10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 29, 2001

OR

[  ] 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: 0-9692

TELLABS, INC.
(Exact name of registrant as specified in its charter)

Delaware	36-3831568
(State of Incorporation)	(I.R.S. Employer Identification No.)

4951 Indiana Avenue, Lisle, Illinois	60532
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (630) 378-8800

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___

Common Shares, $.01 Par Value - 409,773,339 shares outstanding on June 29, 2001.

TELLABS, INC.
INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Comparative Statements of Earnings
	Condensed Consolidated Comparative Balance Sheets
	Condensed Consolidated Comparative Statements of Cash Flow
	Notes to Condensed Consolidated Comparative Financial Statements
Item 2.	Management's Discussion and Analysis
PART II.	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURE

TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF EARNINGS
(Unaudited)
	Three		Six
	Months Ended		Months Ended
(In thousands, except per-share data)	6/29/01	6/30/00	6/29/01	6/30/00
Net Sales
Product	$407,701	$716,596	$1,075,088	$1,310,597
Services and other	101,694	68,864	206,415	106,148
	509,395	785,460	1,281,503	1,416,745
Cost of sales
Product	375,570	298,690	667,527	543,618
Services and other	87,250	64,733	161,495	118,899
	462,820	363,423	829,022	662,517
Gross Profit	46,575	422,037	452,481	754,228
Operating expenses
Marketing, general and administrative	107,707	100,326	218,767	187,292
Research and development	110,624	103,284	238,228	196,304
Merger costs	-	-	-	5,760
Restructuring Expenses	83,757	-	83,757	-
Goodwill amortization	5,975	2,774	10,480	5,789
	308,063	206,384	551,232	395,145
Operating Profit (Loss)	(261,488)	215,653	(98,751)	359,083
Other income (expense)
Interest income	11,255	14,402	25,799	26,248
Interest expense	(138)	(340)	(307)	(397)
Other	3,584	513	5,314	26,495
	14,701	14,575	30,806	52,346
Earnings (Loss) Before Income Taxes and   Cumulative Effect of Change in Accounting   Principle	(246,787)	230,228	(67,945)	411,429
Income taxes	(72,085)	73,100	(15,750)	133,790
Earnings (Loss) Before Cumulative Effect of   Change in Accounting Principle	(174,702)	157,128	(52,195)	277,639
Cumulative effect of change in accounting   principle (net of tax of $13,409)	-	-	-	(29,161)
Net Earnings (Loss)	$(174,702)	$157,128	$(52,195)	$248,478
Earnings (Loss) per Share Before Cumulative   Effect of Change in Accounting Principle
Basic	$(0.43)	$0.38	$(0.13)	$0.68
Diluted	$(0.43)	$0.38	$(0.13)	$0.66
Cumulative Effect of Change in Accounting   Principle per Share
Basic	$ -	$ -	$ -	$(0.07)
Diluted	$ -	$ -	$ -	$(0.07)
Earnings (Loss) per Share
Basic	$(0.43)	$0.38	$(0.13)	$0.61
Diluted	$(0.43)	$0.38	$(0.13)	$0.59
Average number of common shares outstanding	409,514	409,779	409,143	409,287
Average number of common shares outstanding,   assuming dilution	409,514	418,770	409,143	418,839
The accompanying notes are an integral part of these statements.

TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited)
	June 29,	December 29,
	2001	2000
(In thousands, except share amounts)
Assets
Current Assets
Cash and cash equivalents	$ 418,151	$ 329,289
Investments in marketable securities	616,174	693,058
Accounts receivable, net	411,701	802,546
Inventories
Raw materials	194,127	211,405
Work in process	56,446	55,863
Finished goods	223,005	160,987
	473,578	428,255
Deferred tax assets	104,740	29,773
Miscellaneous receivables and other current assets	32,053	39,558
Total Current Assets	2,056,397	2,322,479
Property, plant and equipment	835,013	756,895
Less: accumulated depreciation	325,591	296,134
	509,422	460,761
Goodwill, net	171,443	73,924
Intangibles and other assets, net	207,841	215,903
Total Assets	$ 2,945,103	$ 3,073,067
Liabilities
Current Liabilities
Accounts payable	$ 111,757	$ 155,006
Accrued liabilities	106,925	164,045
Accrued restructuring and other charges	100,014	-
Income taxes	-	93,294
Total Current Liabilities	318,696	412,345
Long-term debt	2,850	2,850
Accrued long-term restructuring charges	25,333	-
Other long-term liabilities	27,994	24,221
Deferred income taxes	-	6,067
Stockholders' Equity
Preferred stock: authorized 5,000,000 shares of
$.01 par value; no shares issued and outstanding	-	-
Common stock: 1,000,000,000 shares of $.01 par
value; 412,773,339 and 411,182,947 shares
issued and outstanding	4,128	4,112
Additional paid-in capital	483,331	441,909
Treasury stock, at cost: 3,000,000 shares	(126,476)	(126,476)
Accumulated other comprehensive income
Cumulative translation adjustment	(177,542)	(127,018)
Unrealized net gains (losses) on
available-for-sale securities	368	(3,559)
Total accumulated other comprehensive income	(177,174)	(130,577)
Retained earnings	2,386,421	2,438,616
Total Stockholders' Equity	2,570,230	2,627,584
Total Liabilities and Stockholders' Equity	$ 2,945,103	$ 3,073,067
The accompanying notes are an integral part of these statements.

TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited)
	For the Six Months Ended
	June 29,	June 30,
(In thousands)	2001	2000
Operating Activities
Net earnings (loss)	$ (52,195)	$ 248,478
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Restructuring and other charges, net of cash paid	254,610	-
Depreciation and amortization	75,730	54,789
Tax benefit associated with stock option exercises	14,783	8,716
Provision for doubtful receivables	17,993	4,279
Deferred income taxes	(82,424)	(8,803)
Gain on investments	(3,289)	(25,836)
Merger costs	-	5,760
Net changes in assets and liabilities:
Accounts receivable	364,846	54,637
Inventories	(144,965)	(113,241)
Miscellaneous receivables and other current assets	5,223	(3,785)
Long-term assets	(30,151)	(46,917)
Accounts payable	(53,621)	50,184
Accrued liabilities	(54,244)	15,714
Income taxes	(98,581)	2,551
Long-term liabilities	3,922	1,269
Net Cash Provided by Operating Activities	217,637	247,795
Investing Activities
Acquisition of property, plant and equipment, net	(128,285)	(64,195)
Payments for purchases of investments	(293,611)	(254,055)
Proceeds from sales and maturities of
investments	382,047	140,232
Payments for acquisitions, net of
cash acquired	(89,010)	(535)
Net Cash Used in Investing Activities	(128,859)	(178,553)
Financing Activities
Proceeds from issuance of common stock	18,770	18,308
Payments of notes payable	-	(6,500)
Net Cash Provided by Financing Activities	18,770	11,808
Effect of Exchange Rate Changes on Cash	(18,686)	(12,003)
Net Increase in Cash and Cash Equivalents	88,862	69,047
Cash and Cash Equivalents at Beginning of Year	329,289	310,553
Cash and Cash Equivalents at End of Year	$ 418,151	$ 379,600
Other Information
Interest paid	$305	$87
Income taxes paid	$143,364	$116,353
The accompanying notes are an integral part of these statements.

TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED COMPARATIVE FINANCIAL STATEMENTS

1. Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the requirements of Form 10-Q and applicable rules of Regulation S-X and accordingly do not include all disclosures normally required by generally accepted accounting principles for complete financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) which are necessary for a fair presentation. Operating results for interim periods are not necessarily indicative of operating results for the full year. Accordingly, the financial statements and notes herein should be read in conjunction with the Form 10-K of Tellabs, Inc. ("Tellabs" or the "Company"), for the year ended December 29, 2000.

Prior year results of operations were restated to reflect the adoption of Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" during the fourth quarter of 2000. In addition, certain reclassifications have been made in the 2000 financial statements to conform with the 2001 presentation.

2. Restructuring and Other Charges

On April 18, 2001, Tellabs initiated a plan to restructure its current business operations and terminate the SALIX and NetCore next-generation switching product efforts. The decision to restructure the Company's current operations was based on the recent slowdown in spending by the major telecommunications carriers, which resulted in revised business forecasts pointing to a decrease in revenue growth. As a result, the Company formulated a plan to align its cost structure with the revised outlook for the business. The decision to exit the SALIX and NetCore next-generation switching product efforts was the result of a multi-year unprofitable business forecast, which was based on analysis of current and future market conditions and direct customer interaction. Major components of the restructuring plan included: the exiting of the SALIX and NetCore next-generation switching product efforts; a strategic assessment of worldwide manufacturing capacity to better align capacity to individual product demand; a workforce reduction associated with the manufacturing capacity alignment; an assessment of global inventory levels; an analysis of outstanding purchase commitments and a review of all leased facilities, in conjunction with the completion of the Company's new corporate headquarters.

In conjunction with this plan, the Company recorded restructuring and other charges totaling $261,639,000 in the second quarter of 2001. Below is an analysis and discussion of the restructuring and other charges by major income statement classification:

(in thousands)

Income Statement Classification	Description of Charges	Accrual	Non-Cash Activity	Cash Activity	Balance at June 29, 2001
Net Product Sales	Reversal of SALIX revenue	$6,224	$2,852	$ -	$9,076
Product Cost of Sales	Inventory write-offs	90,731	(90,731)	-	-
	Purchase commitments	78,025	-	(510)	77,515
	Current asset write-offs	2,902	(2,902)	-	-
Restructuring	Severance and related	6,891	(112)	(5,705)	1,074
	Consolidation of excess facilities	38,450	-	(814)	37,636
	Disposal of property, plant and equipment	27,718	(27,718)	-	-
	Other asset write-offs	10,698	(10,652)	-	46
		$261,639	$(129,263)	$(7,029)	$125,347

Included in net product sales was a reversal of previously recognized sales of the Company's SALIX 7750 product totaling $6,224,000. In addition, the Company also reversed deferred revenue of $2,852,000 related to SALIX product sales. The Company intends to refund the $9,076,000 that it was paid during the remainder of 2001.

Included in product cost of sales were restructuring and other charges totaling $171,658,000. Of that total, $90,731,000 related to write-offs of excess and obsolete inventory, $78,025,000 related to accruals for outstanding non-cancelable inventory purchase commitments, with the remainder related to write-offs of prepaid royalties and licenses related to the SALIX product line. Below is a breakdown of the inventory and purchase commitment charges by product line:

(amounts in thousands)

Product Line	Inventory Write-Off	Purchase Commitments
SALIX/NetCore	$31,085	$8,781
Broadband Access	34,865	49,747
Other	24,781	19,497
Total	$90,731	$78,025

The SALIX/NetCore charges related directly to the exit of that business. The broadband access charges related primarily to the recently reduced demand for the CABLESPAN 2300, which resulted in a build-up of residential service units that will be superseded by new, upgraded units. The other charges were comprised primarily of common components and piece parts that were a direct result of the lower forecasted overall product demand.

From a balance sheet perspective, the inventory write-offs were taken directly against inventory, while the purchase commitments were recorded to accrued restructuring and other charges. From a cash requirement perspective, the Company is actively working with suppliers to settle the outstanding purchase commitments by the end of 2001.

Below is a breakdown of the $83,757,000 in restructuring expenses by type:

Severance and related expenses
The restructuring program will result in the reduction of approximately 550 employees throughout the world. Workforce reductions began in April 2001, and are expected to conclude in the fourth quarter of 2001. The Company recorded a charge of $6,891,000 for severance pay and related fringe benefits. In addition to these reductions, the Company also eliminated approximately 450 temporary or contract positions and will not fill approximately 1,100 open positions.

From a balance sheet standpoint, the severance and related expenses were charged to accrued restructuring and other charges. To date, approximately $5,817,000 has been charged against this reserve, principally for the cash payment of severance pay to terminated employees. The remainder of the severance and related expenditures are expected to be paid by the end of 2001.

Consolidation of excess facilities
The Company recorded charges of $38,450,000 related to the consolidation of excess facilities. The charges relate primarily to lease cancellation and non-cancelable lease costs associated with the closure of the SALIX facility in Germantown, Maryland; the closure of the NetCore facility in Wilmington, Massachusetts and the consolidation of a variety of leased buildings in Illinois, Massachusetts and Georgia, that will no longer be needed as a direct result of the headcount reductions outlined above and the decision not to fill 1,100 open positions.

From a balance sheet standpoint, $13,117,000 will be paid during the next year and was recorded to accrued restructuring and other charges. Of that total, approximately $814,000 has been paid. The remaining $25,333,000 was recorded in a long-term liability account. It is expected that these amounts will be substantially paid by 2003.

Disposal of property, plant and equipment and write-off of other assets
Tellabs recorded charges of $38,416,000 related to the disposal of property, plant and equipment and other long-term assets. Property, plant and equipment that was disposed of totaled $27,718,000 and consisted primarily of leasehold improvements, lab and data equipment and furniture. Other assets written off totaled $10,698,000 and consisted primarily of capitalized prototypes related to the SALIX next-generation switching product effort.

Overall, the restructuring actions outlined above are expected to reduce the Company's overall cost structure by approximately 5% to 6%.

As previously announced, the Company is continuing to review ways to reduce operating expenses as part of an overall effort to align its cost structure and asset base with business expectations. Management is currently studying various alternatives including additional headcount reductions, further consolidation of facilities to achieve operating efficiencies, and other related actions. Appropriate restructuring and other charges, should they be required, would be recognized in third quarter 2001 results.

3. Business Combinations

In February 2001, the Company acquired Future Networks, Inc. ("FNI"), a leader in standards-based voice and cable modem technology, for up to approximately $135,481,000. The aggregate purchase price consisted of cash paid to the former shareholders of FNI of approximately $94,896,000, cash held in escrow of approximately $35,480,000 payable contingent upon FNI achieving certain product development milestones, the value of FNI employee stock options exchanged for Tellabs stock options of approximately $4,930,000 and other acquisition costs.

During the second quarter of 2001, FNI achieved its first product development milestone, which entitles the former shareholders to receive a total cash payment of $11,010,000 from the escrow account. As a result, Tellabs accrued for the milestone payment which will be made during the third quarter. After this payment, there will be $24,470,000 remaining in the escrow account contingent upon FNI achieving its additional product milestones.

The FNI acquisition was accounted for as a purchase, and accordingly, the results of operations of the acquired business were included in the consolidated operating results of Tellabs from the date of acquisition.

The preliminary allocation of purchase price was as follows:

(In thousands)
Fair value of assets acquired	$11,339
Cost in excess of fair value	110,044
Liabilities assumed	10,372
Purchase Price (including the first contingent milestone payment)	$111,011

The total amount allocated to cost in excess of fair value is being amortized using the straight-line method over a period of seven years. Pro forma combined operating results prepared assuming the acquisition had occurred at the beginning of the year are not being presented since they would not differ materially from reported results.

4. New Accounting Policies

The Company adopted the Financial Accounting Standard Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," during the first quarter of 2001 (For more information see Note 7. "Derivative Financial Instruments").

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations that has been used in the past by the Company to account for some of its acquisitions. SFAS No. 141 also modifies the criteria to recognize intangible assets apart from goodwill. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will instead be subject to an annual impairment test. Other intangible assets will continue to be amortized over their useful lives.

Tellabs will immediately follow the business combinations guidance set forth in SFAS No. 141 for any future acquisitions. The non-amortization provisions of SFAS No. 142 will be implemented during the first quarter of 2002. The Company expects an increase of approximately $28 million in pre-tax earnings during 2002 as a result of this accounting change. The Company will perform the required transitional impairment test of goodwill during the first quarter of 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.

5. Comprehensive Income
 
Comprehensive income (loss) for the second quarter of 2001 was $(192,760,000) and $138,787,000 for the second quarter of 2000. For the first six months of 2001, comprehensive income (loss) was $(98,792,000) compared to $193,542,000 for the first six months of 2000.

6. Earnings Per Share Reconciliation
 
The following table sets forth the computation of earnings per share:

	Three Months Ended		Six Months Ended
	June 29,	June 30,	June 29,	June 30,
(In thousands, except per-share amounts)	2001	2000	2001	2000
Numerator:
Net earnings (loss) before cumulative effect   of change in accounting principle	$(174,702)	$157,128	$(52,195)	$277,639
Cumulative effect of change in   accounting principle	-	-	-	(29,161)
Net earnings (loss)	$(174,702)	$157,128	$(52,195)	$248,478
Denominator:
Denominator for basic earnings per share-   weighted-average shares outstanding	409,514	409,779	409,143	409,287
Effect of dilutive securities:
Employee stock options and awards	-	8,991	-	9,552
Denominator for diluted earnings per share-   adjusted weighted-average shares outstanding   and assumed conversions	409,514	418,770	409,143	418,839
Earnings (loss) per share before cumulative effect    of change in accounting principle	$ (0.43)	$ 0.38	$ (0.13)	$ 0.68
Earnings (loss) per share before cumulative effect    of change in accounting principle,    assuming dilution	$ (0.43)	$ 0.38	$ (0.13)	$ 0.66
Cumulative effect of change in accounting    principle per share	$ -	$ -	$ -	$ (0.07)
Cumulative effect of change in accounting    principle per share assuming dilution	$ -	$ -	$ -	$ (0.07)
Earnings (loss) per share	$ (0.43)	$ 0.38	$ (0.13)	$ 0.61
Earnings (loss) per share, assuming dilution	$ (0.43)	$ 0.38	$ (0.13)	$ 0.59

7. Derivative Financial Instruments

Effective in the first quarter of 2001, Tellabs adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards that require companies to record all derivative instruments on the balance sheet at their fair value. Changes in the derivatives' fair value are to be reported in earnings or other comprehensive income, as appropriate.

Tellabs conducts business on a global basis in several major currencies and is subject to the risks associated with fluctuating foreign exchange rates. In response to this, Tellabs developed a foreign currency exposure management policy with the objective of mitigating financial exposure to changing foreign exchange rates, to enable management to focus its attention on its core business. This policy contemplates use of derivative financial instruments, primarily foreign currency forward exchange contracts, to hedge up to 90% of existing nonfunctional currency receivables and payables that are expected to be settled in less than one year. It is the Company's policy to enter into forward exchange contracts only to the extent necessary to meet its overall goal of minimizing nonfunctional foreign currency exposures. Tellabs does not enter into forward exchange contracts for speculative purposes.

Nonfunctional foreign currency exposures are reviewed on a monthly basis and forward exchange contracts are entered into specifically to hedge these identified exposures. The principal currencies currently being hedged by the Company are the British pound, Danish krone, Euro and U.S. dollar.

In accordance with SFAS No. 133 all forward exchange contracts are recorded on the balance sheet at fair value. Forward exchange contracts receivable are included in other current assets, while forward exchange contracts payable are included as part of accrued liabilities in the consolidated condensed balance sheet. Changes in the fair value of these instruments are included in earnings, as part of other income and expense, in the current period. The Company's current hedging practices do not qualify for special hedge accounting treatment as prescribed in SFAS No. 133 since hedges of existing assets or liabilities that will be remeasured with changes in fair value reported currently in earnings are specifically excluded. Adoption of SFAS No. 133 had no significant impact on Tellabs' consolidated financial statements.

Derivative financial instruments involve elements of market and credit risk not recognized in the financial statements. The market risk that results from these instruments relates to changes in the foreign currency exchange rates, which is expected to be partially offset by movements in the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of the Company's derivative transactions. Tellabs does not believe there is a significant credit risk because the counterparties are all large international financial institutions with high credit ratings. In addition, the Company also limits the amount of agreements entered into with any one financial institution in order to mitigate credit risk.

Management's Discussion and Analysis

Quarter Ended June 29, 2001 Compared to Quarter Ended June 30, 2000

Significant Events and Non-Comparable Items
Net Sales for the quarter ended June 29, 2001, were $509.4 million, down 35.1% compared to sales of $785.5 million achieved during the second quarter of 2000. During 2000, Tellabs adopted SAB No. 101, "Revenue Recognition in Financial Statements," which required the Company to modify its revenue recognition policies to be in compliance with the then newly issued guidelines and related interpretive guidance. The adoption of SAB No. 101 was accounted for as a change in accounting principle with the cumulative effect of the change to prior periods reported during the first quarter of 2000.

Tellabs reported a net loss of $174.7 million for the second quarter of 2001, compared to net income of $157.1 million for the same period last year. Net loss per diluted share outstanding was $0.43 per share for the quarter ended June 29, 2001, compared to net earnings per diluted share outstanding of $0.38 per share for the second quarter of 2000. Included in second quarter 2001 earnings were charges totaling $261.6 million related to the Company's efforts to realign its cost structure with its current expectations for lower revenue growth, coupled with the Company's termination of its SALIX and NetCore next-generation switching product effort (For more information, see Note 2. "Restructuring and Other Charges"). The chart below presents pro forma financial information for the second quarter of 2001, excluding the restructuring and other charges. For comparability purposes, all subsequent quarterly comparisons will be based on this pro forma financial information.

(In thousands, except per share amounts)	Quarter Ended June 29, 2001	Restructuring and other charges	Pro forma June 29, 2001
Net Sales
Product	$407,701	$(6,224)	$413,925
Services and other	101,694	-	101,694
	509,395	(6,224)	515,619
Cost of sales
Product	375,570	171,658	203,912
Services and other	87,250	-	87,250
	462,820	171,658	291,162
Gross Profit	46,575	(177,882)	224,457
Marketing, general and administrative	107,707	-	107,707
Research and development	110,624	-	110,624
Restructuring	83,757	83,757	-
Goodwill	5,975	-	5,975
Operating Expenses	308,063	83,757	224,306
Operating Profit (Loss)	(261,488)	(261,639)	151
Earnings (Loss) before Income Taxes	(246,787)	(261,639)	14,852
Income Taxes	(72,085)	(76,765)	4,680
Net Earnings (Loss)	$(174,702)	$(184,874)	$10,172
Earnings (Loss) per Diluted Share	$(0.43)	$(0.45)	$0.02
Average Diluted Shares Outstanding	409,514	409,514	414,834

Results of Operations
Net product sales for the quarter ended June 29, 2001, totaled $413.9 million, a decrease of 42.2% compared to the quarter ended June 30, 2000, stemming from an industry-wide slowdown in customers' equipment purchases. The overall decrease in product sales was driven primarily by lower optical networking product sales. Sales of optical networking products for the second quarter of 2001 were $221.2 million, compared to $513.1 million for the same period last year. The primary driver behind the decrease in optical networking sales was weaker TITAN® 5500/5500S and TITAN 532L systems sales. During the second quarter of 2001, the Company recognized first revenues from sales of two of its new major products: the TITAN 6500 Multiservice Transport Switch ("MTS") and the TITAN 6100 Optical Transport Switch ("OTS"). The Company expects these new products to become a more significant contributor to overall sales in the future. Sales of the Company's broadband access products were $147.8 million compared to $156.0 million in the second quarter of 2000. The reduction in broadband access product sales was a result of lower CABLESPAN® 2300 universal telephony distribution systems sales, which negated relatively strong gains achieved by the Company's FOCUS™ international-standard optical products and increased MartisDXX® managed access and transport systems sales. Sales of the Company's voice quality enhancement products totaled $44.9 million for the second quarter of 2001, compared to $47.4 million for the same period last year. The decrease in voice quality enhancement product sales was attributed mainly to lower sales of Tellabs' echo cancellation products.

Net services and other revenues for the quarter ended June 29, 2001, totaled $101.7 million, an increase of 47.7% compared to the second quarter of 2000. Net services and other revenues consist primarily of revenues generated from the Company's professional services and solutions area. The strong revenue growth achieved by the Company's professional services and solutions area was due to the installation and testing of the Company's products that were sold during the first half of 2001 and latter part of 2000.

Sales within the United States, for the second quarter of 2001, decreased 42.6% compared to the same period last year and accounted for approximately 71.4% of total sales. Sales outside the United States grew 2.5% over the second quarter of 2000, and accounted for approximately 28.6% of total sales.

Gross margin as a percentage of sales, for the quarter ended June 29, 2001, was 43.5% compared to 53.7% for the second quarter of 2000. Gross product margin as a percentage of sales for the second quarter of 2001 was 50.7% compared to 58.3% for the same period last year. The decrease in gross product margin as a percentage of sales was attributable to a variety of factors including: decreased sales volume of the Company's TITAN 5500/5500S systems and lower absorption of fixed manufacturing costs due to decreased product sales. Gross services and other margin as a percentage of sales was 14.2% for the second quarter of 2001, compared to 6.0% for the same period last year. The improvement in gross services and other margin as a percentage of sales was attributable to the Company's continued efforts to perform its services and installations utilizing the most cost-effective means available.

Operating expenses for the quarter ended June 29, 2001 totaled $224.3 million compared to $206.4 million for the quarter ended June 30, 2000. As a percentage of sales, operating expenses for the second quarter of 2001, were 43.5% compared to 26.3% for the same period last year. Research and development expenditures for the second quarter of 2001, totaled $110.6 million, an increase of 7.1% over the comparable period last year. The growth in research and development expenditures was attributable to new product development costs for the Company's optical networking product line, along with the inclusion of development costs from FNI, which was acquired in February 2001 (For more information, see Note 3. "Business Combinations"). These increased expenditures were partially offset by cost savings recognized as a result of the Company's decision to exit the SALIX and NetCore next-generation switching product area. As a percentage of sales, research and development expenditures were 21.5% compared to 13.1% for the second quarter of 2000. The growth in research and development expenditures as a percentage of sales was attributable primarily to lower overall sales in 2001. Tellabs anticipates research and development expenditures for the remainder of 2001 to decrease due primarily to the cancellation of its SALIX and NetCore next-generation switching efforts and the Company's reprioritization of its research and development activities. Overall, Tellabs continues to invest in research and development activities, both to develop new products and to modify existing technologies to meet the needs of its customers. Marketing, general and administrative expenditures for the second quarter of 2001, totaled $107.7 million, an increase of 7.4% over the comparable quarter last year. The growth in selling, general and administrative expenditures was primarily the result of staffing and business infrastructure expenditures initiated to support the Company's original growth estimates for the business. Marketing, general and administrative spending as a percentage of sales was 20.9% compared to 12.8% for the second quarter of 2000. Based upon the changing market conditions in the telecommunications industry during the first half of 2001, Tellabs has re-evaluated its short-term growth prospects and has undertaken a company wide initiative to align expenditures with its lower short-term growth forecasts. The Company anticipates that its cost control efforts will reduce marketing, general and administrative spending over the remainder of 2001.

As previously discussed, included in second quarter 2001 earnings were charges totaling $261.6 million related to the Company's restructuring efforts (For more information, see Note 2. "Restructuring and Other Charges"). The Company is continuing to review ways to reduce operating expenses as part of an overall effort to align its cost structure and asset base with business expectations. Management is currently studying various alternatives including additional headcount reductions, further consolidation of facilities to achieve operating efficiencies, and other related actions. Appropriate restructuring and other charges, should they be required, would be recognized in third quarter 2001 results.

Other income for the quarter ended June 29, 2001, totaled $14.7 million compared to $14.6 million for the second quarter of 2000. Interest income for the second quarter of 2001 totaled $11.3 million, a decrease of 21.9% compared to the second quarter of 2000. The reduction in interest income was a function both of lower prevailing interest rates on investments and lower cash balances available for investment. The decrease in interest income was partially offset by growth in other income, which resulted mainly from gains on investment activity.

The effective tax rate for the quarter ended June 29, 2001 was 31.5% compared to 31.8% for the comparable period last year. Tellabs effective tax rate reflects the benefits of research and development tax credits and lower foreign tax rates, as compared to the United States federal statutory rate.

Six Months Ended June 29, 2001 Compared to Six Months Ended June 30, 2000

Significant Events and Non-Comparable Items
Net sales for the six months ended June 29, 2001, totaled $1,281.5 million, a decrease of 9.5% compared to $1,416.7 million for the same period last year. As previously mentioned, Tellabs adopted SAB No. 101, "Revenue Recognition in Financial Statements," during 2000. The adoption of SAB No. 101 was accounted for as a change in accounting principle with the cumulative effect of the change to prior periods reported during the first period of 2000.

Tellabs reported a net loss of $52.2 million for the first half of 2001, compared to net income of $248.5 million for the same period last year. Net loss per diluted share outstanding was $0.13 per share for the first six months of 2001, compared to net earnings per diluted share outstanding of $0.59 per share for the first half of 2000. Included in 2001 earnings were charges totaling $261.6 million related to the Company's efforts to realign its cost structure with its current expectations for lower revenue growth, coupled with the Company's termination of its SALIX and NetCore next-generation switching product effort (For more information, see Note 2. "Restructuring and Other Charges"). The chart below presents pro forma financial information for the six months ended June 29, 2001, excluding the restructuring and other charges.

(In thousands, except per share amounts)	Six Months Ended June 29, 2001	Restructuring and other charges	Pro forma June 29, 2001
Net Sales
Product	$1,075,088	$(6,224)	$1,081,312
Services and other	206,415	-	206,415
	1,281,503	(6,224)	1,287,727
Cost of sales
Product	667,527	171,658	495,869
Services and other	161,495	-	161,495
	829,022	171,658	657,364
Gross Profit	452,481	(177,882)	630,363
Marketing, general and administrative	218,767	-	218,767
Research and development	238,228	-	238,228
Restructuring	83,757	83,757	-
Goodwill	10,480	-	10,480
Operating Expenses	551,232	83,757	467,475
Operating Profit (Loss)	(98,751)	(261,639)	162,888
Earnings (Loss) before Income Taxes	(67,945)	(261,639)	193,694
Income Taxes	(15,750)	(76,765)	61,015
Net Income (Loss)	$(52,195)	$(184,874)	$132,679
Earnings (Loss) per Diluted Share	$(0.13)	$(0.45)	$0.32
Average Diluted Shares Outstanding	409,143	409,143	415,558

Included in earnings for the first six months of 2000, were charges of $5.8 million ($0.01 per diluted share) related to the Company's merger with SALIX, a gain of $19.2 million ($0.03 per diluted share) on the sale of a certain stock held as an investment and a gain of $4.6 million ($0.01 per diluted share) related to a distribution from one of the Company's technology investments. For comparability purposes, all subsequent comparisons will be based on the pro forma financial information, excluding the above-mentioned charges and gains.

Results of Operations
Net sales for the six months ended June 29, 2001, were $1,287.7 million compared to $1,416.7 million for the first half of 2000. Net product sales for the first half of 2001 totaled $1,081.3 million, a 17.5% decrease compared to the same period last year, due to an industry-wide slowdown in customers' equipment purchases. The main driver behind the overall decrease in product sales was weaker sales of the Company's optical networking products. Sales of optical networking products were $702.8 million, for the first half of 2001, compared to $906.6 million for the same period last year. The 22.5% decrease in optical networking product sales resulted mainly from lower sales of the Company's TITAN 5500/5500S and TITAN 532L systems. During the second quarter of 2001, Tellabs recognized first revenues from sales of two of its emerging products: the TITAN 6500 MTS and TITAN 6100 OTS. Sales of Tellabs' broadband access products for the first six months of 2001, totaled $300.7 million compared to $305.3 million for the same period last year. The 1.5% decline in broadband access product sales resulted primarily from weak CABLESPAN 2300 systems sales, which offset strong sales growth from the Company's FOCUS international-standard optical products and improved sales of MartisDXX managed access and transport systems. Sales of voice quality enhancement products for the first six months of 2001, totaled $77.8 million compared to $98.7 million for the first half of 2000. The 21.2% drop in voice quality enhancement product sales was attributable to lower sales of the Company's digital echo cancellation products.

Net services and other revenue for the six months ended June 29, 2001, totaled $206.4 million compared to $106.1 million for the same period last year. The 94.5% growth in net services and other revenue was a result of revenues generated from the installation and testing of Tellabs' products sold during the first half of 2001 and latter part of 2000.

Sales within the United States for the first half of 2001, decreased 17.1% over the comparable period last year and accounted for approximately 76.1% of overall sales. Sales outside the United States increased 31.4% compared to the first six months of 2000 and accounted for approximately 23.9% of total sales.

Gross margin as a percentage of sales for the six months ended June 29, 2001, was 49.0% compared to 53.2% for the first half of 2000. Gross product margin as a percentage of sales totaled 54.1% compared to 58.5% for the first six months of 2000. The decrease in gross product margin as a percentage of sales was the result of a number of factors, including: decreased sales of the Company's TITAN 5500/5500S systems; lower absorption of fixed manufacturing expenditures due to lower total sales and the accounting for customer shipping and freight revenues as sales revenue in 2001, in accordance with Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and Costs". Gross services and other margin as a percentage of sales was 21.8% for the first half of 2001, compared to (12.0%) for the same period last year. The growth in gross services and other margin as a percentage of sales was the result of increased installations in 2001, coupled with cost control efforts in the Company's professional services area.

Operating expenses for the six months ended June 29, 2001, were $467.5 million compared to $389.4 million for the first half of 2000. As a percentage of sales operating expenses were 36.3% in 2001 compared to 27.5% for the first six months of 2000. Research and development expenditures for the first half of 2001, totaled $238.2 million compared to $196.3 million for the same period last year. The growth in research and development spending resulted from increased expenditures in the optical networking product area, particularly for development work on the TITAN 6700 optical switch and the inclusion of expenditures from FNI, which was acquired in February 2001. These expenditures were partially offset by cost savings that resulted from the Company's decision to exit the SALIX and NetCore next-generation switching business. As a percentage of sales, research and development expenditures for the first six months of 2001, were 18.5% compared to 13.9% in the comparable period last year. Growth in research and development spending as a percentage of sales was primarily the result of lower overall sales volume in 2001. Marketing, general and administrative expenditures were $218.8 million for the first half of 2001, compared to $187.3 million for the same period last year. The 16.8% growth in marketing, general and administrative expenditures was primarily due to staffing increases and business infrastructure decisions made during the last year to support the then-anticipated growth of the Company. During the second quarter of 2001, Tellabs undertook an initiative to align its future expenditures with the new lower short-term revenue outlook for the Company, by curtailing discretionary spending, generally eliminating salary increases for 2001 and instituting an executive level pay-cut. As a percentage of sales, marketing, general and administrative expenditures for the first six months of 2001 were 17.0% compared to 13.2% for the first half of 2000.

As previously discussed, included in second quarter 2001 earnings were charges totaling $261.6 million related to the Company's restructuring efforts (For more information, see Note 2. "Restructuring and Other Charges"). The Company is continuing to review ways to reduce operating expenses as part of an overall effort to align its cost structure and asset base with business expectations. Management is currently studying various alternatives including additional headcount reductions, further consolidation of facilities to achieve operating efficiencies, and other related actions. Appropriate restructuring and other charges, should they be required, would be recognized in third quarter 2001 results.

Total other income for the six months ended June 29, 2001, was $30.8 million compared to $28.6 million for the first half of 2000. Interest income for the first half of 2001 totaled $25.8 million compared to $26.2 million for the same period last year. The decrease in interest income was due to lower available cash and short-term investment balances and lower prevailing interest rates in 2001. Other income for the first half of 2001, was $5.3 million compared to $2.7 million for the comparable period last year. The increase in other income was attributable to gains on investment sales and distributions during 2001.

The effective tax rate for the six months ended June 29, 2001, was 31.5% compared to 32.5% for the same period last year. Tellabs effective tax rate reflects the benefits of research and development tax credits and lower foreign tax rates, as compared to the United States federal statutory rate.

Liquidity and Capital Resources

Cash and cash equivalents at June 29, 2001, totaled $418.2 million compared to $329.3 million at December 29, 2000. Net cash from operations for the six months ended June 29, 2001, was $217.6 million. Principal operating cash inflows for the first half of 2001 were collections of record fourth quarter 2000 accounts receivable and earnings for the period, excluding non-cash gains and charges, primarily the restructuring and other charges of $254.6 million, net of cash paid. Principal operating cash outflows for the first half of 2001 were inventory purchases to support new product introductions, payment of 2000 taxes and the payout of the 2000 Global Incentive Plan.

The balance of accounts receivable, less allowances at June 29, 2001, was $411.7 million compared to $802.5 million at December 29, 2000. The large decrease in accounts receivable was caused by collections of strong fourth quarter 2000 sales during the first quarter of 2001, coupled with lower overall sales in 2001. Days sales in billed receivables outstanding ("DSO") was 73.6 days at June 29, 2001, compared to 72.0 days at December 29, 2000. The increase in DSO was due primarily to the geographic shift in 2001 sales, to more non-US sales as a percentage of overall sales, as compared to 2000. Tellabs continues to focus on reducing DSO by improving the underlying billing and collection process both in the US and internationally.

The balance of net inventory at June 29, 2001, was $473.6 million compared to $428.3 million at December 29, 2000. Included in the June 29, 2001, net inventory balance are reserves totaling $90.7 million taken in connection with the Company's decision to exit the SALIX and NetCore next-generation switching business and the Company's efforts to align its resources with the reduced economic demand, particularly for the CABLESPAN 2300 system (For more information, see Note 2. "Restructuring and Other Charges"). The main drivers behind the growth in inventory, during the first six months of 2001, were a buildup in new product inventory to support product introductions and meet anticipated sales and shipments of the Company's TITAN 6500 MTS that were not yet recognized as revenue. The balance of goodwill, intangible and other assets increased $89.5 million during the first six months of 2001, mainly due to the goodwill associated with the FNI acquisition.

The balance of the Company's current liabilities was $318.7 million at June 29, 2001, compared to $412.3 million at December 29, 2000. The balance of accounts payable was $111.8 million at June 29, 2001, compared to $155.0 million at the end of 2000, due in part to the Company's cost control measures implemented during the second quarter of 2001.

The balance of accrued liabilities was $106.9 million at June 29, 2001, compared to $164.0 million at the prior year-end. The reduction in accrued liabilities during 2001 was primarily the result of the payout of bonuses and incentives from the Company's 2000 Global Incentive Plan, which were accrued in the prior year. The Company anticipates accrued liabilities remaining below 2000 year-end levels due primarily to the cost alignment efforts being undertaken.

Included in current liabilities at June 29, 2001, was an accrual for restructuring and other charges, which totaled $100.0 million. The accrual stemmed from the previously mentioned restructuring efforts being undertaken by the Company and consisted primarily of reserves for inventory purchase commitments, severance costs and leased facility exit costs. The Company anticipates paying out the majority of these reserves over the remainder of 2001.

At June 29, 2001, the Company had no payable recorded for income taxes due to the effects of the previously discussed restructuring and other charges recorded during the second quarter of 2001, as well as payments of 2000 tax liabilities during the first quarter of 2001.

During the first six months of 2001, the Company used $128.9 million in cash to fund investing activities. One of the principal cash requirements during this period was cash used to fund the purchase of property, plant and equipment, which totaled $128.3 million. The primary capital expenditure during the first six months of 2001, was the construction of the Company's new Corporate Headquarters, which required a cash outlay of $43.3 million. Occupancy of the building is slated for the third quarter of 2001. The remainder of the capital expenditures was primarily for investments in equipment, to support the production of the Company's optical networking products, and research and development equipment purchases. During the first quarter of 2001, the Company also used $89.0 million, net of cash acquired, to purchase FNI. During the second quarter of 2001, FNI achieved its first product development milestone as outlined in the original purchase agreement. As a result, Tellabs will pay an additional $11.0 million to FNI during the third quarter of 2001.

The Company's short-term marketable securities balance at June 29, 2001, totaled $616.2 million compared to $693.1 million at the end of 2000. The reduction in the portfolio balance was the result of the Company managing its liquidity position to meet its then current and anticipated cash outflow requirements, such as the FNI acquisition.

Tellabs generated $18.8 million in cash from financing activities, principally from employee stock option exercises.

Working capital at June 29, 2001 totaled $1,737.7 million compared to $1,910.1 million at December 29, 2000. The current ratio at June 29, 2001 was 6.5 to 1 compared to 5.6 to 1 at December 29, 2000. Management believes the current level of working capital will be sufficient to meet the Company's normal operating needs, both now and in the foreseeable future. Sufficient resources exist to support the Company's operations either through currently available cash, through cash generated from future operations, or through short-term or long-term financing.

Forward-Looking Statements

This Management's Discussion and Analysis and other sections of this Form 10-Q contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management's expectations, estimates and assumptions, based on information available at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words "anticipate," "believe," "estimate," "expect," "plan," "intend," "likely," "will," "should" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause our actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to: economic changes impacting the telecommunications industry; new product acceptance; product demand and industry capacity; competitive products and pricing; manufacturing efficiencies; research and new product development; protection and access to intellectual property, patents and technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment; facility construction and start-ups; the regulatory and trade environment; availability and terms of future acquisitions; uncertainties relating to synergies, charges, and expenses associated with business combinations and other transactions; and other risks and future factors that may be detailed from time to time in the Company's filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.1 attached to this Form 10-Q for the quarterly period ended June 29, 2001. The Company's actual future results could differ materially from those predicted in such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time.

PART II. OTHER INFORMATION

ITEM 4. Submission of Matters to a Vote of Security Holders

The Company's Annual Meeting of Stockholders was held on April 24, 2001. At this meeting Michael J. Birck, John J. Goossens and Frederick A. Krehbiel were re-elected as directors. These directors were elected for a term of office expiring at the Company's Annual Meeting of Stockholders in 2004.

Set forth below is a separate tabulation of the votes cast and votes withheld with respect to each nominee for director elected at this meeting:

Director	Votes For	Votes Withheld
Michael J. Birck	268,620,979	83,702,599
John J. Goossens	348,651,605	3,671,973
Frederick A. Krehbiel	348,831,910	3,491,668

The stockholders were also asked to vote on the approval of the 2001 Stock Option Plan. The plan was approved by votes of 271,708,481 for, 13,871,859 against and 1,857,682 abstentions.

ITEM 6. Exhibits and Reports on Form 8-K

(A) Exhibits

Exhibit No.	Description
Exhibit 10.1	Change in Control Agreement for Corporate Officers
Exhibit 10.2	Change in Control Agreement for Senior Executives
Exhibit 99.1	Forward-Looking Statements and Risks and Future Factors Impacting Tellabs

(B) Reports on Form 8-K:

     The Registrant filed a press release on April 20, 2001, announcing earnings for the quarter ended March 30, 2001. The Registrant also announced its plan to realign expenses with its current expectations for lower revenue and earnings growth, as well as the termination of the SALIX next-generation-switching product effort.

     The Registrant filed a press release on June 4, 2001, announcing that it will record restructuring and other charges totaling approximately $262 million in the second quarter of 2001.

     The Registrant filed a press release on June 22, 2001 announcing the revision of revenue and earnings expectations for the second quarter of 2001.

     The Registrant filed a press release on July 18, 2001 announcing earnings for the quarter and six months ended June 29, 2001.

SIGNATURE

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.

                       TELLABS, INC.
                     (Registrant)

                             /s James A. Dite
                        James A. Dite
                                              Vice President and Controller
                                              (Principal Accounting Officer)

August 9, 2001
(Date)

EXHIBIT INDEX

Exhibit No.	Description
Exhibit 10.1	Change in Control Agreement for Corporate Officers
Exhibit 10.2	Change in Control Agreement for Senior Executives
Exhibit 99.1	Forward-Looking Statements and Risks and Future Factors Impacting Tellabs

EX-10.1

CHANGE IN CONTROL
EMPLOYMENT AGREEMENT

This Agreement is made as of this 25th of June, 2001, by and between Tellabs, Inc., a Delaware corporation (the "Corporation") and _______________ (the "Executive").

WITNESSETH:

WHEREAS, the Corporation wishes to attract and retain well-qualified executive and key personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened Change in Control (as defined in Paragraph 2) of the Corporation; and

WHEREAS, to achieve this purpose, the Board of Directors of the Corporation considered and approved this agreement to be entered into with the Executive as being in the best interests of the Corporation and its shareholders;

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties hereto agree as follows:

1. Operation of Agreement

The "effective date of this Agreement" shall be the date on which a Change in Control occurs, and this Agreement shall not have any force or effect whatsoever prior to that date. This Agreement shall supersede, in its entirety, any previously existing Change in Control Agreement between Executive and the Corporation.

2. Change in Control

For the purposes of this Agreement, a "Change in Control" means the first of the following events to occur:

(a)Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose, the Company or any subsidiary of the Company, or any employee benefit plan of the Company or any subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan which acquires beneficial ownership of voting securities of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; provided, however, that no Change in Control will be deemed to have occurred as a result of a change in ownership percentage resulting solely from an acquisition of securities by the Company; and provided further that no Change in Control will be deemed to ha ve occurred if a person inadvertently acquires an ownership interest of 20% or more but then promptly reduces that ownership interest below 20%;

(b) During any two consecutive years (not including any period beginning prior to June 30, 2000), individuals who at the beginning of such two-year period constitute the Board and any new director (except for a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described elsewhere in this definition of Change in Control) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (such individuals and any such new director, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board;

(c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of outstanding voting securities of the Corporation immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Corporation resulting from such Business Combination (including, without limitation, a Corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Corporation; (ii) no person (excluding any Corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such Corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then combined voting power of the then outstanding voting securities of such Corporation except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of the Corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination;

(d) Approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation; or

(e) A tender offer (for which a filing has been made with the Securities and Exchange Commission "SEC") which purports to comply with the requirements of Section 14(d) of the Securities Exchange Act of 1934 and the corresponding SEC rules) is made for the stock of the Corporation, then the first to occur of:

(i) Any time during the offer when the person making the offer owns or has accepted for payment stock of the Corporation with 25% or more of the total voting power of the Corporation's securities, or

(ii) Three business days before the offer is to terminate unless the offer is withdrawn first if the person making the offer could own, by the terms of the offer plus any shares owned by this person, stock with 50% or more of total voting power of the Corporation's securities when the offer terminates.

3. Employment

The Corporation hereby agrees to continue the Executive in its employ and/or the employ of one or more of its subsidiaries and the Executive hereby agrees to remain in the employ of the Corporation and/or such subsidiaries, for the period commencing on the effective date of this Agreement and ending on the second anniversary of such date (the "employment period"), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at a location within the metropolitan area in which the Executive was employed immediately prior to the effective date of this Agreement. The Executive agrees that during the employment period he/she shall devote his/her full business time exclusively to his/her executive duties and shall perform such duties faithfully and efficiently.

4. Compensation, Compensation Plans, Benefits and Perquisites

During the employment period, the Executive shall be compensated as follows:

(a) He/she shall receive an annual salary at a rate which is not less than his/her rate of annual salary immediately prior to the effective date of this Agreement, with the opportunity for increases from time to time thereafter which are in accordance with the Corporation's regular practices.

(b) He/she shall be eligible to participate on a reasonable basis in the Corporation's stock option plans, the annual incentive bonus program and any other bonus and incentive compensation plans (whether now or hereinafter in effect) in which executives with comparable duties are eligible to participate, which plans must provide opportunities to receive compensation which are at least as great as the opportunities under the plans in which the Executive was participating immediately prior to the effective date of this Agreement.

(c) He/she shall be entitled to receive employee benefits and perquisites which are the greater of the employee benefits and perquisites provided by the Corporation to executives with comparable duties or the employee benefits and perquisites to which he/she was entitled immediately prior to the effective date of this Agreement. Such benefits and perquisites shall include, but not be limited to, the benefits and perquisites included under the Tellabs Advantage Program, and the Tellabs, Inc. Employee Welfare Benefits Plan.

5. Termination Following Change in Control

(a) For purposes of this Agreement, the term "termination" shall mean (i) termination by the Corporation of the employment of the Executive with the Corporation and all of its subsidiaries for any reason other than death, disability or "cause" (as defined below), or (ii) resignation of the Executive for "good reason" (as defined below).

(b) The term "good reason" shall mean (i) a significant change in the nature or scope, or the location for the exercise or performance, of the Executive's authority or duties from those referred to in Section 3, a reduction in total compensation, compensation plans, benefits or perquisites from those provided in Section 4, or the breach by the Corporation of any other provision of this Agreement; or (ii) a reasonable determination by the Executive that, as a result of a Change in Control and a change in circumstances thereafter significantly affecting his/her position, he/she is unable to exercise the authorities, powers, function or duties attached to his/her position and contemplated by Section 3 of the Agreement.

(c) The term "cause" means (i) the willful and continued failure by the Executive to substantially perform his/her duties with the Corporation and/or, if applicable, one or more of its subsidiaries (other than any such failure resulting from his/her incapacity due to physical or mental illness) after a demand for substantial performance is delivered to him/her by the Board of Directors of the Corporation which specifically identifies the manner in which the Board believes the Executive has not substantially performed his/her duties, (ii) the willful engaging by the Executive in gross misconduct materially and demonstrably injurious to the property or business of the Corporation or any of its subsidiaries, or (iii) fraud, misappropriation or commission of a felony. For purposes of this paragraph, no act or failure to act on the Executive's part will be considered "willful" unless done, or omitted to be done, by him/her in bad faith and without reasonable belief t hat his/her action or omission was in the interests of the Corporation or not opposed to the interests of the Corporation.

6. Confidentiality

The Executive agrees that during and after the employment period, he/she shall retain in confidence any confidential information known to him/her concerning the Corporation and its subsidiaries and their respective businesses for as long as such information is not publicly disclosed.

7. No Obligation to Mitigate Damages

The Executive shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of this Agreement and the obtaining of any such other employment shall in no event effect any reduction of the Corporation's obligations under this Agreement.

8. Severance Allowance

(a) In the event of termination of the Executive during the employment period, the Executive shall be entitled to receive a lump sum severance allowance within five days of such termination, in an amount which is equal to the sum of the following:

(i) The amount equivalent to salary payments for 24 calendar months, at the rate required by paragraph 4(a) and in effect immediately prior to termination, plus a pro rata share of the estimated amount of any bonus which would have been payable for the bonus period which includes the termination date; and

(ii) The amount equivalent to 24 calendar months of bonus at the target rate, which includes his/her termination date.

(b)In addition to such amount under paragraph (a) above, the Executive shall also receive in cash the value of the incentive compensation (including, but not limited to, employer contributions to the Tellabs Advantage Program and the right to receive stock awards and to exercise stock options and other bonus and similar incentive compensation benefits) to which he/she would have been entitled under all incentive compensation plans maintained by the Corporation if he/she had remained in the employ of the Corporation for 24 months after such termination. The amount of such payment shall be determined as of the date of termination and shall be paid as promptly as practicable and in no event later than 30 days after such termination.

(c)The Corporation shall maintain in full force and effect for the Executive's continued benefit (and, to the extent applicable, the continued benefit of his dependents) all of the employee benefits (including, but not limited to, coverage under any medical and insurance plans, programs or arrangements) to which he/she would have been entitled under all employee benefit plans, programs or arrangements maintained by the Corporation if he/she had remained in the employ of the Corporation for 24 calendar months after his/her termination, or if such continuation is not possible under the terms and provisions of such plans, programs or arrangements, the Corporation shall arrange to provide benefits substantially similar to those which the Executive (and, to the extent applicable, his/her dependents) would have been entitled to receive if the Executive had remained a participant in such plans, programs or arrangements for such 24-month period, as the case may be.

9. Adjustments in Case of "Excess Parachute Payments"

If any payments or benefits received or to be received by the Executive in connection with the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Corporation, or any person affiliated with the Corporation) (the "Payments"), will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed), the Corporation shall pay at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Payments and any federal, state and local income or other applicable tax and Excise Tax upon the payment provided for by this paragraph, shall be equal to the Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income ta xes at the Executive's highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the Executive's highest marginal rate of taxation in the state and locality of the Executive's residence on the date on which the Excise Tax is determined, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The computations required by this paragraph shall be made by the independent public accountants then regularly retained by the Corporation, in consultation with tax counsel selected by them and acceptable to the Executive. The Corporation shall provide the Executive with sufficient tax and compensation data to enable the Executive or his/her tax advisor to verify such computations and shall reimburse the Executive for reasonable fees and expenses incurred with respect thereto. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, the Executive shall repay to the Corporation at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by the Executive) plus interest on the amount of such repayment from the date the Gross-Up Payment was initially made to the date of repayment at the rate provided in Section 1274(b)(2)(B) of the Code (the "Applicable Rate"). In the event that the Excise Tax is determined by the Internal Revenue Service or by such independent public accountants to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Corporation shall make an additional Gross-Up Payment in respect of such excess (plus any interes t, penalties, fines or additions to tax payable with respect to such excess) at the time that the amount of such excess if finally determined. Any payment to be made under this paragraph shall be payable within five (5) days of the determination of the accountants that such a payment is required hereunder and, if applicable, within five (5) days of such determination that the Excise Tax is greater or less than initially calculated but, in no event, later than thirty (30) days after the Executive's receipt of the Payments resulting in such Excise Tax.

10. Interest; Indemnification

(a)In the event any payment to Executive under this Agreement is not paid within five business days after it is due, such payment shall thereafter bear interest at the prime rate from time to time as published in The Wall Street Journal, Midwest Edition.

(b)The Corporation hereby indemnifies the Executive for all legal fees and expenses incurred by Executive in contesting any action of the Corporation with respect to this Agreement, including the termination of Executive's employment hereunder, or incurred by Executive in seeking to obtain or enforce any right or benefit provided by this Agreement.

11. Notices

Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he/she has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices.

12. Arbitration of Disputes and Reimbursements of Legal Costs.

Any controversy or claim arising out of or relating to this Agreement (or the breach thereof) shall be settled by final, binding and non-appealable arbitration in Chicago, Illinois by three arbitrators. Subject to the following provisions, the arbitration shall be conducted in accordance with the rules of the American Arbitration Association (the "Association") then in effect. One of the arbitrators shall be appointed by the Corporation, one shall be appointed by the Executive, and the third shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the third arbitrator within 30 days of the appointment of the second arbitrator, then the third arbitrator shall be appointed by the Association and shall be experienced in the resolution of disputes under employment agreements for executives of major corporations. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by either part y in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If the Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Corporation shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Corporation's and the Executives' reasonable attorneys' fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys' fees and expenses) and shall share the fees of the American Arbitration equally.

13. Non-Alienation

The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or the laws of descent and distribution.

14. Governing Law

The provisions of this Agreement shall be construed in accordance with the laws of the State of Illinois.

15. Amendment

This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.

16. Successor to the Corporation

This Agreement shall be binding upon and inure to the benefit of the Corporation and any successor of the Corporation.

17. Severability

In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.

IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written.

________________________________________
Executive

TELLABS, INC.,

a Delaware corporation

By:_____________________________________

President and Chief Executive Officer

ATTEST:

____________________________________

Secretary

(Seal)

EX-10.2

CHANGE IN CONTROL
EMPLOYMENT AGREEMENT

This Agreement is made as of this 25th of June, 2001, by and between Tellabs, Inc., a Delaware corporation (the "Corporation") and _______________ (the "Executive").

WITNESSETH:

WHEREAS, the Corporation wishes to attract and retain well-qualified executive and key personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened Change in Control (as defined in Paragraph 2) of the Corporation; and

WHEREAS, to achieve this purpose, the Board of Directors of the Corporation considered and approved this agreement to be entered into with the Executive as being in the best interests of the Corporation and its shareholders;

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties hereto agree as follows:

1. Operation of Agreement

The "effective date of this Agreement" shall be the date on which a Change in Control occurs, and this Agreement shall not have any force or effect whatsoever prior to that date. This Agreement shall supersede, in its entirety, any previously existing Change in Control Agreement between Executive and the Corporation.

    2.   Change in Control

For the purposes of this Agreement, a "Change in Control" means the first of the following events to occur:

(a)Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose, the Company or any subsidiary of the Company, or any employee benefit plan of the Company or any subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan which acquires beneficial ownership of voting securities of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; provided, however, that no Change in Control will be deemed to have occurred as a result of a change in ownership percentage resulting solely from an acquisition of securities by the Company; and provided further that no Change in Control will be deemed to ha ve occurred if a person inadvertently acquires an ownership interest of 20% or more but then promptly reduces that ownership interest below 20%;

(b) During any two consecutive years (not including any period beginning prior to June 30, 2000), individuals who at the beginning of such two-year period constitute the Board and any new director (except for a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described elsewhere in this definition of Change in Control) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (such individuals and any such new director, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board;

(c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of outstanding voting securities of the Corporation immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Corporation resulting from such Business Combination (including, without limitation, a Corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Corporation; (ii) no person (excluding any Corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such Corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then combined voting power of the then outstanding voting securities of such Corporation except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of the Corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination;

(d) Approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation; or

(e) A tender offer (for which a filing has been made with the Securities and Exchange Commission "SEC") which purports to comply with the requirements of Section 14(d) of the Securities Exchange Act of 1934 and the corresponding SEC rules) is made for the stock of the Corporation, then the first to occur of:

(i) Any time during the offer when the person making the offer owns or has accepted for payment stock of the Corporation with 25% or more of the total voting power of the Corporation's securities, or

(ii) Three business days before the offer is to terminate unless the offer is withdrawn first if the person making the offer could own, by the terms of the offer plus any shares owned by this person, stock with 50% or more of total voting power of the Corporation's securities when the offer terminates.

3. Employment

The Corporation hereby agrees to continue the Executive in its employ and/or the employ of one or more of its subsidiaries and the Executive hereby agrees to remain in the employ of the Corporation and/or such subsidiaries, for the period commencing on the effective date of this Agreement and ending on the third anniversary of such date (the "employment period"), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at a location within the metropolitan area in which the Executive was employed immediately prior to the effective date of this Agreement. The Executive agrees that during the employment period he/she shall devote his/her full business time exclusively to his/her executive duties and shall perform such duties faithfully and efficiently.

4.   Compensation, Compensation Plans, Benefits and Perquisites

During the employment period, the Executive shall be compensated as follows:

(a) He/she shall receive an annual salary at a rate which is not less than his/her rate of annual salary immediately prior to the effective date of this Agreement, with the opportunity for increases from time to time thereafter which are in accordance with the Corporation's regular practices.

(b) He/she shall be eligible to participate on a reasonable basis in the Corporation's stock option plans, the annual incentive bonus program and any other bonus and incentive compensation plans (whether now or hereinafter in effect) in which executives with comparable duties are eligible to participate, which plans must provide opportunities to receive compensation which are at least as great as the opportunities under the plans in which the Executive was participating immediately prior to the effective date of this Agreement.

(c) He/she shall be entitled to receive employee benefits and perquisites which are the greater of the employee benefits and perquisites provided by the Corporation to executives with comparable duties or the employee benefits and perquisites to which he/she was entitled immediately prior to the effective date of this Agreement. Such benefits and perquisites shall include, but not be limited to, the benefits and perquisites included under the Tellabs Advantage Program, and the Tellabs, Inc. Employee Welfare Benefits Plan.

5. Termination Following Change in Control

(a) For purposes of this Agreement, the term "termination" shall mean (i) termination by the Corporation of the employment of the Executive with the Corporation and all of its subsidiaries for any reason other than death, disability or "cause" (as defined below), or (ii) resignation of the Executive for "good reason" (as defined below).

(b) The term "good reason" shall mean (i) a significant change in the nature or scope, or the location for the exercise or performance, of the Executive's authority or duties from those referred to in Section 3, a reduction in total compensation, compensation plans, benefits or perquisites from those provided in Section 4, or the breach by the Corporation of any other provision of this Agreement; or (ii) a reasonable determination by the Executive that, as a result of a Change in Control and a change in circumstances thereafter significantly affecting his/her position, he/she is unable to exercise the authorities, powers, function or duties attached to his/her position and contemplated by Section 3 of the Agreement.

(c) The term "cause" means (i) the willful and continued failure by the Executive to substantially perform his/her duties with the Corporation and/or, if applicable, one or more of its subsidiaries (other than any such failure resulting from his/her incapacity due to physical or mental illness) after a demand for substantial performance is delivered to him/her by the Board of Directors of the Corporation which specifically identifies the manner in which the Board believes the Executive has not substantially performed his/her duties, (ii) the willful engaging by the Executive in gross misconduct materially and demonstrably injurious to the property or business of the Corporation or any of its subsidiaries, or (iii) fraud, misappropriation or commission of a felony. For purposes of this paragraph, no act or failure to act on the Executive's part will be considered "willful" unless done, or omitted to be done, by him/her in bad faith and without reasonable belief t hat his/her action or omission was in the interests of the Corporation or not opposed to the interests of the Corporation.

6.   Confidentiality

The Executive agrees that during and after the employment period, he/she shall retain in confidence any confidential information known to him/her concerning the Corporation and its subsidiaries and their respective businesses for as long as such information is not publicly disclosed.

7.   No Obligation to Mitigate Damages

The Executive shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of this Agreement and the obtaining of an

8.   Severance Allowance

(a) In the event of termination of the Executive during the employment period, the Executive shall be entitled to receive a lump sum severance allowance within five days of such termination, in an amount which is equal to the sum of the following:

(i) The amount equivalent to salary payments for 36 calendar months, at the rate required by paragraph 4(a) and in effect immediately prior to termination, plus a pro rata share of the estimated amount of any bonus which would have been payable for the bonus period which includes the termination date; and

(ii) The amount equivalent to 36 calendar months of bonus at the target rate, which includes his/her termination date.

(b)In addition to such amount under paragraph (a) above, the Executive shall also receive in cash the value of the incentive compensation (including, but not limited to, employer contributions to the Tellabs Advantage Program and the right to receive stock awards and to exercise stock options and other bonus and similar incentive compensation benefits) to which he/she would have been entitled under all incentive compensation plans maintained by the Corporation if he/she had remained in the employ of the Corporation for 36 months after such termination. The amount of such payment shall be determined as of the date of termination and shall be paid as promptly as practicable and in no event later than 30 days after such termination.

(c)The Corporation shall maintain in full force and effect for the Executive's continued benefit (and, to the extent applicable, the continued benefit of his dependents) all of the employee benefits (including, but not limited to, coverage under any medical and insurance plans, programs or arrangements) to which he/she would have been entitled under all employee benefit plans, programs or arrangements maintained by the Corporation if he/she had remained in the employ of the Corporation for 36 calendar months after his/her termination, or if such continuation is not possible under the terms and provisions of such plans, programs or arrangements, the Corporation shall arrange to provide benefits substantially similar to those which the Executive (and, to the extent applicable, his/her dependents) would have been entitled to receive if the Executive had remained a participant in such plans, programs or arrangements for such 36-month period, as the case may be.

9.   Adjustments in Case of "Excess Parachute Payments"

If any payments or benefits received or to be received by the Executive in connection with the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Corporation, or any person affiliated with the Corporation) (the "Payments"), will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed), the Corporation shall pay at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Payments and any federal, state and local income or other applicable tax and Excise Tax upon the payment provided for by this paragraph, shall be equal to the Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income ta xes at the Executive's highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the Executive's highest marginal rate of taxation in the state and locality of the Executive's residence on the date on which the Excise Tax is determined, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The computations required by this paragraph shall be made by the independent public accountants then regularly retained by the Corporation, in consultation with tax counsel selected by them and acceptable to the Executive. The Corporation shall provide the Executive with sufficient tax and compensation data to enable the Executive or his/her tax advisor to verify such computations and shall reimburse the Executive for reasonable fees and expenses incurred with respect thereto. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, the Executive shall repay to the Corporation at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by the Executive) plus interest on the amount of such repayment from the date the Gross-Up Payment was initially made to the date of repayment at the rate provided in Section 1274(b)(2)(B) of the Code (the "Applicable Rate"). In the event that the Excise Tax is determined by the Internal Revenue Service or by such independent public accountants to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Corporation shall make an additional Gross-Up Payment in respect of such excess (plus any interes t, penalties, fines or additions to tax payable with respect to such excess) at the time that the amount of such excess if finally determined. Any payment to be made under this paragraph shall be payable within five (5) days of the determination of the accountants that such a payment is required hereunder and, if applicable, within five (5) days of such determination that the Excise Tax is greater or less than initially calculated but, in no event, later than thirty (30) days after the Executive's receipt of the Payments resulting in such Excise Tax.

10.   Interest; Indemnification

(a)In the event any payment to Executive under this Agreement is not paid within five business days after it is due, such payment shall thereafter bear interest at the prime rate from time to time as published in The Wall Street Journal, Midwest Edition.

(b)The Corporation hereby indemnifies the Executive for all legal fees and expenses incurred by Executive in contesting any action of the Corporation with respect to this Agreement, including the termination of Executive's employment hereunder, or incurred by Executive in seeking to obtain or enforce any right or benefit provided by this Agreement.

11. Notices

Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he/she has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices.

12. Arbitration of Disputes and Reimbursements of Legal Costs.

Any controversy or claim arising out of or relating to this Agreement (or the breach thereof) shall be settled by final, binding and non-appealable arbitration in Chicago, Illinois by three arbitrators. Subject to the following provisions, the arbitration shall be conducted in accordance with the rules of the American Arbitration Association (the "Association") then in effect. One of the arbitrators shall be appointed by the Corporation, one shall be appointed by the Executive, and the third shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the third arbitrator within 30 days of the appointment of the second arbitrator, then the third arbitrator shall be appointed by the Association and shall be experienced in the resolution of disputes under employment agreements for executives of major corporations. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by either part y in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If the Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Corporation shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Corporation's and the Executives' reasonable attorneys' fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys' fees and expenses) and shall share the fees of the American Arbitration equally.

13. Non-Alienation

The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or the laws of descent and distribution.

14. Governing Law

The provisions of this Agreement shall be construed in accordance with the laws of the State of Illinois.

15. Amendment

This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.

16. Successor to the Corporation

This Agreement shall be binding upon and inure to the benefit of the Corporation and any successor of the Corporation.

17. Severability

In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.

IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written.

________________________________________

Executive

TELLABS, INC.,

a Delaware corporation

By:____________________________________

President and Chief Executive Officer

ATTEST:

____________________________________

Secretary

(Seal)

EX-99.1

Exhibit 99.1

Forward-Looking Statements and Risks and Future Factors Impacting Tellabs

Press releases and the reports and other documents we file with the Securities and Exchange Commission may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management's expectations, estimates and assumptions, based on information available at the time the document, or any document incorporated therein by reference, was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words "anticipate," "believe," "estimate," "expect," "plan," "intend," "likely," "will," "should" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause our actual performan ce or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to, those indicated below. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time. You are cautioned not to rely on forward-looking statements.

Demand for our products may decrease if we are unable to anticipate and adapt to rapidly changing technology.

The communications equipment industry is characterized by rapid technological change. In our industry, we also face evolving industry standards, changing market conditions and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make existing products or products under development obsolete or unmarketable. In order to grow and remain competitive, we will need to adapt to these rapidly changing technologies, to enhance our existing solutions and to introduce new solutions to address our customers' changing demands.

In addition, new product development often requires long-term forecasting of market trends, development and implementation of new technologies and processes, and a substantial capital commitment. We have invested, and we will continue to invest, substantial resources for the development of new products. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of new solutions. In addition, these new solutions and enhancements must meet the requirements of our current and prospective customers and must achieve significant market acceptance. If we fail to anticipate or respond on a cost-effective and timely basis to technological developments, changes in industry standards or customer requirements, or if we have any significant delays in product development or introduction, our business, operating results and financial condition could be adversely affected.

Our business may be adversely affected by general economic and market conditions.

Our business is subject to the effects of general economic conditions in the United States and globally, and, in particular, market conditions in the communications and networking industries. In recent quarters, our operating results have been adversely affected as a result of recent unfavorable economic conditions and reduced capital spending throughout our customer base, particularly in the United States. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the United States or a global economic slowdown, we may continue to experience adverse impacts on our business, operating results and financial condition.

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

In the past, our principal product offerings have been products designed to connect and transmit information on traditional telephony networks. With the growth of multimedia applications and the development of enhanced Internet, data, video and voice services, our recent product offerings and research and development efforts have been and are focused on emerging technologies and network equipment, software and integration service offerings for communications equipment applications. The market for communications network equipment, software and integration services is rapidly changing. Our future growth will be dependent in part on our ability to develop successfully and introduce commercially new products for this market. Our future will also depend on the growth of 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:

• the amount of capital expenditures by network providers;
• regulatory and legal developments;
• changes to capital expenditure rates by network providers due to consolidation among our customers;
• the addition of new customers to the market; and
• end-user demand for integrated Internet, data, video, voice and other network services.

We cannot predict whether the market for communications equipment products and services will develop rapidly. The recent slowdown in the general economy, changes in the service provider market, and the constraints on capital availability have had a material adverse effect on the markets where we sell our products and services. Also, we cannot predict with certainty 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. We may not be able to compete successfully, and competitive pressures may adversely affect our business, operating results and financial condition.

Our industry is highly competitive.

Competition in the communications equipment industry is intense. We believe that competition may increase substantially with the increased use of broadband networks. We believe our success in competing with other manufacturers of communications equipment products and services will depend primarily on our engineering, manufacturing and marketing skills, the price, quality and reliability of our products, our delivery and service capabilities and our control of operating expenses. Pricing pressures could increase from current and future competitors and customers. Many of our foreign and domestic competitors have more engineering, manufacturing, marketing, financial and personnel resources available to them. Competition may also be affected by consolidation among communications equipment providers. As a result, other providers may be able to respond more quickly to new or emerging technologies and changes in customer requirements. We cannot predict whether we will be able to compete successfully with cur rent and future competitors using our existing and new products and services. In addition, we believe that technological change, the increasing addition of Internet, data, video, voice and other services to networks, the possibility of regulatory changes and industry consolidation of new entrants will continue to cause rapid evolution in the competitive environment. The full scope and nature of these changes are difficult to predict at this time. Increased competition could lead to price cuts, reduced gross margins and loss of market share, which may adversely affect our business, operating results and financial condition.

Our operating results fluctuate significantly.

Our operating results vary significantly from quarter to quarter. These fluctuations are the result of a number of factors, including:

• the volume and timing of orders from and shipments to our customers;
• the timing of and our ability to obtain new customer contracts;
• the timing of and our ability to recognize revenue for product and service sales;
• the timing of new product and service announcements;
• the availability of products and services;
• the overall level of capital expenditures by our customers;
• the market acceptance of new and enhanced versions of our products and services or variations in the mix of products and services we sell;
• the utilization of our production capacity and employees; and
• the availability and cost of key components.

Our recent operating results may not be a good predictor of our results in future periods. The recent economic downturn has caused a significant change in our short-term growth strategy and, therefore, may not be an accurate indicator of future operating results. Our expense levels are based in part on expectations of future revenues. If revenue levels in a particular period are lower than expected, our operating results will be adversely affected. In addition, our operating results may be subject to seasonal factors. With the introduction of new products and the timing of acceptance of those products by our customers, the revenues associated with the sale of such products may be deferred longer than our other legacy products.

We may not realize expected benefits from any restructuring initiatives.

We recently announced an initiative to focus our business on core operations performance by restructuring and streamlining operations. In light of our rapidly changing market, we cannot predict whether we will realize expected synergies and improved operating performance as a result of any restructuring and streamlining of operations or whether we will need to engage in any further restructuring activities in the future. We continue to review alternatives to reduce operating expenses including additional headcount reductions, further consolidation of facilities and other related actions. We also cannot predict whether any restructuring and streamlining of operations will adversely affect our ability to retain key employees, which, in turn, would adversely affect our operating results.

Conditions in international markets could affect our operations.

Due to our international sales and our international manufacturing and software development operations, we are subject to the risks of conducting business internationally. These risks include:

• local economic and market conditions;
• political and economic instability;
• unexpected changes in our impositions of legislative or regulatory requirements;
• fluctuations in the exchange rate of the U.S. dollar;
• tariffs and other barriers and restrictions;
• longer payment cycles;
• difficulties in enforcing intellectual property and contract rights;
• greater difficulty in accounts receivable collection;
• potentially adverse taxes; and
• the burdens of complying with a variety of foreign laws and telecommunications standards.

We also are subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships. We maintain business operations and have sales in many international markets. Economic conditions in many of these markets represent significant risks to us. We cannot predict whether our sales and business operations in these markets will be adversely affected by these conditions. Instability in foreign markets, particularly in Asia, Latin America and the Middle East, could have a negative impact on our business, financial condition and operation results. In addition to the effect of international economic instability on foreign sales, domestic sales to U.S. customers having significant foreign operations could be adversely impacted by these economic conditions, which may adversely affect our business, financial condition and operating results in the future.

Our intellectual property rights may not be adequate to protect our business.

Our future success depends in part upon our proprietary technology. Although we attempt to protect our proprietary technology through patents, copyrights and trade secrets, we cannot predict whether such protection will indeed prevent others from using our technology, or whether our competitors can develop competitive technology independently without violating our proprietary rights.

We may receive third-party infringement claims related to our business.

As the competition in the communications equipment industry increases and the functionality of the products in this industry converges, companies in the communications equipment industry increasingly may become the target of infringement claims. We have received and may continue to receive notices from third parties, including some of our competitors, claiming that we are infringing third-party patents or other proprietary rights. Such third parties may choose to litigate their claims and we cannot predict whether we will prevail in such litigation over third-party claims. We also cannot predict whether we will be able to secure, on commercially reasonable terms, any licenses that we may seek to secure. Third-party claims, whether with or without merit, can result in costly litigation, divert our management's time, attention and resources, delay or halt our product shipments, require us to pay damages, require us to enter into royalty-bearing licensing arrangements or otherwise impose obligations or restrictions upon us which could adversely affect our business, financial condition and operating results.

We may be unable to identify or complete strategic dispositions, acquisitions and investments.

Our decision to dispose or otherwise exit businesses may result in the recording of accrued liabilities for special one-time charges, such as workforce reduction costs. Furthermore, estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets, including goodwill and purchased intangible assets, could change as a result of such dispositions. Our long-term growth strategy includes the continued acquisition of, or investment by us in, complementary businesses, products, services or technologies. We cannot assure that we will be able to identify suitable acquisitions or investment candidates. Even if we identify suitable candidates, we cannot assure that we will be able to make acquisitions or investments on commercially acceptable terms, if at all. If we acquire a company, we may have difficulty assimilating its businesses, products, services, technologies and personnel into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and adversely affect our operating results. In addition, we may incur debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of any equity securities could be dilutive to our stockholders.

We may encounter difficulties obtaining raw materials and supplies needed to make our products and retaining personnel to install and service our products.

Our ability to produce our products is dependent upon the availability of certain raw materials and supplies. The availability of these raw materials and supplies is subject to market forces beyond our control. From time to time there may not be sufficient quantities of raw materials and supplies in the marketplace to meet the customer demand for our products. In addition, the costs to obtain these raw materials and supplies are subject to price fluctuations because of market demand. Many companies utilitize the same raw materials and supplies in the production of their products as we use in our products. Companies with more resources than our own may have a competitive advantage in obtaining raw materials and supplies due to greater buying power. Servicing our products also requires certain raw materials, supplies and personnel. The availability of these resources are similarly subject to market forces and availability beyond our control. The ability to attract and retain personnel in the geograp hic areas that our customers need our services may also be restricted by market and competitive pressures. Reduced supply and higher prices of raw materials, supplies and personnel may adversely affect our business, operating results and financial condition.

The regulatory environment in which we operate is changing.

The communications equipment industry is subject to regulation in the United States and other countries. Our business is dependent upon the continued growth of the telecommunications industry in the United States and internationally. Federal and state regulatory agencies regulate most of our domestic customers. In early 1996, the U.S. Telecommunications Act of 1996 was enacted. The Telecommunications Act lifted certain restrictions on the ability of companies, including the Regional Bell Operating Companies and other customers of ours, to compete with one another. The Telecommunications Act also made other significant changes in the regulation of the telecommunications industry. Although these changes have increased our opportunities to provide solutions for our customers' Internet, data, video and voice needs, recent consolidation and failures in the telecommunications industry have limited the number of customers available and increased the amount of excess equipment available. Additionally, com petition in our markets could intensify as a result of future changes or new regulations in the United States or internationally, which could adversely affect our business, operating results and financial condition.

Our stock price is volatile.

Based on the trading history of our common stock and the nature of the market for publicly traded securities of companies in our industry, we believe that some factors have caused and are likely to continue to cause the market price of our common stock to fluctuate substantially. These factors included:

• announcements of new products and services by us or our competitors;
• quarterly fluctuations in our financial results or the financial results of our competitors or our customers;
• customer contract awards to us or our competitors;
• increased competition with our competitors or among our customers;
• disputes concerning intellectual property rights;
• developments in telecommunications regulations;
• general conditions in the communications equipment industry; and
• general economic conditions.

In addition, communications equipment company stocks have experienced significant price and volume fluctuations that are often unrelated to the operating performance of such companies. This market volatility may adversely affect the market price of our common stock.

We are dependent upon key personnel.

Like all high-technology companies, our success is dependent on the efforts and abilities of our senior management and other qualified employees. Our ability to attract, retain and motivate skilled employees and other senior management personnel is critical to our continued growth. The competition for qualified employees, and particularly engineers, programmers and systems analysts, has been and likely will continue to be intense. In addition, because we may acquire one or more businesses in the future, our success will depend, in part, upon our ability to retain and integrate our own operations personnel with personnel from acquired entities who are necessary to the continued success or the successful integration of the acquired businesses. Moreover, due to our recent initiative to focus our business on core operations and improve our operating performance by restructuring and streamlining operations, we cannot assure that we will be able to attract and retain key personnel.