agreement, other than maintenance for ongoing technical support, were completed in 2002.

Since our inception in May 1997, we have incurred significant losses, and as of September 30, 2003, we had an accumulated deficit of approximately $844.4 million. For the nine months ended September 30, 2003, we had losses of approximately $64.5 million, compared to losses of approximately $356.3 million for the nine months ended September 30, 2002.

While we have taken actions to reduce our cost structure, we anticipate that we will continue to incur operating losses unless the overall economic environment improves, carriers resume meaningful spending on optical switches, and our revenue increases significantly compared to current levels. We currently anticipate that the cost of revenue and our resulting gross margin will continue to be adversely affected by the reduced demand for our products. A significant portion of our operating expenses is, and will continue to be, fixed in the short term. During the nine months ended September 30, 2003, we incurred substantial operating losses of approximately $66.8 million, which includes charges of approximately $25.9 million related to our prospective change to the fair market value method of accounting for stock options in accordance with SFAS No. 123. We adopted SFAS No. 123 on January 1, 2003. We have not achieved profitability on a quarterly or an annual basis since our inception and anticipate that we will continue to incur net losses for the foreseeable future. At this time, we have limited visibility into future revenue and cannot predict when, or if, the economic environment and demand for our products will improve.

123

Results of Operations

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

Revenue

For the three months ended September 30, 2003, we recognized revenue of approximately $4.9 million, which represents an increase of $3.0 million from revenue of approximately $1.9 million for the three months ended September 30, 2002. The increase in revenue is primarily due to revenue recognized as a result of purchases made by Cable & Wireless in connection with the build out of their network in 2003. We had no non-cash charges related to warrant issuances for the three months ended September 30, 2003, which represented a decrease of $0.5 million over non-cash charges related to warrant issuances of approximately $0.5 million for the same period in 2002. The decrease in non-cash charges is due to impairment charges of approximately $57.9 million for deferred warrant cost recorded during 2002, reducing the balance of deferred warrant cost to $0 as of December 31, 2002. Going forward, we do not expect to record any additional charges related to deferred warrant costs. As a result of the foregoing, revenue, net of non-cash charges related to equity issues, increased from approximately $1.4 million for the three months ended September 30, 2002 to approximately $4.9 million for the three months ended September 30, 2003. There can be no certainty as to the severity or duration of the current economic downtown or its impact on our future revenue. We expect that revenue in 2003 will be down compared to 2002 although actual results may vary due to changes in the condition of our business.

Cost of Revenue

For the three months ended September 30, 2003, our cost of revenue totaled approximately $4.8 million, which represents a decrease of $9.4 million from cost of revenue of approximately $14.2 million for the three months ended September 30, 2002. The decrease was primarily due to a reduction in stock compensation expense of approximately $6.5 million for the three months ended September 30, 2003 as compared to September 30, 2002. As a result of the restructuring measures taken during the second quarter of 2002 and the first quarter of 2003, overhead expenses decreased from $4.2 million for the three months ended September 30, 2002 to $3.0 million for the three months ended September 30, 2003. Cost of revenue includes stock-based compensation of approximately $0.7 million for the three months ended September 30, 2003 and approximately $7.2 million for the three months ended September 30, 2002. Gross profit was approximately $0.1 million and approximately $(12.8) million for the three months ended September 30, 2003 and 2002, respectively. The approximately $12.9 million increase in gross profit was primarily related to a significant decline in charges for warranty costs and stock compensation expense. Our cost of revenue is largely based on anticipated revenue trends and a high percentage of our costs are, and will continue to be, relatively fixed in the short term, although actual results may vary due to changes in the condition of our business and the consummation of the proposed merger with Zhone Technologies, Inc.

Research and Development Expense

For the three months ended September 30, 2003, we incurred research and development expense of approximately $5.9 million, which represents a decrease of $1.9 million from research and development expense of approximately $7.8 million for the three months ended September 30, 2002. The decrease is attributed primarily to a decrease of research and development personnel expense by approximately $2.3 million in conjunction with workforce reductions in June 2002 and January 2003 offset by an increase of prototype expense by approximately $0.8 million. We expect that research and development expense will not change significantly in future periods, although actual results may vary due to changes in the condition of our business and the consummation of the proposed merger with Zhone Technologies, Inc.

Sales and Marketing Expense

For the three months ended September 30, 2003, we incurred sales and marketing expense of approximately $1.8 million, which represents a decrease of approximately $1.5 million from sales and marketing expense of approximately $3.3 million for the three months ended September 30, 2002. The decrease resulted primarily from a reduction of sales and marketing personnel expense by approximately $.8 million and a decline of expenses for advertising and promotion by approximately $0.4 million. In order to decrease sales and marketing expenses in future periods, we will continue to engage in more targeted marketing using focused and lower-cost programs specifically addressing geographic markets with the potential of near-term customer opportunities. This is in contrast to our more broad-based market-wide marketing activities of past periods, which were inherently more comprehensive and therefore more expensive. We expect that sales and marketing expense will not change significantly in future periods, although actual results may vary due to changes in the condition of our business and the consummation of the proposed merger with Zhone Technologies, Inc.

General and Administrative Expense

For the three months ended September 30, 2003, we incurred general and administrative expense of approximately $6.0 million, which represents a decrease of $1.5 million from general and administrative expense of approximately $7.5 million for the three months ended September 30, 2002. The decrease was primarily due to a decrease of facilities expenses by approximately $0.6 million and personnel-related expenses by approximately $0.7 million in conjunction with workforce reductions in June 2002 and January 2003. We expect that general and administrative expense will not change significantly in future periods, although actual results may vary due to changes in the condition of our business and the consummation of the proposed merger with Zhone Technologies, Inc.

Amortization of Intangible Assets

We incurred no amortization expense for the three months ended September 30, 2003, which represents a decrease of $0.1 million from amortization expense of approximately $.1 million for the three months ended September 30, 2002. For the three months ended September 30, 2002, these amounts were due to the amortization of identifiable intangible assets relating to our acquisition of Astarte in 2000 and an intellectual property license from AT&T Corp. in 2000, both of which were amortized over an estimated useful life of five years. The decrease in amortization expense is due to impairment charges of approximately $53.1 million in 2002, which reduced the remaining balance of intangible assets to $0 as of December 31, 2002.

Restructuring and Impairment of Long-Lived Assets

As a result of the settlement with 185 Monmouth Parkway Associates and other parties described in Note 9 to the condensed consolidated financial statements presented above, the company has reversed approximately $1.9 million of a reserve related to the non-cancelable lease to its statement of operations in the quarter ended September 30, 2003. The reserve was initially recorded as part of the company’s January 2003 restructuring plan.

Stock-Based Compensation Expense

For the three months ended September 30, 2003, we recorded stock-based compensation expense of approximately $4.3 million, which represents a decrease of $86.0 million from stock-based compensation expense of approximately $90.3 million for the three months ended September 30, 2002. The decrease was primarily due to the completion of our stock option exchange program for employees on September 4, 2002, which resulted in charges of approximately $55.6 million, of which approximately $54.9 million was recorded as deferred compensation expense prior to our initial public offering, and the remainder represents the fair market value of the share awards. In addition, during the third quarter of 2002, we recorded a charge of approximately $26.9 million related to the accounting for proposed changes to our management incentive program, including notes receivables from 12 employees (see Note 10, “Stockholders’ Equity” of the Notes to Condensed Consolidated Financial Statements (Unaudited) above), in accordance with EITF Issue No. 00-23, “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44.”

Interest Income, Net

For the three months ended September 30, 2003, we recorded interest income, net of interest expense, of approximately $0.4 million, which represents a decrease of $0.3 million from interest income, net of interest expense, of approximately $.7 million for the three months ended September 30, 2002. Net interest income consists of interest earned on our cash and cash equivalent balances, offset by interest expense related to outstanding borrowings. The decrease in our interest income is primarily attributable a lower average cash balance and to lower interest rates for the three months ended September 30, 2003, as compared to the same period in 2002.

Income Taxes

We recorded no income tax provision or benefit for the three months ended September 30, 2003 and 2002, due to our operating loss position and the uncertainty of our ability to realize our deferred income tax assets, including our net operating loss carry forwards.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Revenue

For the nine months ended September 30, 2003, we recognized revenue of approximately $25.2 million, which represents a decrease of $33.8 million from revenue of approximately $59.0 million for the nine months ended September 30, 2002. The decrease is primarily due to unfavorable economic conditions resulting in significantly reduced capital expenditures of our existing customers and a corresponding decrease of purchases of our products during the first nine months of 2003 compared to the same period of 2002. Non-cash charges related to warrant issuances totaled $0 for the nine months ended September 30, 2003, which represented a decrease of $36.7 million over non-cash charges related to warrant issuances of approximately $36.7 million for the same period in 2002. The decrease in non-cash charges is due to impairment charges of approximately $57.9 million for deferred warrant cost recorded during 2002, reducing the balance of deferred warrant cost to $0 as of December 31, 2002. Going forward, we do not expect to record any additional charges related to deferred warrant cost. As a result of the foregoing, revenue, net of non-cash charges related to equity issues, increased from approximately $22.4 million for the nine months ended September 30, 2002 to approximately $25.2 million for the nine months ended September 30, 2003. There can be no certainty as to the severity or duration of the current economic downtown or its impact on our future revenue. We expect that revenue in 2003 will be down compared to 2002 although actual results may vary due to changes in the condition of our business.

Cost of Revenue

For the nine months ended September 30, 2003, our cost of revenue totaled approximately $20.0 million, which represents a decrease of $51.3 million from cost of revenue of approximately $71.3 million for the nine months ended September 30, 2002. The decrease was primarily due to reduced material cost of approximately $4.6 million related to the corresponding decrease in revenue during the nine months ended September 30, 2003, a decrease in inventory reserves of $21.9 million and reduced overhead expenses of approximately $3.3 million as a result of the workforce reduction during 2002 and 2003. In addition, cost of revenue for the nine months ended September 30, 2002 included charges for excess and obsolete inventory of approximately $16.8 million, while there were no corresponding charges for the same period in 2003. Cost of revenue includes stock-based compensation of approximately $5.3 million for the nine months ended September 30, 2003 and approximately $10.1 million for the nine months ended September 30, 2002. This decrease of $4.8 million was primarily a result of the completion of our stock option exchange program for employees on September 4, 2002. Gross profit (loss) was approximately $5.1 million and approximately $(48.9) million for the three months ended September 30, 2003 and 2002, respectively. This increase of $54.0 million was primarily related to significant inventory and warrant charges taken during the first nine months of 2002. Our cost of revenue is largely based on anticipated revenue trends and a high percentage of our costs are, and will continue to be, relatively fixed in the short term, although actual results may vary due to changes in the condition of our business and the consummation of the proposed merger with Zhone Technologies, Inc.

Research and Development Expense

For the nine months ended September 30, 2003, we incurred research and development expense of approximately $17.4 million, which represents a decrease of $18.2 million from research and development expense of approximately $35.6 million for the three months ended September 30, 2002. The decrease is attributed primarily to a decrease of research and development personnel expense by approximately $14.9 million in conjunction with workforce reductions in June 2002 and January 2003 and reduced prototype expenses. We expect that research and development expense will not change significantly in future periods, although actual results may vary due to changes in the condition of our business and the consummation of the proposed merger with Zhone Technologies, Inc.

Sales and Marketing Expense

For the nine months ended September 30, 2003, we incurred sales and marketing expense of approximately $6.1 million, which represents a decrease of approximately $9.0 million from sales and marketing expense of approximately $15.1 million for the nine months ended September 30, 2002. The decrease resulted primarily from a reduction of sales and marketing personnel expense by approximately $4.7 million and a decline of expenses for advertising and promotion by approximately $2.5 million. In order to decrease sales and marketing expenses in future periods, we will continue to engage in more targeted marketing using focused and lower-cost programs specifically addressing geographic markets with the potential of near-term customer opportunities. This is in contrast to our more broad-based market-wide marketing activities of past periods, which were inherently more comprehensive and therefore more expensive. We expect that sales and marketing expense will not change significantly in future periods, although actual results may vary due to changes in the condition of our business and the consummation of the proposed merger with Zhone Technologies, Inc.

General and Administrative Expense

For the nine months ended September 30, 2003, we incurred general and administrative expense of approximately $17.7 million, which represents a decrease of $5.6 million from general and administrative expense of approximately $23.3 million for the nine months ended September 30, 2002. The decrease was primarily due to a decrease of facilities expenses by approximately $1.8 million, depreciation by approximately $1.7 million and personnel-related expenses by approximately $1.9 million. We expect that general and administrative expense will not change significantly in future periods, although actual results may vary due to changes in the condition of our business and the consummation of the proposed merger with Zhone Technologies, Inc.

Amortization of Intangible Assets

We incurred no amortization expense for the nine months ended September 30, 2003, which represents a decrease of $6.9 million from amortization expense of approximately $6.9 million for the nine months ended September 30, 2002. For the nine months ended September 30, 2002, these amounts were due to the amortization

of identifiable intangible assets relating to our acquisition of Astarte in 2000 and an intellectual property license from AT&T Corp. in 2000, both of which were amortized over an estimated useful life of five years. The decrease in amortization expense is due to impairment charges of approximately $53.1 million in 2002, which reduced the remaining balance of intangible assets to $0 as of December 31, 2002.

Stock-Based Compensation Expense

For the nine months ended September 30, 2003, we recorded stock-based compensation expense of approximately $30.5 million, which represents a decrease of $87.2 million from stock-based compensation expense of approximately $117.7 million for the nine months ended September 30, 2002. The decrease was primarily due to the completion of our stock option exchange program for employees on September 4, 2002, which resulted in charges of approximately $55.6 million, of which approximately $54.9 million was recorded as deferred compensation expense prior to our initial public offering, and the remainder represents the fair market value of the share awards. In addition, during the third quarter of 2002, we recorded a charge of approximately $26.9 million related to the accounting for proposed changes to our management incentive program, including notes receivables from 12 employees (see Note 10, “Stockholders’ Equity” of the Notes to Condensed Consolidated Financial Statements (Unaudited) above), in accordance with EITF Issue No. 00-23, “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44.” The decrease was offset by the adoption of SFAS No. 123. Prior to 2003, we accounted for stock-based employee compensation arrangements under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25) and related interpretations. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” We selected the prospective method of adoption described in SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All other old grants will continue to be accounted for under the intrinsic value provision of APB No. 25. We recorded approximately $25.9 million stock-based compensation for new grants, which is included in the $30.5 million in stock-based compensation recorded for the nine months ended September 30, 2003. The remaining $4.6 million of stock-based compensation recorded in the first nine months of 2003 related to grants existing prior to January 1, 2003.

Restructuring and Impairment of Long-Lived Assets

During the nine months ended September 30, 2003, we terminated approximately 130 employees. During the first quarter of 2003, we recorded charges for the workforce reduction of approximately $3.2 million primarily related to severance and extended benefits. In addition, we recorded a charge of approximately $3.5 million related to the consolidation of facilities. As a result of the settlement with 185 Monmouth Parkway Associates and other parties described in Note 9 to the condensed consolidated financial statements presented above, the company has reversed approximately $1.9 million of a reserve related to the non-cancelable lease to its statement of operations in the quarter ended September 30, 2003. The reserve was initially recorded as part of the company’s January 2003 restructuring plan.

In addition, during the first quarter of 2003, we wrote down net property, plant, and equipment by approximately $0.7 million. These charges cover assets idled by restructuring for which we have a committed disposal plan.

We do not believe that the restructuring program will have a material impact on revenues. We expect that the actions described above will result in an estimated annual reduction in employee-related expenses and cash flows of approximately $10 to $15 million.

Other Income, Net

For the nine months ended September 30, 2003, we recorded other income, net of other expense, of approximately $1.0 million, which represents an increase of $1.0 million from other income, net of other expense, of approximately $0 million for the nine months ended September 30, 2002. The increase was primarily due to a payment of approximately $1.0 million received from an insurance policy during the nine months ended September 30, 2003.

Interest Income, Net

For the nine months ended September 30, 2003, we recorded interest income, net of interest expense, of approximately $1.3 million, which represents a decrease of $1.4 million from interest income, net of interest expense, of approximately $2.7 million for the nine months ended September 30, 2002. Net interest income consists of interest earned on our cash and cash equivalent balances, offset by interest expense related to outstanding borrowings. The decrease in our interest income for this period is primarily attributable a lower average cash balance and to lower interest rates for the nine months ended September 30, 2003, as compared to the same period in 2002.

Income Taxes

We recorded no income tax provision or benefit for the nine months ended September 30, 2003 and 2002, due to our operating loss position and the uncertainty of our ability to realize our deferred income tax assets, including our net operating loss carry forwards.

Liquidity and Capital Resources

We finance our operations primarily through available cash. As of September 30, 2003, our cash and cash equivalents totaled approximately $140.9 million, compared to $171.0 million as of December 31, 2002. As of September 30, 2003, our working capital totaled approximately $137.5 million, compared to $154.1 million as of December 31, 2002. The decrease was primarily due to cash used in operating activities.

Cash used in operating activities for the nine months ended September 30, 2003 was approximately $34.9 million, which represents an increase of $10.1 million from cash used in operating activities of approximately $24.8 million for the nine months ended September 30, 2002. The increase reflects primarily net losses of approximately $66.4 million. The net losses and the increase in accounts receivable of approximately $15.1 million were only partly offset by non-cash charges of approximately $30.5 million and depreciation and amortization of approximately $14.6 million.

We used insignificant amounts of cash in investing activities for the nine months ended September 30, 2003 due to decreased capital requirements during nine months ended September 30, 2003. Cash used in investing activities of approximately $5.6 million was unchanged from cash used in investing activities of approximately $5.6 million for the nine months ended September 30, 2002.

Cash provided by financing activities for the nine months ended September 30, 2003 was approximately $4.9 million, while cash used in financing activities was approximately $5.0 million for the nine months ended September 30, 2002. Cash provided by financing activities during the three months ended September 30, 2003

was primarily attributable to proceeds of $2.9 million from the issuance of common stock under our employee stock purchase plan and stock incentive plans. Cash used in investing activities during the three months ended September 30,2003 was primarily attributed to payments of $0.7 million against our outstanding $1.9 million bank loan.

During the year ended December 31, 2000, we entered into a $10.0 million line of credit with Commerce Bank/Shore, N.A. The line of credit bears interest at a rate of 2.5% per annum and expires on January 1, 2004. As of December 31, 2002 and September 30, 2003, approximately $8.0 million was outstanding under this line of credit. There are no financial covenants related to this line of credit. We do not intend to renew this line of credit after the expiration date.

We do not engage in any off-balance sheet financing arrangements. We have not entered into any agreements for derivative financial instruments and have no obligations to provide vendor financing to our customers.

Our expenses have exceeded, and in the foreseeable future are expected to exceed, our revenue. Our future liquidity and capital requirements will depend upon numerous factors, including an improvement in the current economic environment, a significant increase in our revenues compared to current levels, expansion of operations, product development, increased sales and marketing to existing and potential customers, or significant adverse effects from litigation and other matters. If capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. Any additional equity financing may be dilutive to our stockholders and debt financing, if available, may involve restrictive covenants with respect to dividends, raising capital and other financial and operational matters that could restrict our operations.

At current revenue levels, we anticipate that some portion of our available cash will continue to be consumed by operations. If we do not obtain revenues from our customers or new customers, we will continue to use our available cash to fund our operating activities. We may also use a portion of our available cash, and may need additional capital, to acquire or invest in businesses, technologies or products that are complementary to our business. We have not determined the amounts we plan to spend on any of the uses described above or the timing of these expenditures.

Based on our current plans and business conditions, we believe that our current cash, cash equivalents, investments and our line of credit facilities will enable us to meet our working capital, capital expenditure, and other liquidity requirements for the next 12 months.

We have no contractual obligations other than those recorded on our balance sheet, except for our operating lease agreements for facilities, which expire on various dates through 2007.

RECENT DEVELOPMENTS

On November 3, 2003, we announced today that our board of directors had unanimously approved a one-for-four reverse stock split of the company’s outstanding common stock. The reverse stock split was approved by the Tellium stockholders at the annual meeting of stockholders on May 21, 2003. As a result of the reverse stock split, every four shares of Tellium common stock will be exchanged for one share of Tellium common stock. Consummation of the reverse stock split is subject to stockholder approval of the proposed merger between the company and Zhone Technologies, Inc. and will be effective immediately prior to the closing of the merger. The company currently anticipates that the reverse stock split and the merger will be effective on November 13, 2003, or as soon thereafter as is practicable, after each company holds a special meeting of its stockholders to approve the merger.

RISK FACTORS

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our expected future revenue, liquidity, cash flows, expenses, and levels of net losses;

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our ability to sell additional products to our existing customers, add new customers, and develop new products that meet our customers’ needs;

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our expectation that research and development, sales and marketing, and general and administrative expenses will not change significantly in future periods;

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our ability to vigorously defend any legal claims or pursue any counter-claims in connection with the Corning arbitration, the securities class action lawsuits, and/or the shareholder derivative lawsuits;

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our expectation that we will continue to meet all of the Nasdaq SmallCap Market listing requirements;

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our anticipation that the merger with Zhone will close on or about November 13, 2003, or as soon thereafter as is practicable; and

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any statements using forward-looking words, such as “anticipate”, “believe”, “could”, “estimate”, “intend”, “may”, “should”, “will”, “would”, “projects”, “expects”, “plans”, or other similar words.

These forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to be materially different from the results expressed or implied by the forward-looking statements. The forward-looking statements in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. Shareholders, potential investors, and other readers are urged to consider carefully the following factors, among others, in evaluating the forward-looking statements:

Risks Related To Our Business And Financial Results

We have incurred significant losses to date and expect to continue to incur losses in the future, which may cause our stock price to decline.

We have incurred significant losses to date and expect to continue to incur losses in the future. We had net losses of approximately $64.5 million for the nine months ended September 30, 2003 and approximately $356.3 million for the nine months ended September 30, 2002. As of September 30, 2002 and 2003, we had an

accumulated deficit of approximately $723.4 million and approximately $844.4 million, respectively. We have significant fixed expenses and expect to continue to incur significant manufacturing, research and development, sales and marketing, administrative, and other expenses in connection with the ongoing development of our business. In order to become profitable, we will need to generate and sustain higher revenue. If we do not generate sufficient revenue to achieve or sustain profitability, our stock price could continue to decline.

Our business has been, and may continue to be, adversely affected by recent unfavorable developments in the communications industry, world events, and the economy in general.

Our customers are experiencing a severe economic slowdown that could lead to a further decrease in our revenue. For much of the last five years, the market for our equipment has been influenced by the entry into the communications services business of a substantial number of new telecommunications companies. In the United States, this was due largely to changes in the regulatory environment, in particular those brought about by the Telecommunications Act of 1996. These new companies raised billions of dollars in capital, much of which they invested in new equipment, causing acceleration in the growth of the market for telecommunications equipment. Recently, we have seen a reversal of this trend, including the failure of a large number of the new entrants and a sharp contraction of the availability of capital to the industry. This, in turn, has caused a substantial reduction in demand for telecommunications equipment, including our products.

The amount of debt being held by our carrier customers, and the continued cuts to capital spending, put our customers’ and potential customers’ businesses in jeopardy. Our operating results and financial condition consequently could be materially and adversely affected in ways we cannot foresee.

This industry trend has been compounded by the slow growth of the United States economy, as well as weak performance by economies in virtually all of the countries in which we are marketing our products. The combination of these factors has caused customers to become more conservative in their capital investment plans and more uncertain about their future purchases. As a consequence, we are facing a market that is both reduced in absolute size and more difficult to predict and plan for.

We expect the factors described above to affect our business for at least several more quarters, if not longer, in several significant ways. It is likely that our markets will be characterized by reduced capital expenditures by our customers. It is possible that a recovery in spending by carriers in our equipment will lag the general recovery in telecommunications spending. Although we have implemented restructuring plans to reduce our business expenses, our costs are largely based on the requirements that we believe are necessary to support our sales efforts and a high percentage of our expenses are, and will continue to be, fixed. As a result, we currently expect to continue to incur operating losses unless revenue increases significantly.

Current unfavorable economic and market conditions combined with our limited operating history makes forecasting our future revenues and operating results difficult, which may impair our ability to manage our business and your ability to assess our prospects.

We began our business operations in May 1997 and shipped our first optical switch in January 1999. We have limited meaningful historical financial and operational data upon which we can base projected revenue and planned operating expenses and upon which you may evaluate us and our prospects. As a young company in the unpredictable telecommunications industry, which is in the midst of a prolonged downturn, we face risks relating to our ability to implement our business plan, including our ability to continue to develop and upgrade our technology and our ability to maintain and develop customer and supplier relationships. You should consider our business and prospects in light of the heightened risks and unexpected expenses and problems we may face as a company in an early stage of development in the currently difficult telecommunications market.

We have entered into a merger agreement with Zhone Technologies, Inc. Failure to complete the merger with Zhone could have an adverse effect on our business, financial condition, and results of operations.

We have entered into a merger agreement with Zhone Technologies, Inc. On completion of the merger, our existing security holders would own approximately 40% of the combined company’s outstanding securities on a fully-converted basis. The merger is subject to the approval of the stockholders of both Tellium and Zhone. It is also subject to a number of other closing conditions. There can be no assurance that the merger will occur or, if it does, what effect it will have on our business, financial condition, and results of operations. We expect to complete the merger on or about November 13, 2003, or as soon thereafter as is practicable. If the merger with Zhone is not completed, we could suffer a number of consequences that would adversely effect our business, including:

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the diversion of management’s attention from our day-to-day business and the unavoidable disruption of our employees and our relationships with customers as a result of efforts, and uncertainties relating to the anticipated merger may detract from our ability to grow revenues and minimize costs, which, in turn, may lead to a loss of market position;

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the significant expenses we have incurred and will continue to incur in connection with the proposed transaction; and;

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the possibility that termination of the merger agreement under some circumstances would require Tellium to pay Zhone a termination fee of $3 million or to reimburse expenses incurred by Zhone.

We have filed a joint proxy statement/prospectus with the Securities and Exchange Commission and mailed it to all holders of Tellium stock. The definitive joint proxy statement/prospectus contains important information about Tellium, Zhone, and the proposed merger, risks related to the merger and the combined company, and related matters. We urge you to read the definitive joint proxy statement/prospectus filed with the SEC on October 15, 2003.

We may not achieve the benefits we expect from the merger with Zhone, which may have a material adverse effect on the combined company’s business, financial condition, and results of operations.

The combined company will need to overcome significant challenges in order to realize any benefits or synergies from the merger, including timely, efficient and successful execution of a number of post-merger strategies, including:

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combining the operations of the two companies;

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integrating and managing the combined company;

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retaining and assimilating the key personnel of each company;

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retaining existing customers of both companies;

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resolving the outstanding management loans we have with three of our executive officers, including any claims they may assert under the terms of agreements they signed in July 2002 that were determined by our board of directors to be void and unenforceable against us;

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retaining strategic partners of each company; and

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creating and maintaining uniform standards, controls, procedures, policies, and information.

The execution of these post-merger strategies will involve considerable risks and may not be successful. These risks include:

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the potential disruption of the combined company’s ongoing business and distraction of its management;

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unanticipated expenses and potential delays related to integration of technology and other resources of the two companies;

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the significant expenses the combined company will incur in connection with the proposed transaction, including transaction and severance costs and costs in connection with resolving the outstanding management loans we have with three of our executive officers;

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the impairment of relationships with employees, suppliers, and customers as a result of any integration of new management personnel; and

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potential unknown liabilities associated with the merger and the combined operations.

Failure to overcome these risks or any other problems encountered in connection with the merger could slow the growth of the combined company or lower the quality of its services, which could reduce customer demand and have a material adverse effect on our business, financial condition, and results of operations. We will also incur substantial non-cash charges in connection with the merger related to goodwill and amortization of other intangibles.

We expect that future revenue, if any, will be generated from a limited number of customers. The deterioration of our relationships with our customers has had, and will continue to have, a significant negative impact on our revenue and cause us to continue to incur substantial operating losses.

For the nine months ended September 30, 2003, we derived limited revenue from Cable & Wireless and no revenue from Dynegy Connect or Qwest. We do not expect any significant purchases by any of our customers in future periods.

In May, 2003, 360networks Corporation acquired Dynegy, Inc.’s North American communications business, including Dynegy’s high-capacity broadband network, existing customer base, remaining fiber leases, and co-location facilities. It is unlikely that 360networks will purchase any of our equipment in future periods.

In light of current market conditions, we do not expect any significant purchases to be made by Qwest for the foreseeable future.

In 2003, Cable & Wireless began deployment of our switches in their global network. Under our agreement with Cable & Wireless, Cable & Wireless may, but is not obligated to, place additional orders for our equipment.

In June 2002 and again in January 2003, we announced a business restructuring that included a significant reduction in our research and development efforts, including the Aurora Optical Switch. This may negatively impact our ability to secure additional revenue from our current customers.

If any of our customers terminates its contract with us or does not make future purchases of our products, we will continue to incur substantial operating losses, which will seriously harm our ability to build a successful ongoing business.

If we do not attract new customers, our revenue may not increase and may decrease.

We must expand our customer base in order to succeed. If we are not able to attract new customers who are willing to make significant commitments to purchase our products and services for any reason, including if there is a further downturn in their businesses, our business will not grow and our revenue will not increase. Our customer base and revenue will not grow if:

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our carrier customers continue to cut their capital budgets and do not invest in next-generation optical networking products;

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customers are unwilling or slow to utilize our products;

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we experience delays or difficulties in completing the development and introduction of our planned products or product enhancements;

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our competitors introduce new products that are superior to our products;

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our products do not perform as expected; or

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we do not meet our customers’ delivery requirements.

In the past, we issued warrants to some customers. We may not be able to attract new customers and expand our sales with our existing customers if we do not provide warrants or other incentives.

If our line of optical switches or their future enhancements are not successfully developed, they will not be accepted by our existing and potential customers and our future revenue will not grow.

We began to focus on the marketing and the selling of optical switches in the second quarter of 1999. Our future revenue growth depends on the commercial success and adoption of our optical switches.

We are developing new products and enhancements to existing products. We may not be able to develop new products or product enhancements in a timely manner, or at all. Any failure to develop new products or product enhancements will substantially decrease market acceptance and sales of our present and future products. Any failure to develop new products or product enhancements could also delay purchases by our customers under their contracts, or, in some cases, could cause us to be in breach under our contracts with our customers. Even if we are able to develop and commercially introduce new products and enhancements, these new products or enhancements may not achieve widespread market acceptance and may not be satisfactory to our customers. Any failure of our future products to achieve market acceptance or be satisfactory to our customers could slow or eliminate our revenue growth.

Because the industry in which we compete is subject to consolidation, we could potentially lose customers, which would harm our business.

We believe that the industry in which we compete may enter into a consolidation phase. In 2001, one of our larger competitors, CIENA Corporation, completed the acquisition of another company in our industry, ONI Systems Corp. Over the past two years, the market valuations of the majority of companies in our industry have declined significantly, and most companies have experienced dramatic decreases in revenue because of decreased customer demand in general, a smaller customer base because of financial difficulties impacting emerging service providers, reductions in capital expenditures by incumbent service providers and other factors. We expect that the weakened financial position of many companies in our industry may cause acquisition activity to increase. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in operating results as we compete to be a single-product family vendor and could have a material adverse effect on our business, operating results, and financial condition.

Because of the long and variable sales cycles for our products, our revenue and operating results may vary significantly from quarter to quarter. As a result, our quarterly results may be below the expectations of market analysts and investors, causing the price of our common stock to decline.

Our sales cycle is long because a customer’s decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation, testing, and product qualification process. We may incur substantial expenses and devote senior management attention to potential relationships that may never materialize, in which event our investments will largely be lost and we may miss other opportunities. In addition, after we enter into a contract with a customer, the timing of purchases and deployment of our products may vary widely and will depend on a number of factors, many of which are beyond our control, including:

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accuracy of customer traffic growth demands;

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specific network deployment plans of the customer;

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installation skills of the customer;

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size of the network deployment;

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complexity of the customer’s network;

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degree of hardware and software changes required; and

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new product availability.

For example, customers with significant or complex networks usually expand their networks in large increments on a periodic basis.

Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. The long sales cycles, as well as the placement of large orders with short lead times on an irregular and unpredictable basis, may cause our revenue and operating results to vary significantly and unexpectedly from quarter to quarter. As a result, it is likely that in some future quarters our operating results may be below the expectations of market analysts and investors, which could cause the trading price of our common stock to decline.

We expect the average selling prices of our products to decline, which may reduce revenue and gross margins.

Our industry has experienced a rapid erosion of average product selling prices. Consistent with this general trend, we anticipate that the average selling prices of our products will decline in response to a number of factors, including:

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competitive pressures;

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increased sales discounts; and

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new product introductions by our competitors.

If we are unable to achieve sufficient cost reductions and increases in sales volumes, this decline in average selling prices of our products will reduce our revenue and gross margins.

We have recorded significant non-cash charges as a result of options and other equity issuances. We will continue to record non-cash charges related to equity issuances, which will adversely affect our future operating results. If investors consider this impact material, the price of our common stock could decline.

We have recorded deferred compensation expense and have begun to amortize non-cash charges to earnings as a result of options and other equity awards granted to employees and non-employee directors. Our future operating results will reflect the continued amortization of those charges over the vesting period of these options and awards. At September 30, 2003, we had recorded deferred compensation expense of approximately $4.6 million, which will be amortized to stock-based compensation expense through 2005.

Prior to 2003, we accounted for stock-based employee compensation arrangements under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25) and related interpretations. Effective January 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” We selected the prospective method of adoption described in SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All other old grants will continue to be accounted for under the intrinsic value provision of APB No. 25. We recorded approximately $25.9 million stock-based compensation for new grants, which is included in the $30.5 million in stock-based compensation recorded for the nine months ended September 30, 2003. The remaining $4.6 million of stock-based compensation recorded in the first nine months of 2003 related to grants existing prior to January 1, 2003. It is unknown what affect, if any, this change to SFAS No. 123 will have on the price of our common stock.

All of the non-cash charges related to equity issuances referred to above may negatively impact future operating results. It is possible that some investors might consider the impact on operating results to be material, which could result in a decline in the price of our common stock.

We could become subject to claims brought by our executive officers regarding agreements they signed in July 2002 that were subsequently voided by our board of directors. A resolution of these claims in their favor would have a material adverse effect on our business.

On various dates between April and June 2000, we loaned funds to members of our management team on a full-recourse basis to enable them to exercise previously granted stock options with average exercise prices of $2.14 per share. Individuals receiving loans included executive officers, vice presidents, and other employees. Upon exercise of the stock options, each of these individuals received restricted stock that vested over four years, and pledged the restricted shares to secure payment of their loans to us which generally become due in full in April through June 2005. Our stock price has fallen substantially below $2.14 per share, causing these loans to be under-collateralized while the individuals remain personally liable for payment on the loans when they come due. This circumstance posed personal financial problems for the individuals involved and undercut the intended incentivizing effect of the restricted stock program.

In an effort to restructure our management incentive arrangements, in July 2002, our board of directors authorized changes to this restricted stock and management loan program for the 12 participating individuals (then consisting of three executive officers—Messrs. Carr, Bala, and Losch, five vice presidents, three other employees, and one former vice president). These changes included our repurchase of the shares of restricted stock and related reduction of the loans, modifications of the terms of the remaining loans, and establishment of new incentive compensation arrangements which would include a bonus program applicable in the event of a change of control of Tellium and providing for bonuses in an amount sufficient to repay, on an after-tax basis, the then remaining balance of the loans.

We attempted to implement these board-approved changes, and in late July 2002 repurchase agreements and other implementing documents were signed. However, certain problems arose in the implementation of the changes and the board subsequently determined that the documented changes did not reflect its intentions and the scope of what it had authorized and that we would not go forward with the changes in the restricted stock and loan program at that time. Accordingly, the board determined that it should not ratify and approve the implementing documents that had been executed and that the documents and the transactions provided for by them were void and unenforceable against us. The board also determined to continue to consider changes to our management incentive compensation arrangements, including the management loan arrangements. As previously disclosed, we were not aware of what position the executives who signed implementing agreements in July 2002 would take with respect to the board’s action to void those agreements and were, therefore, unable to assess at that time whether those developments would have a material adverse effect on us.

During January 2003, our board of directors approved a set of changes to our management compensation arrangements, including changes in the restricted stock and loan program for the individuals involved in that program, other than with respect to our executive officers. As of May 13, 2003, all of the continuing and former non-executive senior managers participating in the program had executed agreements incorporating the board-approved changes to the program. As a result of these changes, the shares of restricted stock securing their loans were acquired by us and their loans were cancelled, and other changes in compensation arrangements for such individuals were made. The board continued to consider whether changes in the management compensation program for our executive officers, including the restricted stock and loan arrangements with Messrs. Carr, Bala, and Losch, should be made.

None of our executive officers with restricted stock, Messrs. Carr, Bala, and Losch, were offered the share repurchase, loan forgiveness, and cash bonus program discussed above. Consequently, these executives currently hold approximately 7.2 million shares of restricted stock of Tellium which secure recourse loans owed to us with an approximate balance of principal and accrued interest at October 31, 2003 of $21.7 million. An additional 1.6 million shares also serve as collateral to secure these loans and are held by donees of these executives.

•

We believe that the agreements signed in July 2002 are void and unenforceable against us and intend to vigorously defend any attempt to enforce these agreements. If we are required to make these payments, the financial condition of our business would be seriously and adversely harmed.

We face risks associated with our restructuring plans that may adversely affect our business, operating results, and financial condition.

In response to industry and market conditions, we have restructured our business and reduced our workforce. The assumptions underlying our restructuring efforts will be assessed on an ongoing basis and may prove to be inaccurate. We may have to restructure our business in the future to achieve certain cost savings and to strategically realign our resources.

Our restructuring plan is based on certain assumptions regarding the cost structure of our business and the nature, severity, and duration of the current industry downturn, which may not prove to be accurate. Any reassessments may result in the recording of additional charges, such as workforce reduction costs, facilities reduction costs, asset write-downs, and contractual settlements.

Additionally, estimates and assumptions used in asset valuations are subject to uncertainties, as are accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets. As a result, future market conditions may result in further charges for the write-down of tangible assets.

We may not be able to successfully implement the initiatives we have undertaken in restructuring our business. Even if successfully implemented, these initiatives may not be sufficient to meet the changes in industry and market conditions and may be insufficient to achieve future profitability. Furthermore, our workforce reductions may impair our ability to realize our current or future business objectives. Costs actually incurred in connection with restructuring actions may be higher than the estimated costs of such actions and/or may not lead to the anticipated cost savings. Additionally, upon the resumption of meaningful purchase activity by customers, we may not be able to sufficiently accelerate business activities in a time frame required by customers in order to secure their business. As a result, our restructuring efforts may not result in our attaining profitability and may also adversely affect our business, operating results, and financial condition.

Because our stock had traded below $1.00 for an extended period of time, we transferred the listing of our stock from the Nasdaq National Market to the Nasdaq SmallCap Market. If we do not continue to meet the continued listing requirements for the Nasdaq SmallCap Market, our stock may be subject to delisting from the Nasdaq SmallCap Market. This would result in a limited public market for our common stock and make obtaining future equity financing more difficult for us.

On August 7, 2002, the Nasdaq Stock Market, Inc. notified us that our stock had traded for more than 30 consecutive trading days below the $1.00 minimum per share price required for continued listing on the Nasdaq National Market. Subsequently, we transferred our common stock to the Nasdaq SmallCap Market at the opening of business on November 19, 2002. By transferring to the Nasdaq SmallCap Market, we received an extended grace period to August 5, 2003 in which to satisfy the minimum bid price requirement of $1.00 per share. We received an additional 90-day extension until November 3, 2003 when our initial extended grace period expired on August 5, 2003. On September 18, 2003, the Nasdaq Stock Market notified us that our common stock had traded at $1.00 or greater for at least 10 consecutive trading days and, therefore, we had satisfied the $1.00 minimum per share price required for continued listing on the Nasdaq SmallCap Market. If we do not continue to meet the continued listing requirements for the Nasdaq SmallCap Market and are not successful in an appeal from any adverse determination, our common stock may be delisted from trading on the Nasdaq SmallCap Market and could trade on the OTC Bulletin Board. The OTC Bulletin Board is a substantially less liquid market than the Nasdaq National Market or the Nasdaq SmallCap Market.

In addition, the delisting of our common stock from either the Nasdaq National Market or the Nasdaq SmallCap Market may have a material adverse effect on us by, among other things, reducing:

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the market price of our common stock;

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the number of institutional and other investors that will consider investing in our common stock;

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the number of market makers in our common stock;

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the availability of information concerning the trading prices and volume of our common stock;

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the number of broker-dealers willing to execute trades in shares of our common stock; and

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our ability to obtain equity financing for the continuation of our operations.

If delisted, we cannot assure you when, if ever, our common stock would once again be eligible for listing on either the Nasdaq National Market or the Nasdaq SmallCap Market.

We have experienced and expect to continue to experience volatility in our stock price, which makes an investment in our stock more risky.

The market price of our common stock has fluctuated significantly in the past and may fluctuate significantly in the future in response to a number of factors, some of which are beyond our control, including:

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changes in financial estimates by securities analysts;

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changes in market valuations of communications and Internet infrastructure-related companies;

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announcements, by us or our competitors, of new products or of significant acquisitions, strategic partnerships, or joint ventures;

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volume fluctuations, which are particularly common among highly volatile securities of Internet-related companies;

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volatility of stock markets, particularly the Nasdaq SmallCap Market on which our common stock is listed;

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additional litigation and/or adverse results from existing or future litigation;

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quarterly fluctuations in our financial results or the financial results of our competitors or our customers;

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consolidation among our competitors or customers;

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disputes concerning intellectual property rights;

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developments in telecommunications regulations; and

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general conditions in the communications equipment industry.

In addition, the stock market in general, and the Nasdaq SmallCap Market and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of the actual operating performance.

A number of lawsuits have been instituted against us. These suits could distract our management and could result in substantial costs or large judgments against us.

In addition to the securities litigation, in late July 2002, Corning Incorporated filed a Demand for Arbitration arising out of a dispute in connection with our October 2000 merger with Astarte Fiber Networks, Inc. Corning alleges that Astarte and Tellium, as successor-in-interest to Astarte, fraudulently induced Corning to enter into a contract, breached that contract, and breached warranties presented in that contract. The Demand for Arbitration was subsequently amended to add a claim for unjust enrichment. Corning seeks an award of $38 million, plus expenses and interest. We have filed a response with the American Arbitration Association that we are not a proper party to the dispute. A third party to the Demand has also responded to the American Arbitration Association that we are not relevant to the dispute. The arbiters have been empanelled, and a preliminary hearing was held on February 27, 2003. At the preliminary hearing, we made a motion to dismiss the suit against us for failure to state a viable claim as to Tellium, and the arbiters set a briefing schedule on the motion. The parties completed briefing on July 18, 2003. On September 17, 2003, the arbiters denied our motion to dismiss, with a suggestion that Tellium refile its motion on the close of discovery. The parties have also commenced some discovery, including requests for documents, written interrogatories, and depositions. On October 28, 2003, Tellium commenced in the United States District Court for the Southern District of New York an action for a declaratory judgment that Tellium is not a proper party to the arbitration. Tellium’s action seeks to have the arbitration stayed and Corning enjoined from pursuing arbitration any further against Tellium. It is too early in the dispute process to determine what impact, if any, this dispute will have upon our business, financial condition, or results of operations. We intend to vigorously defend the claims made in any legal proceedings that may result and pursue any possible counterclaims against Corning, Astarte, and other parties associated with the claims.

Continued scrutiny resulting from resulting from ongoing government investigations may have a material and adverse effect on our business.

the second investigation, the SEC is examining various transactions and business relationships involving Qwest and eleven companies having a vendor relationship with Qwest, including Tellium. This investigation, insofar as it relates to us, appears to focus generally on whether our transactions and relationships with Qwest were appropriately disclosed in our public filings and other public statements.

In addition, the United States Attorney in Denver is conducting an investigation involving Qwest, including Qwest’s relationships with certain of its vendors, including Tellium. In connection with that investigation, the U.S. Attorney has sought documents and information from us and has sought interviews and/or grand jury testimony from persons associated or formerly associated with us, including certain of our officers. The U.S. Attorney has indicated that, while aspects of its investigation are in an early stage, neither we nor any of our current or former officers or employees is a target of the investigation.

We are cooperating fully with these investigations. We are not able, at this time, to say when the SEC and/or U.S. Attorney investigations will be completed and resolved, or what the ultimate outcome with respect to Tellium will be. These investigations could result in substantial costs and a diversion of management’s attention and may have a material and adverse effect on our business, financial condition, and results of operations.

Fluctuations in our stock price could impact our relationships with existing customers and discourage potential customers from doing business with us.

Fluctuations in our stock price could lead to a loss of revenue due to our inability to engage new customers and vendors and to renew contracts with our current customers and vendors. Existing and potential customers and vendors may perceive our fluctuating stock price as a sign of instability and may be unwilling to do business with us. If this were to continue to occur, our business and financial condition could be harmed.

Risks Related To Our Products

Our products may have errors or defects that we find only after full deployment, or problems may arise from the use of our products in conjunction with other vendors’ products, which could, among other things, make us lose customers and revenue.

Our products are complex and are designed to be deployed in large and complex networks. Our products can only be fully tested when completely deployed in these networks with high amounts of traffic. Networking products frequently contain undetected software or hardware errors when first introduced or as new versions are released. Our customers may discover errors or defects in our software or hardware, or our products may not operate as expected after they have used them extensively in their networks. In addition, service providers typically use our products in conjunction with products from other vendors. As a result, if problems occur, it may be difficult to identify the source of the problems.

If we are unable to fix any defects or errors or other problems arise, we could:

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lose revenues;

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lose existing customers;

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fail to attract new customers and achieve market acceptance;

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divert development resources;

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increase service and repair, warranty, and insurance costs; and

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be subjected to legal actions for damages by our customers.

If our products do not operate within our customers’ networks, installations will be delayed or cancelled, reducing our revenue, or we may have to modify some of our product designs. Product modifications could increase our expenses and reduce the profit margins on our products.

Our customers require that our products be designed to operate within their existing networks, each of which may have different specifications. Our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. If our products do not operate within our customers’ networks, installations could be delayed and orders for our products could be cancelled, causing our revenue to decline. The requirement that we modify product designs in order to achieve a sale may result in a longer sales cycle, increased research and development expense, and reduced margins on our products.

The market for communications equipment products and services is rapidly changing.

The market for communications network equipment, software, and integration services is rapidly changing. We believe our future growth will depend, in part, on our ability to successfully develop and introduce commercially new features for our existing products and new products for this market. Our future will also depend on the return of growth in the communications equipment market. The growth in the market for communications equipment products and services is dependent on a number of factors. These factors include:

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resumption of meaningful capital equipment purchases by network providers;

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the amount of capital expenditures by network providers;

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regulatory and legal developments;

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changes to capital expenditure rates by network providers;

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continued growth of network traffic globally;

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the addition of new customers to the market; and

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end-user demand for integrated advanced high-speed network services.

We cannot predict the growth rate of the market for communications equipment products and services. The slowdown in the general economy over the past two years, changes and consolidation in the service provider market, and the constraints on capital availability have had a material adverse effect on many of our service provider customers, with a number of such customers going out of business or substantially reducing their expansion plans and purchases. Also, we cannot predict technological trends or new products in this market. In addition, we cannot predict whether our products and services will meet with market acceptance or be profitable or how their sales may be impacted by the possible consolidation of communications service provider customers. We may not be able to compete successfully, and competitive pressures may affect our business, operating results, and financial condition materially and adversely.

If our products do not meet industry standards that may emerge, or if some industry standards are not ultimately adopted, we will not gain market acceptance and our revenue will not grow.

Our success depends, in part, on both the adoption of industry standards for new technologies in our market and our products’ compliance with industry standards. To date, no industry standards have been adopted related to some functions of our products. The absence of industry standards may prevent market acceptance of our products if potential customers delay purchases of new equipment until standards are adopted. In addition, in developing our products, we have made, and will continue to make, assumptions about the industry standards that may be adopted by our competitors and existing and potential customers. If the standards adopted are different from those that we have chosen to support, customers may not choose our products, and our sales and related revenue will be significantly reduced.

If we do not establish and increase our market share in the intensively competitive optical networking market, we will experience, among other things, reduced revenue and gross margins.

If we do not compete successfully in the intensely competitive market for public telecommunications network equipment, we may lose any advantage that we might have by being the first to market with an optical switch. In addition to losing any competitive advantage, we may also:

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not be able to obtain or retain customers;

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experience price reductions for our products;

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experience order cancellations;

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experience increased expenses; and

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experience reduced gross margins.

Many of our competitors, in comparison to us, have:

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longer operating histories;

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greater name recognition;

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larger customer bases; and

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significantly greater financial, technical, sales, marketing, manufacturing, and other resources.

These competitors may be able to reduce our market share by adopting more aggressive pricing policies than we can or by developing products that gain wider market acceptance than our products.

Our ability to compete could be jeopardized and our business plan seriously compromised if we are unable to protect, from third-party challenges, the development and maintenance of the proprietary aspects of the optical switching products and technology we design.

Our products utilize a variety of proprietary rights that are critical to our competitive position. Because the technology and intellectual property associated with our optical switching products are evolving and rapidly changing, our current intellectual property rights may not adequately protect us in the future. We rely on a combination of laws including patent, copyright, trademark, and trade secret laws and contractual restrictions to protect the intellectual property utilized in our products. For example, we enter into non-competition, confidentiality, or license agreements with our employees, consultants, corporate partners, and customers and control access to, and distribution of, our software, documentation, and other proprietary information. These agreements may be insufficient to prevent former employees from using our technology after the termination of their employment with us. In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Also, it is possible that no patents or trademarks will be issued from our currently pending or future patent or trademark applications. Because legal standards relating to the validity, enforceability, and scope of protection of patent and intellectual property rights in new technologies are uncertain and still evolving, the future viability or value of our intellectual property rights is uncertain. Moreover, effective patent, trademark, copyright, and trade secret protection may not be available in some countries in which we distribute, or may anticipate distributing, our products. Furthermore, our competitors may independently develop similar technologies that limit the value of our intellectual property or design around patents issued to us. If competitors are able to use our technology, our competitive edge would be reduced or eliminated.

If necessary licenses of third-party technology are not available to us or are very expensive, our products could become obsolete and our business seriously harmed because we could have to limit or cease the development of some of our products.

We currently license technology from several companies that is integrated into our products. We may occasionally be required to license additional technology from third parties or expand the scope of current licenses to sell or develop our products. Existing and future third-party licenses may not be available to us on commercially reasonable terms, if at all. The loss of our current technology licenses or our inability to expand or obtain any third-party license required to sell or

develop our products could require us to obtain substitute technology of lower quality or performance standards or at greater cost or limit or cease the sale or development of certain products or services. If these events occur, we may not be able to increase our sales and our revenue could decline.

Risks Related To The Expansion Of Our Business

If carriers do not adopt optical switching as a solution to their capacity expansion and bandwidth management needs, our operating results will be negatively affected and our stock price could decline.

The market for optical switching is new and unpredictable. Optical switching may not be widely adopted as a method by which service providers address their data capacity requirements. In addition, most service providers have made substantial investments in their current network and are typically reluctant to adopt new and unproven technologies. They may elect to remain with their current network design or to adopt a new design, like ours, in limited stages or over extended periods of time. A decision by a customer to purchase our product involves a significant capital investment. We will need to convince service providers of the benefits of our products for future network upgrades, and if we are unable to do so, a viable market for our products may not develop or be sustainable. If the market for optical switching does not develop, or develops even more slowly than current projections, our operating results will be below our expectations and the price of our stock could decline.

If we are not successful in developing new and enhanced products that respond to customer requirements and technological changes, customers will not buy our products and we could lose revenue.

The market for optical switching is characterized by changing technologies, new product introductions, and evolving customer and industry standards. We may be unable to anticipate or respond quickly or effectively to rapid technological changes. Also, we may experience design, manufacturing, marketing, and other difficulties that could delay or prevent our development and introduction of new products and enhancements. In addition, if our competitors introduce products based on new or alternative technologies, our existing and future products could become obsolete and our sales could decrease.

If we do not expand our sales, marketing, and distribution channels, we may be unable to increase market awareness and sales of our products, which may prevent us from increasing our sales and achieving and maintaining profitability.

Our products require a sophisticated sales and marketing effort targeted towards a limited number of key individuals within our current and prospective customers’ organizations. These customers may have long- standing vendor relationships that may inhibit our ability to close business. We currently use our direct sales force and plan to develop a distribution channel as required in different regions, using both direct and indirect sales. We believe that our success will depend on our ability to establish successful relationships with various distribution partners as required by customer or region. Customer required partnerships may be with vendors that are also competitors and as such we are at greater risk of not establishing these potential customer-driven partnerships. If we are unable to expand our sales, marketing, and distribution operations, particularly in light of our recent restructurings, we may not be able to effectively market and sell our products, which may prevent us from increasing our sales and achieving and maintaining profitability.

If we are unable to deliver the high level of customer service and support demanded by our customers, we may be unable to increase our sales or we may lose customers and our operating results will suffer.

Our products are complex and our customers demand that a high level of customer service and support be available at all hours. Our customer service and support functions are provided by our small internal customer service and support organization. We may need to increase our staff to support new and existing customers. The reduction of on-site and regional support personnel may negatively impact our ability to properly service customer activities in a timely manner and may also negatively impact customer satisfaction.

If we are unable to manage these functions internally and satisfy our customers with a high level of service and support, any resulting customer dissatisfaction could impair our ability to retain customers and make future sales. We have also considered, and could consider in the future, using third parties to provide certain customer support services. We may be unable to manage effectively those third parties who may provide support services for us and they may provide inadequate levels of customer support. If we are unable to expand our customer service and support organization (internally or externally) and rapidly train these personnel, we may not be able to increase our sales, which could cause the price of our stock to decline.

We depend on our key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain our key employees, our ability to compete could be harmed.

We depend on the continued services of our executive officers, especially Harry J. Carr, our Chief Executive Officer and Chairman of the Board, Krishna Bala, our Chief Technology Officer, and other key engineering, sales, marketing, and support personnel, who have critical industry experience and relationships that we rely on to implement our business plan. With the exception of Mr. Carr, none of our officers or key employees is bound by an employment agreement for any specific term. We do not have “key person” life insurance policies covering any of our employees. All of our key employees have been granted stock-based awards, which are intended to represent an integral component of their compensation package. These stock-based awards do not currently provide the intended incentive to our employees given our stock price decline. The loss of the services of any of our key employees, the inability to attract and retain qualified personnel in the future, or delays in hiring qualified personnel could delay the development and introduction of, and negatively impact our ability to sell, our products.

If we become subject to unfair hiring, wrongful termination, or other employment-related claims, we could incur substantial costs in defending ourselves.

We may become subject to claims from companies in our industry whose employees accept positions with us that we have engaged in unfair hiring practices or inappropriately taken or benefited from confidential or proprietary information. These claims may result in material litigation or judgments against us.

Additionally, in response to changing business conditions, we have reduced our workforce by approximately 330 employees between the second quarter of 2002 and the first quarter of 2003. As a result of dramatic business restructurings, companies often face claims related to employee compensation and/or wrongful termination based on discrimination or other factors pertaining to employment and/or termination. We could incur substantial costs in defending ourselves or our employees against these claims, regardless of the merits of the claims. In addition, defending ourselves from these claims could divert the attention of our management away from our core business, which could cause our financial performance to suffer.

We do not have significant experience in international markets and may have unexpected costs and difficulties in developing international revenue.

We are expanding the marketing and sales of our products internationally. This effort will require significant management attention and financial resources to successfully develop international sales and support channels. We will face risks and challenges that we do not have to address in our U.S. operations, including:

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currency fluctuations and exchange control regulations;

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changes in regulatory requirements in international markets;

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expenses associated with developing and customizing our products for foreign countries;

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reduced protection for intellectual property rights; and

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compliance with international technical and regulatory standards that differ from domestic standards.

We may not be able to obtain additional capital to fund our existing and future operations.

At September 30, 2003, we had approximately $140.9 million in cash and cash equivalents. Based on our current plans and business conditions, we believe that our current cash, cash equivalents, investments, our line of credit facilities, and cash anticipated to be available from future operations, will enable us to meet our working capital, capital expenditure requirements, and other liquidity requirements for the next 12 months. We may need to raise additional funding at that time or earlier if we decide to undertake more rapid expansion, including acquisitions of complementary products or technologies, or if we increase our marketing and/or research and development efforts in order to respond to competitive pressures. As a result, we may need to raise substantial additional capital. We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of our planned product development and/or marketing and sales efforts and we may be unable to respond appropriately to competitive pressures, any of which would seriously harm our business. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of additional securities could result in dilution to our existing stockholders. If additional funds are raised through the issuance of debt securities, their terms could impose additional restrictions on our operations.

If we make acquisitions, our stockholders could be diluted and we could assume additional contingent liabilities. In addition, if we fail to successfully integrate or manage the acquisitions we make, our business could be disrupted and we could lose sales.

We may consider investments in complementary businesses, products, or technologies. In the event of any future acquisitions, we could:

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issue stock that would dilute our current stockholders’ percentage ownership;

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incur debt that will give rise to interest charges and may impose material restrictions on the manner in which we operate our business;

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assume liabilities;

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incur amortization expenses related to intangible assets; or

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incur large and immediate write-offs.

We also face numerous risks, including the following, in operating and integrating any acquired business:

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problems combining the acquired operations, technologies, or products;

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diversion of management’s time and attention from our core business;

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adverse effects on existing business relationships with suppliers and customers;

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risks associated with entering markets in which we have no or limited prior experience; and

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potential loss of key employees, particularly those of acquired companies.

We may not be able to successfully integrate businesses, products, technologies, or personnel that we might acquire in the future. If we fail to do so, we could experience lost sales or disruptions to our business.

The communications industry is subject to government regulations. These regulations could negatively affect our growth and reduce our revenue.

Our products and our customers’ products are subject to Federal Communications Commission rules and regulations. Current and future Federal Communications Commission rules and regulations affecting communications services or our customers’ businesses or products could negatively affect our business. In addition, international regulatory standards could impair our ability to develop products for international service providers in the future. We may not obtain or maintain all of the regulatory approvals that may, in the future, be required to operate our business. Our inability to obtain these approvals, as well as any delays caused by our compliance and our customers’ compliance with regulatory requirements, could result in postponements or cancellations of our product orders, which would significantly reduce our revenue.

Risks Related To Our Product Manufacturing

If we fail to predict our manufacturing and component requirements accurately, we could incur additional costs or experience manufacturing delays, which could harm our customer relationships.

We provide forecasts of our demand to our contract manufacturers and component vendors up to six months prior to scheduled delivery of products to our customers. In addition, lead times for materials and components that we order are long and depend on factors such as the procedures of, or contract terms with, a

specific supplier and demand for each component at a given time. If we overestimate our requirements, we may have excess inventory, which could increase our costs and harm our relationship with our contract manufacturers and component vendors due to unexpectedly reduced future orders. If we underestimate our requirements, we may have an inadequate inventory of components and optical assemblies, which could interrupt manufacturing of our products, result in delays in shipments to our customers and damage our customer relationships.

Some of the optical components used in our products may be difficult to obtain. This could inhibit our ability to manufacture our products and we could lose revenue and market share.

Our industry has previously experienced shortages of optical components and may again in the future. For some of these components, there previously were long waiting periods between placement of an order and receipt of the components. If such shortages should reoccur, component suppliers could impose allocations that limit the number of components they supply to a given customer in a specified time period. These suppliers could choose to increase allocations to larger, more established companies, which could reduce our allocations and harm our ability to manufacture our products. If we are not able to manufacture and ship our products on a timely basis, we could lose revenue, our reputation could be harmed, and customers may find our competitors’ products more attractive.

Any disruption in our manufacturing relationships may cause us to fail to meet our customers’ demands, damage our customer relationships, and cause us to lose revenue.

We rely on a small number of contract manufacturers to manufacture our products in accordance with our specifications and to fill orders on a timely basis. Our contract manufacturers may not always have sufficient quantities of inventory available to fill our orders or may not allocate their internal resources to fill these orders on a timely basis.

We currently do not have long-term contracts with any of our manufacturers. As a result, our contract manufacturers are not obligated to supply products to us for any specific period, in any specific quantity, or at any specific price, except as may be provided in a particular purchase order. If for any reason these manufacturers were to stop satisfying our needs without providing us with sufficient warning to procure an alternate source, our ability to sell our products could be harmed. In addition, any failure by our contract manufacturers to supply us with our products on a timely basis could result in late deliveries. Our inability to meet our delivery deadlines could adversely affect our customer relationships and, in some instances, result in termination of these relationships or potentially subject us to litigation. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming and could significantly interrupt the supply of our products. If we are required or choose to change contract manufacturers, we may damage our customer relationships and lose revenue.

There are a limited number of suppliers that manufacture components for optical networking products. Any disruption to their businesses could seriously jeopardize our ability to develop and/or manufacture our equipment.

There is currently significant turmoil in the optical components marketplace. Our ability to produce our products could be significantly impacted if our component suppliers:

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change their product direction;

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experience cash flow or other financial problems, which delay their supply of components to us;

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cease operating completely; or

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cease production of required components.

We purchase several of our key components from single or limited sources. If we are unable to obtain these components on a timely basis, we will not be able to meet our customers’ product delivery requirements, which could harm our reputation and decrease our sales.

We purchase several key components from single or, in some cases, limited sources. We do not have long-term supply contracts for these components. If any of our sole or limited source suppliers experience capacity constraints, work stoppages, or any other reduction or disruption in output, they may not be able or may choose not to meet our delivery schedules. Also, our suppliers may:

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enter into exclusive arrangements with our competitors;

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be acquired by our competitors;

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stop selling their products or components to us at commercially reasonable prices;

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refuse to sell their products or components to us at any price; or

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be unable to obtain or have difficulty obtaining components for their products from their suppliers.

If supply for these key components is disrupted, we may be unable to manufacture and deliver our products to our customers on a timely basis, which could result in lost or delayed revenue, harm to our reputation, increased manufacturing costs, and exposure to claims by our customers. Even if alternate suppliers are available to us, we may have difficulty identifying them in a timely manner, we may incur significant additional expense, and we may experience difficulties or delays in manufacturing our products. Any failure to meet our customers’ delivery requirements could harm our reputation and decrease our sales.

Item 3.

Qualitative and Quantitative Disclosure About Market Risk

We have not entered into contracts for derivative financial instruments. We have assessed our vulnerability to market risks, including interest rate risk associated with financial instruments included in cash and cash equivalents and foreign currency risk. Due to the short-term nature of our investments and other investment policies and procedures, we have determined that the risks associated with interest rate fluctuations related to these financial instruments are not material to our business. Additionally, as all sales contracts are denominated in U.S. dollars and our European subsidiaries are not significant in size compared to the consolidated company, we have determined that foreign currency risk is not material to our business.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, evaluated, summarized, and reported accurately within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule 13a-14). Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the date of that evaluation.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Item 2.

Changes in Securities and Use of Proceeds.

(a)

Changes in Securities.

None.

(b)

Use of Proceeds.

On May 17, 2001, in connection with our initial public offering, a Registration Statement on Form S-1 (No. 333-46362) was declared effective by the Securities and Exchange Commission. The net proceeds of our initial public offering were approximately $139.5 million. The proceeds of this offering were invested in short-term, interest-bearing, investment-grade securities. We expect to use the net proceeds from this offering primarily to fund operating losses and for working capital and other general corporate purposes to implement our business strategies. We may also use a portion of the net proceeds from our initial public offering to acquire or invest in businesses, technologies, or products that are complementary to our business.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits and Reports on Form 8-K.

(a)

Exhibits.

Exhibit		Description
10.1*		Modification dated September 5, 2003 of Business Loan Agreement dated June 1, 2000 by and between Commerce Bank/Shore, N.A. and Tellium, Inc.

10.2*		Third Amendment dated September 5, 2003 to the Promissory Note dated June 1, 2000 and Rider to Promissory Note dated July 30, 2001 made by Tellium, Inc. In favor of Commerce Bank/Shore, N.A.

31.1*		Section 302 Certification of Harry J. Carr, Chief Executive Officer

31.2*		Section 302 Certification of Michael J. Losch, Chief Financial Officer

32*		Certification of Harry J. Carr, Chief Executive Officer, and Michael J. Losch, Chief Financial Officer

*	Filed herewith

(b)

Reports on Form 8-K.

On July 28, 2003, we filed a report on Form 8-K announcing that (i) we had entered into an Agreement and Plan of Merger, dated as of July 27, 2003, with Zhone Technologies, Inc., a Delaware corporation, and Zebra Acquisition Corp., a wholly-owned subsidiary of Tellium, (iii) Tellium and Zhone had issued a joint press release dated July 28, 2003 announcing the execution of the Merger Agreement, and (iii) we had issued a press release announcing our financial results for the quarter ended June 30, 2003.

On August 1, 2003, we filed a report on Form 8-K to file as an exhibit a written transcript of conference call of Tellium held on July 28, 2003, regarding its results of operations and financial condition for the quarter ended June 30, 2003.

On October 16, 2003, we filed a report on Form 8-K to file as an exhibit a press release announcing its financial results for the quarter ended September 30, 2003.

On November 4, 2003, we filed a report on Form 8-K to file as an exhibit a press release announcing that our board of directors had unanimously approved a one-for-four reverse stock split of Tellium’s outstanding common stock.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		TELLIUM, INC.

Dated: November 13, 2003		/S/ HARRY J. CARR

		Harry J. Carr Chairman of the Board and Chief Executive Officer

Dated: November 13, 2003		/S/ MICHAEL J. LOSCH

		Michael J. Losch Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)

EX-10.1 3 dex101.htm MODIFICATION DATED SEPT. 5, 2003 Modification dated Sept. 5, 2003

Exhibit 10.1

SECOND MODIFICATION OF BUSINESS LOAN AGREEMENT

THIS AGREEMENT is made this 5th day of September, 2003, between Commerce Bank/Shore, N.A., whose address is 1701 Route 70 East, Cherry Hill, New Jersey 08054 (hereinafter, the “Bank”) and Tellium, Inc., a Delaware corporation, whose address is 2 Crescent Place, Oceanport, New Jersey 07757 (the “Borrower”).

BACKGROUND STATEMENT OF FACTS

On June 1, 2000, Borrower and Bank executed a Business Loan Agreement as subsequently amended by a Rider to Business Loan Agreement dated July 30, 2001, as further amended by a Modification Of Business Loan Agreement dated June 30, 2003 (the “Loan Agreement”) which set forth the terms and conditions of a certain revolving line of credit loan described therein from the Bank to the Borrower in the original principal amount of up to $10,000,000.00 (the “Loan”); (Note: All undefined capitalized words used herein shall have the same meaning as set forth in the Loan Agreement.).

The Loan is evidenced by a Promissory Note in the original principal amount of up to $10,000,000.00 dated June 1, 2000, which was subsequently amended by a Rider to Promissory Note dated July 30, 2001, as Amendment To Promissory Note dated September 1, 2001 and a Second Amendment To Promissory Note dated June 30, 2003 (the “Note”).

The Borrower has previously requested extensions of the term of the Loan and the Bank has granted each such request.

The Borrower has now requested an additional extension and modification of the terms of the Loan.

NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:

1. Term:

The parties agree that the term of the Loan shall be extended to expire on January 1, 2004.

2. Collateral:

Notwithstanding anything to the contrary contained in this Agreement, the parties agree that all collateral, including Commerce Bank Certificate of Deposit #14827, shall remain pledged to the Bank as collateral for the Loan.

3. Fees:

The parties agree to the payment by Borrower to Bank of the following fees in connection with this Agreement:

The Bank shall not charge Borrower any fee in connection with the granting of this extension;

At the time of issuance of any standby letter of credit as provided for herein, a fee equal to 1% per annum, plus any other standard fees and commissions routinely charged in connection therewith, as determined by the Bank in its sole discretion;

At the time of issuance of any documentary letter of credit as provided for herein or any standard fees and commissions routinely charged in connection therewith, as determined by the Bank, in its sole discretion.

4. Letters of Credit:

Standby Letters of Credit: The parties agree that Borrower shall be entitled to request the issuance of one or more standby letters of credit, none of which shall expire later than the expiration of the term of the Loan on January 1, 2004;

Documentary Letters of Credit: The parties agree that Borrower shall be entitled to request the issuance of one or more documentary letters of credit, none of which shall expire later than the expiration of the term of the Loan on January 1, 2004;

The issuance of either standby or documentary letters of credit shall be requested by the Borrower on a form provided by Bank and directed to such office of Bank as is designated by Bank, no later than 12:00 noon (New Jersey time) on the day prior to the proposed issuance date; and

The total amount of all outstanding standby letters of credit and documentary letters of credit shall not exceed $5,000,000.00.

5. The parties hereto agree that, except as modified herein and in the Third Amendment To Promissory Note, the terms of the Loan Agreement, the Note and all the Related Documents, as described in the Loan Agreement, shall remain the same and are in full force and effect.

7. The within Agreement and the terms and provisions of this Agreement shall inure to the benefit of and be binding upon the respective parties, their successors and assigns.

IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first above written.

Attest/Witness:	TELLUM, INC.
/s/	By:	/S/ WILLIAM J. PROETTA
		William J. Proetta, President

Attest/Witness:	COMMERCE BANK, N.A.
/s/	By:	/S/ CYNTHIA A. COLUCCI
		Cynthia A. Colucci, Vice President

EX-10.2 4 dex102.htm THIRD AMENDMENT DATED SEPT. 5, 2003 TO PROMISSORY NOTE DATED JUNE 1, 2000 Third Amendment dated Sept. 5, 2003 to Promissory Note dated June 1, 2000

Exhibit 10.2

THIRD AMENDMENT TO PROMISSORY NOTE

This Third Amendment, made this 5th day of September, 2003, to the Promissory Note dated June 1, 2000, in the original sum of Ten Million and 00/100 ($10,000,000.00) Dollars, as subsequently amended by a Rider to Promissory Note dated July 30, 2001, an Amendment To Promissory Note dated September 1, 2001 and a Second Amendment To Promissory Note dated June 30, 2003 (hereinafter referred to as the “Note”), made by Tellium, Inc., a Delaware corporation (hereinafter referred to as the “Borrower”) in favor of Commerce Bank/Shore, N.A. (hereinafter referred to as the “Bank”).

W I T N E S S E T H

WHEREAS, the Borrower has requested that the Bank extend the term of the Note; and

WHEREAS, Bank has agreed to said request, subject to the terms and conditions set forth in this Third Amendment.

NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained and Borrower’s promise to pay Bank all sums due pursuant to the terms of the Note, as modified herein, it is agreed that the terms of the Note shall be amended and modified as follows:

Payment: This section of the Note shall be amended to provide that Borrower will pay this loan in full on or before January 1, 2004.

Except as amended herein, the terms and provisions of the Note remain unchanged, are and shall remain in full force and effect unless and until modified or amended in writing in accordance with their terms, and are hereby ratified and confirmed.

IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first above written.

BORROWER:	TELLIUM, INC.,
Attest/Witness:	A Delaware Corporation

By: /s/	By:	/S/ WILLIAM J. PROETTA
		William J. Proetta, President

BANK:	COMMERCE BANK, N.A.
Attest/Witness:
By: /s/	By:	/S/ CYNTHIA A. COLUCCI
		Cynthia A. Colucci, Vice President

EX-31.1 5 dex311.htm SECTION 302 CERTIFICATION OF HARRY J. CARR, CEO Section 302 Certification of Harry J. Carr, CEO

Exhibit 31.1

SECTION 302 CERTIFICATION

I, Harry J. Carr, Chief Executive Officer of Tellium, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Tellium, Inc.;

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

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

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)

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

(b)

[omit pursuant to SEC Release No. 33-8238];

(c)

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

(d)

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

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

(a)

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

(b)

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

Date: November 13, 2003.
	TELLIUM, INC.

	By:	/S/ HARRY J. CARR
		Harry J. Carr Chief Executive Officer

EX-31.2 6 dex312.htm SECTION 302 CERTIFICATION OF MICHAEL J. LOSCH, CFO Section 302 Certification of Michael J. Losch, CFO

Exhibit 31.2

SECTION 302 CERTIFICATION

I, Michael J. Losch, Chief Financial Officer of Tellium, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Tellium, Inc.;

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

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

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)

(b)

[omit pursuant to SEC Release No. 33-8238];

(c)

(d)

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

(a)

(b)

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

Date November 13, 2003.
	TELLIUM, INC.

	By:	/S/ MICHAEL J. LOSCH
		Michael J. Losch Chief Financial Officer

EX-32 7 dex32.htm CERTIFICATION OF HARRY J. CARR, CEO AND MICHAEL J. LOSCH, CFO Certification of Harry J. Carr, CEO and Michael J. Losch, CFO

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C.§1350

We hereby certify that this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof, to the best of our knowledge, fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Tellium, Inc.

		TELLIUM, INC.
		By:		/S/ HARRY J. CARR
				Harry J. Carr Chief Executive Officer

		TELLIUM, INC.
		By:		/S/ MICHAEL J. LOSCH
				Michael J. Losch Chief Financial Officer

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