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 March 29, 2002

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.)

One Tellabs Center, 1415 W. Diehl Road, Naperville, Illinois	60563
(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 - 410,872,795 shares outstanding on March 29, 2002.

TELLABS, INC.
INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Comparative Statements of Operations
	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 OPERATIONS
(Unaudited)
	Three
	Months Ended
(In millions, except per-share data)	3/29/02	3/30/01
Net Sales
Product	$314.6	$667.4
Services and other	56.9	104.7
	371.5	772.1
Cost of Sales
Product	165.5	292.0
Services and other	31.0	74.2
	196.5	366.2
Gross Profit	175.0	405.9
Operating expenses
Selling, general and administrative	77.2	111.1
Research and development	90.6	126.9
In-process research and development	5.4	-
Intangible asset amortization	1.7	0.7
Goodwill amortization	-	4.5
	174.9	243.2
Operating Profit	0.1	162.7
Other income (expense)
Interest income	7.5	14.5
Interest expense	(0.5)	(0.2)
Other	1.3	1.8
	8.3	16.1
Earnings Before Income Taxes	8.4	178.8
Income taxes	3.1	56.3
Net Earnings	$5.3	$122.5
Earnings per Share
Basic	$0.01	$0.30
Diluted	$0.01	$0.29
Average number of common shares outstanding	410.5	408.8
Average number of common shares outstanding, assuming dilution	414.8	416.3
The accompanying notes are an integral part of these statements.

TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
	March 29,	December 28,
	2002	2001
(In millions, except share amounts)	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$ 528.5	$ 701.9
Investments in marketable securities	383.1	399.7
Accounts receivable, net	247.1	330.9
Inventories
Raw materials	131.1	145.5
Work in process	31.8	33.7
Finished goods	130.6	149.9
	293.5	329.1
Deferred income taxes	107.2	138.2
Income taxes	28.7	26.5
Miscellaneous receivables and other current assets	15.5	18.3
Total Current Assets	1,603.6	1,944.6
Property, plant and equipment	863.3	862.7
Less: accumulated depreciation	353.9	342.2
	509.4	520.5
Goodwill, net	454.3	188.6
Intangible assets, net	75.0	14.0
Other Assets	196.7	198.1
Total Assets	$ 2,839.0	$ 2,865.8
Liabilities
Current Liabilities
Accounts payable	$ 52.8	$ 63.5
Accrued liabilities	119.9	100.8
Accrued restructuring and other charges	119.0	155.2
Total Current Liabilities	291.7	319.5
Long-term debt	0.5	3.4
Accrued long-term restructuring charges	18.8	24.9
Other long-term liabilities	38.6	31.0
Deferred income taxes	5.7	21.4
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; 414,122,795 and 413,497,100 shares
issued and outstanding	4.1	4.1
Additional paid-in capital	540.9	496.0
Treasury stock, at cost: 3,250,000 shares	(129.6)	(129.6)
Deferred compensation expense	(28.7)	(1.4)
Accumulated other comprehensive income (loss)
Cumulative translation adjustment	(167.8)	(164.4)
Unrealized net gains on
available-for-sale securities	2.9	4.3
Total accumulated other comprehensive (loss)	(164.9)	(160.1)
Retained earnings	2,261.9	2,256.6
Total Stockholders' Equity	2,483.7	2,465.6
Total Liabilities and Stockholders' Equity	$ 2,839.0	$ 2,865.8
The accompanying notes are an integral part of these statements.

TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited)
	Three Months Ended
(In millions)	3/29/02	3/30/01
Operating Activities
Net Earnings	$ 5.3	$ 122.5
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization	35.8	37.2
Provision for doubtful accounts	(8.8)	3.8
Purchased in-process research and development	5.4	--
Other	7.1	12.5
Net changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable	96.6	199.5
Inventories	36.7	(110.8)
Miscellaneous receivables and other current assets	2.8	1.9
Long-term assets	(16.0)	(11.1)
Accounts payable	(11.4)	(18.2)
Accrued liabilities	(0.9)	(41.5)
Payments of restructuring liabilities	(42.3)	--
Income taxes	6.3	(46.7)
Long-term liabilities	(1.8)	2.8
Net Cash Provided by Operating Activities	114.8	151.9
Investing Activities
Acquisition of property, plant and equipment, net	(9.5)	(69.0)
Proceeds from sales and maturities of
investments	99.5	258.8
Payments for purchases of investments	(86.3)	(205.8)
Payments for acquisitions, net of
cash acquired	(283.2)	(89.0)
Net Cash Used for Investing Activities	(279.5)	(105.0)
Financing Activities
Payments of notes payable and capital leases	(8.2)	--
Proceeds from issuance of common stock	1.1	14.3
Net Cash Provided by (Used for) Financing Activities	(7.1)	14.3
Effect of Exchange Rate Changes on Cash	(1.6)	(9.1)
Net Increase (Decrease) in Cash and Cash Equivalents	(173.4)	52.1
Cash and Cash Equivalents at Beginning of Year	701.9	329.3
Cash and Cash Equivalents at End of Year	$ 528.5	$ 381.4
Other Information
Interest paid	0.5	0.2
Income taxes paid	9.7	85.8
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 28, 2001.

2. New Accounting Policies

During the first quarter of 2002, the Company adopted SFAS 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and eliminates the pooling-of-interests method of accounting for future acquisitions. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets. SFAS 142 eliminates the amortization of goodwill and intangible assets with indefinite useful lives. SFAS 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. For more information, please refer to Note 4, Goodwill and Intangible Assets.

Also during the first quarter of 2002, the Company adopted SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 provides a single accounting model for long-lived assets to be disposed of and replaces SFAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. Adoption of this Statement did not have a material effect on the Company’s results of operations, financial position or cash flows. The Company will follow the guidance in SFAS 144 for impairment reviews of long-lived assets.

3. Business Combinations

In January 2002, the Company acquired 100% of the outstanding voting stock of Ocular Networks, Inc. (“Ocular”), a developer of optical solutions for the metropolitan (“metro”) optical networking market, for $322.7 million. As part of the acquisition, the Company obtained Ocular’s Optical Network Xchange^TM (“OSX”) products, the Tellabs 6400 transport switch (formerly Ocular OSX 6000^TM), the Tellabs 6410 transport edge node (formerly Ocular OSX 1000^TM) and the Tellabs 6490 element manager (formerly Ocular Metro Watch^TM).

The acquisition was accounted for as a purchase, in accordance with the guidance in SFAS 141, Business Combinations, with the results of operations and cash flows for Ocular included in the Company’s consolidated results from the date of the acquisition. Pro forma combined results of operations 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.

Components of the purchase price were as follows:

Component	(in millions)
Cash paid to Ocular shareholders	$278.5
Fair value of Ocular stock options assumed	42.7
Payable to former Ocular restricted stockholders	28.5
Acquisition costs	2.3
	352.0
Deferred compensation expense	(29.3)
Total	$322.7

The Black-Scholes option valuation model was used to determine the fair value of the Ocular stock options assumed. The deferred compensation expense represents the intrinsic value of the unvested Ocular stock options on the acquisition date, which will be recognized over the remaining service period of the options. Also included in the purchase price was a payable of $28.5 million to former holders of restricted Ocular stock awards, which were given to certain key employees. On the acquisition date, the restricted stock award holders exchanged these awards for the right to receive $28.5 million in cash, which Tellabs has agreed it will pay out either, immediately, if certain pre-defined conditions are met, or over the original vesting period of the awards.

The preliminary allocation of the purchase price was as follows:

	(In millions)
Goodwill	$264.8
Intangible assets subject to amortization-   developed technology	64.4
Purchased in-process research and development costs	5.4
Other assets	10.2
Total Assets	$344.8
Total Liabilities	$22.1
Purchase Price	$322.7

The purchase price allocation is preliminary, awaiting a final determination of deferred taxes related to the acquisition and other minimal costs.

The developed technology intangible asset of $64.4 million represents the value of the underlying technology for the Tellabs 6400 transport switch and the Tellabs 6490 element manager. This intangible asset is being fully amortized over its estimated useful life using the straight-line method. The $5.4 million of in-process research and development costs was expensed during the first quarter of 2002. These costs related to the development of the Tellabs 6410 transport edge node.

The Company also recorded goodwill of $264.8 million. The Company believes that by acquiring Ocular it has extended the addressable market for its products within the metro optical network. Ocular’s product offerings complement Tellabs’ by focusing on small to mid-size tier 2 and 3 central offices, a market opportunity that has previously not been addressed by Tellabs. Tellabs existing 5000 series of digital cross-connect systems are optimized for larger, or tier 1, central offices. The Company estimates that no goodwill will be deductible for tax purposes.

4. Goodwill and Intangible Assets

During the first quarter of 2002, the Company adopted SFAS 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and eliminates the pooling-of-interests method of accounting for future acquisitions. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets. SFAS 142 eliminates the amortization of goodwill and intangible assets with indefinite useful lives. SFAS 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.

In its initial application of SFAS 142, the Company determined that it operated in one reporting unit for purposes of completing the impairment review of goodwill. Therefore, the Company tested for impairment at the consolidated entity level and determined that a potential impairment did not exist. As a result, no further actions were required. The Company plans to perform its annual impairment review in the fourth quarter of each year.

Below is a comparison of the results of operations for the quarter ended March 29, 2002, with the pro-forma results of operations for the quarter ended March 30, 2001, adjusted to exclude goodwill amortization expense.

(in millions, except per-share amounts)	March 29, 2002	March 30, 2001
Net Earnings	$5.3	$122.5
Add back: Goodwill amortization	--	3.7
Pro-forma Earnings	$5.3	$126.2
Earnings per Share - Basic	$0.01	$0.30
Add back: Goodwill amortization	--	0.01
Pro-forma Earnings per Share - Basic	$0.01	$0.31
Earnings per Share - Diluted	$0.01	$0.29
Add back: Goodwill amortization	--	0.01
Pro-forma Earnings per Share - Diluted	$0.01	$0.30
Average number of common shares outstanding	410.5	408.8
Average number of common shares outstanding, assuming dilution	414.8	416.3

Goodwill increased $265.7 million, during the first quarter of 2002, to $454.3 million. $264.8 million of the overall increase was due to goodwill that resulted from the Ocular acquisition. The remaining $0.9 million related to the reclassification of intangible assets from the Tellabs Denmark acquisition that no longer qualifed as intangibles under SFAS 141.

At March 29, 2002, the Company had finite lived intangible assets with a carrying value of $87.4 million and accumulated amortization of $12.4 million. These assets consisted of developed technology acquired in both the Tellabs Denmark acquisition, totaling $23.0 million, and the Ocular acquisition totaling $64.4 million. At March 29, 2002, the net carrying value of the Tellabs Denmark developed technology was $11.7 million, while the net carrying value of the Ocular developed technology was $63.3 million. These intangible assets are being fully amortized using the straight-line method over periods ranging from 7 to 10 years. The overall weighted-average amortization period is 9.2 years. Total amortization expense for the period ended March 29, 2002, was $1.7 million.

The remaining amortization expense for 2002 is $7.3 million. The estimated amortization expense for the next four years is as follows:

	(in millions)
2003	$9.7
2004	$9.7
2005	$9.7
2006	$8.3

5. Restructuring and Other Charges

2001 Restructuring Programs
During 2001, the Company’s management and Board of Directors approved plans to restructure its business operations. The Company’s restructuring efforts included termination of the SALIX and NetCore next-generation switching effort, discontinuation of the development of the TITAN 6700 Optical Transport Switch, strategic realignment of worldwide manufacturing capacity and related workforce reductions, reduction of excess inventories and related purchase commitments, and a consolidation of the Company’s facilities. These steps were undertaken to both realign the Company’s cost structure with the lower anticipated business and industry outlook and to focus the Company’s resources on the metro optical networking and business service markets. These actions resulted in charges of $448.6 million, consisting of non-cash asset write-downs of $204.1 million, cash outlays of $64.4 million and an accrual for future payouts of $180.1 million.

Below is an analysis of the activity related to the Company’s 2001 restructuring programs and their status at March 29, 2002:

(in millions)
Description of Reserve	Balance at December 28, 2001	Non-Cash Activity	Cash Activity	Balance at March 29, 2002
Excess purchase     commitments	$94.6	$-	$(24.0)	$70.6
Severance and     related expenses	26.4	-	(14.0)	12.4
Consolidation of     excess leased     facilities	56.8	-	(4.3)	52.5
Other liabilities	2.3	-	-	2.3
	$180.1	$-	$(42.3)	$137.8

The Company continues to work towards negotiating the final settlement of the remaining excess purchase commitments by the end of 2002. The majority of the remaining reserve for severance and related expenditures should be paid out during the second quarter of 2002. The Company anticipates utilizing its entire reserve for excess leased facility charges over the next several years, in accordance with the terms of the original leases. The remaining reserve for other liabilities consists primarily of government grants to be repaid during 2002.

6. Comprehensive Income
 
Comprehensive income for the first quarter of 2002 was $0.5 million and $94.0 million for the first quarter of 2001.

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

	Three Months Ended
(In millions, except per-share amounts)	3/29/02	3/30/01
Numerator:
Net earnings	$5.3	$122.5
Denominator:
Denominator for basic earnings per share-   weighted-average shares outstanding	410.5	408.8
Effect of dilutive securities:
Employee stock options and awards	4.3	7.5
Denominator for diluted earnings per share-   adjusted weighted-average shares   outstanding and assumed   conversions	414.8	416.3
Earnings per share	$ 0.01	$ 0.30
Earnings per share, assuming dilution	$ 0.01	$ 0.29

8. Subsequent Event

On April 17, 2002, the Company announced plans to re-align its cost structure with the reduced revenue outlook for the business, while continuing incremental investments in areas expected to drive the Company’s future growth. This restructuring plan calls for the termination of approximately 1,200 employees worldwide; the closure of a manufacturing plant in Ronkonkoma, New York; and the consolidation of several smaller locations. The Company plans to record restructuring and other charges of approximately $130 million in the second quarter of 2002, related to severance costs, lease terminations and the write-down of certain property, plant and equipment. The Company will also record a charge of approximately $110 million associated with excess inventory and purchase commitments resulting from the lower revenue outlook for the business.

Management’s Discussion and Analysis

Overview — Quarter Ended March 29, 2002

The Company’s operations continued to be impacted by the industry-wide slowdown in capital spending by the major telecommunications carriers that began during the second quarter of 2001. Overall, net sales declined 51.9% to $371.5 million, with declines seen across all major product and service groups, particularly optical networking products, which experienced a 62.5% decline compared to the first quarter of 2001. Sales to customers within the United States accounted for approximately 70% of overall sales, down nine percentage points from the first quarter of 2001, while sales outside the United States accounted for approximately 30% of overall sales.

In January 2002, the Company purchased Ocular Networks, Inc. (“Ocular”), for $322.7 million, in order to expand Tellabs’ addressable metropolitan (“metro”) optical networking market by providing the Company with complimentary products to address network utilization issues at the “edge” of optical networks, close to the end-user.

Gross margin as a percentage of sales was 47.1%, a decrease of 5.5 percentage points when compared with last year. This reduction was due primarily to a change in product mix along with lower absorption of fixed manufacturing costs due to the overall decline in sales volume.

Operating expenses of $174.9 million were 28.1% lower than the first quarter of 2001. The improvement reflects cost savings from the Company’s restructuring programs and discretionary spending controls implemented during 2001, along with the cost benefits from adopting SFAS 142. Included in operating expenses for the first quarter of 2002 was a charge of $5.4 million related to the write-off of in-process research and development costs associated with the Ocular acquisition.

Other income totaled $8.3 million, which was 48.5% lower than the first quarter of last year. The decline in other income was due to a decrease in interest income, brought about by a combination of lower average investment balances in 2002, as a result of the Ocular acquisition, along with lower interest rates when compared with the first quarter of 2001.

The effective tax rate for the quarter was 36.8% compared with 31.5% last year, reflecting the change in the worldwide earnings mix, lower projected research and development tax credits and certain non-deductible expenses from the Ocular acquisition. Excluding these non-deductible expenses the Company's effective tax rate for the first quarter of 2002 was 35.0%.

Net earnings for the first quarter of 2002 were $5.3 million compared with $122.5 million in the first quarter of 2001, while earnings per share, assuming dilution were $0.01 per share compared with $0.29 per share. Net earnings for the first quarter of 2002, excluding the $5.4 million write-off of acquired in-process research and development, were $8.9 million or $0.02 per weighted-average diluted shares outstanding.

During the first quarter of 2002, the Company’s cash and equivalents and short-term investments balance decreased $190.0 million to $911.6 million. Excluding the cash payments for the Ocular acquisition, the Company generated cash flow of approximately $93.2 million. The Company’s principal source of cash in the quarter was its cash generated from operations of $114.8 million. Besides the Ocular acquisition, the Company also used cash to fund capital expenditures of $9.5 million and financing activities of $7.1 million.

Management believes the current level of working capital is 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, through short-term or long-term financing or equity offerings.

Based on a review of current economic indicators and discussions with key customers, the Company does not anticipate a near-term recovery in its customers' capital spending. As a result, the Company initiated another restructuring program on April 17, 2002. This plan calls for the termination of approximately 1,200 employees worldwide, the closure of a manufacturing plant in Ronkonkoma, New York and the consolidation of several smaller offices worldwide. Costs associated with these actions are expected to total approximately $130 million and be recorded in the second quarter of 2002. The Company will also record a charge of approximately $110 million, in the second quarter of 2002, associated with excess inventory and purchase commitments resulting from the lower revenue outlook for the business. The Company anticipates these latest restructuring actions will allow it to reduce its operating expenditures for 2002 from its previous guidance of approximately $785 million to approximately $685 million.< /P>

For a more detailed analysis of the results for the first quarter of 2002, please refer to the Results of Operations and Liquidity and Capital Resources discussions below.

Results of Operations — Quarter Ended March 29, 2002 vs Quarter Ended March 30, 2001

Net sales for the first quarter of 2002 were $371.5 million compared with $772.1 million for the first quarter of 2001. The 51.9% decline in first quarter sales reflects the impact the global reduction in capital spending by telecommunications carriers had on the Company’s operations. This reduction, which began in the second quarter of 2001, was the result of major telecommunications carriers re-calibrating their capital spending levels to take into account their existing capacity on-hand and current end-customer demand levels. The Company cannot forecast with any degree of certainty when a recovery in capital spending can be expected, nor can it forecast what normal customer spending levels will be once this structural market correction is completed.

From a product standpoint, net sales totaled $314.6 million compared with $667.4 million in the first quarter of 2001. The 52.9% reduction in net product sales was seen across all of the Company’s major product groups. The largest decline, however, was experienced in optical networking product sales, which decreased 62.5% to $180.5 million due to lower sales of the Tellabs® 5000 series of digital cross-connect systems. The Company did, however, see some improvement in sales of its emerging optical networking products, the Tellabs® 7100 optical transport system and Tellabs® 6500 transport switch. During the first quarter of 2002, the Company recognized initial revenues on sales of the Tellabs 6500 to a second customer.

As a result of its January 2002 acquisition of Ocular, the Company added three new products to its optical networking portfolio: the Tellabs® 6400 transport switch (formerly Ocular OSX 6000™), the Tellabs® 6410 transport edge node (formerly Ocular OSX 1000™) and the Tellabs® 6490 element manager (formerly Ocular Metro Watch™). These products will expand the Company’s addressable metro optical networking market, by allowing the Company to address network utilization issues at the “edge” of optical networks, close to the end-user. Tellabs purchased Ocular for approximately $322.7 million in cash and options. For more information on the acquisition, please refer to Note 3, Business Combinations.

Broadband access product sales totaled $114.9 million for the first quarter of 2002 compared with $152.9 million in the first quarter of 2001. Lower sales of the Tellabs® 8100 series of managed access systems and Tellabs® 6300 series of managed transport systems accounted for the majority of the 24.8% decline in sales, as the effects of the carrier spending slowdown were also being felt outside North America. Sales of the Tellabs® 2300 telephony distribution system were also down compared to last year. Sales of the Tellabs® 7200 optical transport system, however, posted relatively strong gains compared with last year, from sales to the Asia-Pacific region.

Voice-quality enhancement product sales totaled $19.1 million compared with $32.9 million in the first quarter last year. The 41.8% decline in sales was due to lower sales of Tellabs Integrated Voice Products and lower sales of Tellabs® 3000 series of voice-quality enhancement systems.

Services and other revenues for the first quarter of 2002 were $56.9 million compared with $104.7 million in the first quarter of 2001. The Company generates this revenue primarily through its services and solutions area, which is responsible for the installation, testing and support of the Company’s products. The 45.7% decline in services and other revenues is a direct byproduct of the Company’s lower product sales, particularly in the optical networking area.

Sales within the United States accounted for approximately 70% of first quarter 2002 sales. Compared with last year, sales within the United States declined 57.4% due to lower optical networking product sales. Sales outside the United States accounted for approximately 30% of first quarter 2002 sales, which was a decrease of 31.2% compared with last year. This decline was primarily the result of lower broadband access product sales, in particular, the Tellabs 8100 managed access system and Tellabs 6300 series of managed transport systems.

Gross margin as a percentage of sales was 47.1% compared with 52.6% for the first quarter of 2001. From a product standpoint, gross margin as a percentage of sales was 47.4% compared with 56.3% last year. This decline was a byproduct of the carrier spending slowdown, particularly in the United States, as the Company experienced a shift in product mix due to lower sales of its higher margin 5000 series of digital cross-connects. The calculation of gross product margin as a percentage of sales in 2002 was also negatively impacted due to the significantly lower sales denominator.

Gross services and other margin as a percentage of sales was 45.5% compared with 29.1% for the first quarter of 2001. The primary drivers behind this improvement were cost savings and efficiencies that the Company realized in its solutions and services area as a result of its 2001 restructuring initiatives. In addition, the Company also realized a benefit from a shift in the mix of its service offerings toward higher margin solutions sales. The Company does not expect this change in the mix of its service offerings to continue, since the Company typically derives a majority of its services and other revenues from the installation and testing of new systems.

Operating expenses for the first quarter of 2002 totaled $174.9 million compared with $243.2 million for the first quarter of 2001. Included in 2002 operating expenses was a charge of $5.4 million for the write-off of in-process research and development costs resulting from the acquisition of Ocular. Excluding this charge, operating expenses totaled $169.5 million and were 30.3% lower than first quarter 2001 levels. Also during the first quarter of 2002, the Company implemented Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets, which eliminates the amortization of goodwill and indefinite-lived intangible assets in lieu of an impairment review methodology. Accordingly, the Company did not record goodwill amortization in the first quarter of 2002, but instead performed the transitional impairment review of goodwill as outlined in SFAS 142. Based on the results of the review, the Company determined that goodwill was not impaired. For more in formation on recently adopted accounting policies, see Note 2, New Accounting Policies.

Research and development expenditures totaled $90.6 million for the quarter compared with $126.9 million in the first quarter of 2001. The 28.6% reduction in research and development spending was primarily the result of cost savings derived from the Company’s 2001 restructuring efforts, which included the termination of the Company’s next-generation switching product effort and the discontinuance of the TITAN 6700® optical switch. These year-over-year cost savings were partially reduced by the inclusion of expenditures for Ocular, which was acquired in January 2002. In addition to the restructuring initiatives, the Company is also re-prioritizing its research and development efforts by dedicating additional resources to metro optical networking and business services, areas expected to drive the Company’s future growth. As a percentage of sales, research and development expenditures were 24.4% compared to 16.4% in the first quarter of 2001, due to lower sales leverage.

Selling, general and administrative expenditures totaled $77.2 million compared with $111.1 million in the first quarter of 2001. The 30.5% spending reduction was a direct byproduct of savings recognized from the Company’s 2001 restructuring efforts, along with the stringent discretionary spending controls initiated in the second quarter of 2001. As a percentage of sales, selling, general and administrative spending was 20.8% compared with 14.4% in the first quarter of 2001, due again, to a significantly lower sales denominator in 2002.

Other income for the first quarter of 2002 totaled $8.3 million compared with $16.1 million for the first quarter of 2001. The decline in other income was driven mainly by a decrease in interest income that resulted from lower average investment balances in 2002, as a result of the Ocular acquisition, along with lower overall interest rates.

The effective tax rate for the first quarter of 2002 was 36.8% compared to 31.5% in the first quarter of 2001, reflecting the change in the worldwide earnings mix, lower projected research and development tax credits and certain non-deductible expenses related to the Ocular acquisition. Excluding these non-deductible expenses the Company's effective tax rate for the first quarter of 2002 was 35.0%.

Based on a review of current economic indicators and discussions with key customers, the Company does not anticipate a near-term recovery in its customers' capital spending. As a result, the Company announced another restructuring program in the second quarter of 2002. This restructuring is designed to re-align the Company’s cost structure with the reduced revenue outlook for the business, while continuing to invest in areas expected to drive the Company’s future growth. This new restructuring plan calls for the termination of approximately 1,200 employees worldwide; the closure of a manufacturing plant in Ronkonkoma, New York and the consolidation of several smaller locations worldwide. The Company plans to record restructuring and other charges of approximately $130 million in the second quarter of 2002, related to severance costs, lease terminations and the write-down of certain property, plant and equipment. The Company will also record a charge of approximately $110 million associated with excess inventory and purchase commitments resulting from the lower revenue outlook for the business. The Company anticipates these latest restructuring actions will allow it to reduce its operating expenditures for 2002 from its previous guidance of approximately $785 million to approximately $685 million.

Liquidity and Capital Resources

The Company’s net working capital balance at March 29, 2002, was $1,311.9 million compared with $1,625.1 million at December 28, 2001. The current ratio was 5.5 to 1 at the end of the first quarter of 2002 compared with 6.1 to 1 at the end of 2001.

The Company’s principal source of liquidity remained its cash and equivalents and short-term investments, which decreased $190.0 million during the first quarter of 2002 to $911.6 million. This decrease was primarily the result of the $283.2 million in net cash paid for the Ocular acquisition.

The Company was able to generate net cash from operations of $114.8 million in part, due to its cash earnings of $44.8 million, which are defined as net income adjusted for non-cash gains and charges, principally depreciation and amortization. The Company generated the remaining $70.0 million in operating cash through an overall improvement in its financial position. This improvement was driven mainly by accounts receivable collections of $96.6 million, a reduction in inventory of $36.7 million and an increase in income taxes receivable of $6.3 million, that offset cash payouts of 2001 restructuring reserves of $42.3 million, accounts payable of $11.4 million and growth in long-term assets of $16.0 million. The Company’s short-term investments portfolio remained relatively stable at $383.1 million compared with $399.7 million at December 28, 2001.

The balance of the Company’s gross accounts receivable totaled $284.1 million at March 29, 2002. The 26.8% decrease during the first quarter of 2002 was the result of collections of fourth quarter 2001 receivables and lower overall sales. Days sales outstanding was 61 days on March 29, 2002, compared with 64 days at the end of 2001.

The net inventory balance at March 29, 2002, totaled $293.5 million compared with $329.1 million at December 29, 2001. The 10.8% decline was primarily the result of sales of optical networking products, including the Tellabs 6500 transport switch, and broadband access products.

During the first quarter of 2002, the Company used $9.5 million in funds for property, plant and equipment purchases. The principal outlay was an additional $3.3 million related to the buildout of the Company’s Naperville facility. The Company anticipates 2002 capital spending will be below 2001 levels due to the completion of construction on the Naperville facility in the third quarter of 2001.

Net goodwill increased $265.7 million and intangible assets increased $61.0 million during the quarter. Both of these increases were the result of the acquisition of Ocular in January 2002. For more information on the Ocular acquisition please refer to Note 3, Business Combinations. Other assets remained relatively unchanged at $196.7 million.

The balance of current liabilities at March 29, 2002, was $291.7 million compared with $319.5 million at December 28, 2001. The reduction in current liabilities was primarily the result of payments of liabilities related to the Company’s 2001 restructuring initiatives, totaling $42.3 million. These payments related principally to the settlement of excess inventory purchase commitments of $24.0 million, severance payouts totaling $14.0 million and lease payments for excess facilities of $4.3 million. Overall, the Company has $137.8 million in reserves remaining related to its 2001 restructuring activities. The Company anticipates paying $119.0 million of these liabilities within the next year. For more information on the Company’s 2001 restructuring efforts, please refer to Note 5, Restructuring and Other Charges.

Accrued liabilities totaled $119.9 million at March 29, 2002, compared with $100.8 million at December 28, 2001. The increase was due mainly to an accrual for cash payments owed to certain key Ocular employees that held restricted stock awards on the acquisition date. These shareholders agreed to surrender their restricted shares in exchange for the right to receive cash payments totaling $28.5 million. Cash payments will be made to these individuals either upon demand, if certain pre-defined conditions are met, or in accordance with the original vesting schedule of the restricted stock awards. Based on the vesting schedule, $19.0 million was recorded to accrued liabilities with the remaining $9.5 million included in other long-term liabilities. As of March 29, 2002, $4.8 million had been paid to these individuals.

During the first quarter of 2002, the Company used $5.4 million in cash to repay an outstanding loan agreement and two equipment capital leases assumed in the Ocular acquisition. The Company also repaid industrial revenue bonds issued in December 1991 for $2.9 million.

Management believes the current level of working capital, and in particular its cash and short-term investment balance of $911.6 million, is 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, cash generated from future operations, short-term or long-term financing or equity offerings.

Critical Accounting Policies and Disclosures about Market Risk

Investments in marketable securities
During the normal course of business, the Company invests a portion of its cash and cash equivalents in marketable securities. The Company accounts for these investments using the guidance in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and its related interpretive guidance. All securities in the Company’s short-term marketable securities portfolio are considered available-for-sale securities and are marked-to-market on a monthly basis with the resulting unrealized gains and losses, net of deferred taxes, reported as a separate component of stockholders’ equity.

At March 29, 2002, the Company had an unrealized loss on short-term marketable securities of $4.8 million, compared to an unrealized gain of $7.1 million at December 28, 2001.

In accordance with SFAS No. 115, when the Company determines that a decline in the fair value of a security is other than temporary, the Company will record an impairment loss to adjust the security to its new, lower market value. In assessing whether a decline in market value for a security is considered other than temporary, the Company examines a variety of factors, including: current and anticipated macro-economic conditions, the outlook for the particular industry, the long-term business outlook for the investee, the amount of time the investment’s fair value has been below cost and the Company’s liquidation strategy with respect to the particular investment. The Company did not have any securities with long-term declines in market value during the first quarter of 2002.

Other investments
Included in Other Assets were investments in start-up technology companies and partnerships that invest in start-up technology companies. These investments are recorded at cost, which approximates fair market value. The balance of these investments was $36.4 million at March 29, 2002, which was consistent with year-end 2001 levels.

Accounts receivable
Through the normal course of business, the Company markets its products to various telecommunications service providers. Sales to these customers have varying degrees of collection risk associated with them, depending on a variety of factors. During the first quarter of 2002 the Company decreased its allowance for uncollectable accounts by $20.2 million, $11.7 million of which related to the write-off of receivables, while the remaining $8.5 million related to the recognition of previously reserved sales to certain high-risk customers that the Company has subsequently collected funds on.

Inventory reserves
The Company reviews its ending inventory levels for excess quantities and obsolescence, based upon current market conditions and estimates of future demand. During 2001, the Company wrote-off $120.3 million of excess and obsolete inventory, as a result of the economic downturn in the telecommunications industry, the exiting of the next-generation switching initiative and discontinuance of the TITAN 6700. During the second quarter of 2002, the Company will record additional charges of approximately $50 million for excess inventory resulting from the continuation of the economic slowdown. Additional charges may need to be recorded if conditions in the telecommunications industry continue to deteriorate.

Purchase commitments
The Company, through its normal course of business, enters into a variety of non-cancelable, non-returnable commitments for the purchase of custom inventory piece parts. These commitments are generally entered into at market rates and expire within the next year. In the event of a dramatic decline in sales, such as was experienced in 2001 and the first quarter of 2002, the Company may incur excess inventory and subsequent losses as a result of these commitments. During 2001, the Company accrued $127.0 million related to outstanding purchase commitments as part of its restructuring actions. The Company will record an additional charge of approximately $60 million in the second quarter of 2002 for excess purchase commitments as part of its 2002 restructuring actions. Should sales continue to dramatically decline, the Company may incur additional losses from these commitments.

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 the 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 that 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 t he Company’s filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.1 to Form 10-Q for the quarterly period ended June 29, 2001, filed with SEC on August 9, 2001. The Company’s actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors should not place undue reliance on the forward-looking statements in determining whether to buy, sell or hold any of the Company’s securities. 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 6. Exhibits and Reports on Form 8-K

(A) Exhibits

     10.1 — Deferred Income Plan, effective as of September 2, 2001

(B) Reports on Form 8-K:

     The Registrant filed a press release on January 28, 2002, announcing earnings for the quarter and year ended December 28, 2001.

     The Registrant filed a press release on April 17, 2002, announcing earnings for the quarter ended March 29, 2002, along with details of additional restructuring actions to be taken in the second quarter of 2002.

     The Registrant filed a press release on April 26, 2002, announcing the election of Mellody Hobson to the Company’s Board of Directors, along with the re-election of Stephanie Pace Marshall and William F. Souders.

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)

May 3, 2002
(Date)

EX-10

TELLABS, INC.

DEFERRED INCOME PLAN

Effective as of September 2, 2001

TABLE OF CONTENTS

Page

Purpose 1

ARTICLE I Definitions 1

ARTICLE 2	Selection, Enrollment, Eligibility	8
2.1	Selection by Committee	8
2.2	Enrollment Requirements	8
2.3	Eligibility; Commencement of Participation	8
2.4	Termination of Participation and/or Deferrals	8

ARTICLE 3	Deferral Commitments/Credit to Accounts/Vesting/Measurement Funds/Taxes	9
3.1	Minimum Deferrals	9
3.2	Maximum Deferrals	9
3.3	Election to Defer; Effect of Election Form	10
3.4	Withholding of Annual Deferral Amounts	11
3.5	Annual Company Contribution Amount	11
3.6	Annual Restricted Stock Amount	11
3.7	Annual Restoration Contribution Amount	11
3.8	Annual Stock Option Gain Amount	12
3.9	Annual Vacation Rollover Contribution Amount	12
3.10	Investment of Trust Assets	12
3.11	Sources of Stock	13
3.12	Vesting	13
3.13	Crediting/Debiting of Account Balances	13
3.14	FICA and Other Taxes	15
3.15	Distributions	16

ARTICLE 4	In-Service Benefits; Unforeseeable Financial Emergencies; Withdrawal Election	16
4.1	In-Service Benefit	16
4.2	Payment of In-Service Benefit	16
4.3	Other Benefits Take Precedence Over In-Service	16
4.4	Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies	16
4.5	Withdrawal Election	17

ARTICLE 5	Retirement Benefit	17
5.1	Retirement Benefit	17
5.2	Payment of Retirement Benefit	17
5.3	Settlement in Stock	18
5.4	Death Prior to Completion of Retirement Benefit	18

ARTICLE 6	Pre-Retirement Survivor Benefit	18
6.1	Pre-Retirement Survivor Benefit	18

ARTICLE 7	Termination Benefit	18
7.1	Termination Benefit	18
7.2	Payment of Termination Benefit	18

ARTICLE 8	Disability Waiver and Benefit	18
8.1	Disability Waiver	18
8.2	Disability Benefit; Continued Eligibility	19

ARTICLE 9	Beneficiary Designation	19
9.1	Beneficiary	19
9.3	Acknowledgement	19
9.4	No Beneficiary Designation	19
9.5	Doubt as to Beneficiary	19
9.6	Discharge of Obligations	19

ARTICLE 10	Leave of Absence	20
10.1	Paid Leave of Absence	20
10.1	Unpaid Leave of Absence	20

ARTICLE 11	Termination, Amendment or Modification	20
11.1	Termination	20
11.2	Amendment	21
11.3	Effect of Change in Control	21
11.4	Plan Agreement	21
11.5	Effect of Payment	21

ARTICLE 12	Administration	22
12.1	Committee Duties	22
12.3	Agents	22
12.4	Binding Effect of Decisions	22
12.5	Indemnity of Committee	22
12.6	Employer Information	22

ARTICLE 13	Other Benefits and Agreements	22
13.1	Coordination with Other Benefits	22

ARTICLE 14	Claims Procedures	23
14.1	Presentation of Claim	23
14.2	Notification of Decision	23
14.3	Review of a Denied Claim	23
14.4	Decision of Review	23
14.5	Legal Action	24

ARTICLE 15	Trust	24
15.1	Establishment of the Trust	24
15.2	Interrelationship of the Plan and the Trust	24
15.3	Distributions From the Trust	24

ARTICLE 16	Miscellaneous	24
16.1	Status of Plan	24
16.2	Unsecured General Creditor	24
16.3	Employer’s Liability	24
16.4	Nonassignability	25
16.5	Not a Contract of Employment	25
16.6	Furnishing Information	25
16.7	Terms	25
16.8	Captions	25
16.9	Governing Law	25
16.10	Notice	25
16.11	Successors	26
16.12	Spouse’s Interest	26
16.13	Validity	26
16.14	Incompetent	26
16.15	Court Order	24
16.16	Distribution in the Event of Taxation	26
16.17	Insurance	27
16.18	Legal Fees To Enforce Rights After Change in Control	27

TELLABS DEFERRED INCOME PLAN

Effective as of September 2, 2001

Purpose

The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated Employees and Directors who contribute materially to the continued growth, development and future business success of Tellabs, Inc., a Delaware corporation, its subsidiary, Tellabs Operations, Inc., and its other subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for other purposes of Title I of ERISA. This Plan shall supersede in its entirety the Tellabs Operations, Inc. Deferred Income Plan, dated April 1, 1992, as amended. Any and all balances accrued by a Participant under such predecessor plan shall be subject to the terms and conditions of this Plan and shall be referred to as the “Initial Account Balances.”

ARTICLE 1
Definitions

For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:

1.1    “Account(s)” shall mean the Account or Accounts maintained on the books of the Company used solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan and shall not constitute a separate fund of assets. The Accounts available for each Participant shall be identified as the Retirement Account and the In-Service Account.

1.2    “Account Balance” shall mean the total amount of money (excluding stock) a Participant has in an Account or Accounts under the Plan. For a Participant with both an In-Service Account and a Retirement Account his Account Balance is the sum of the amounts credited to his Retirement Account and In-Service Account under this Plan. Participant’s election of a Valuation Fund shall apply to a Participant's entire Account Balance unless Participant specifically designates certain Valuation Funds for the Retirement Account and other Valuation Funds for the In-Service Account.

1.3    “Annual Bonus” shall mean any compensation, in addition to Base Annual Salary, relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, payable to a Participant as an Employee under any Employer's annual bonus and cash incentive plans, excluding stock options and restricted stock.

1.4    “Annual Company Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5.

1.5    “Annual Deferral Amount” shall mean that portion of a Participant’s Base Annual Salary, Annual Bonus and Directors Fees that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant’s Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year’s Annual Deferral Amount shall be the actual amount withheld prior to such event.

1.6    “Annual Installment Method” shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: The Account Balance of the Participant shall be calculated as of the close of business on the last business day of the Plan Year immediately preceding any annual payment. The amount of the annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a 10-year Annual Installment Method, the first payment shall be 1/10 of the Account Balance, calculated as described in this definition. The following year, the payment shall be 1/9 of the Account Balance, calculated as described in this definition. Each annual installment shall be paid on or as soon as practical after the last business day of the a pplicable year. Shares of Stock that shall be distributable with respect to the Annual Stock Option Gain Amount and the Annual Restricted Stock Amount shall be distributable in shares of actual Stock in the same manner previously described. However, the Committee may, in its sole discretion, adjust the annual installments in order to distribute whole shares of actual Stock.

1.7    “Annual Restoration Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.7.

1.8    “Annual Restricted Stock Amount” shall mean, with respect to a Participant for any one Plan Year, the amount of Restricted Stock deferred in accordance with Section 3.6 of this Plan, calculated using the closing price of Stock at the end of the business day closest to the date such Restricted Stock would otherwise vest, but for the election to defer.

1.9    “Annual Stock Option Gain Amount” shall mean, with respect to a Participant for any one Plan Year, the portion of Qualifying Gains deferred with respect to an Eligible Stock Option exercise, in accordance with procedures and guidelines established by the Committee.

1.10    “Annual Vacation Rollover Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.9.

1.11    “Base Annual Salary” shall mean the annual cash compensation relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, excluding bonuses, non-standard commissions, overtime, fringe benefits, stock options, restricted stock, relocation expenses, unused and unpaid excess vacation days, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee’s gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer, including this Plan, and shall be calculated to include amounts not otherwise included in the Participant’s gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee.

1.12    “Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant.

1.13    “Beneficiary Designation Form” shall mean the form that may be established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.

1.14    “Board” shall mean the Board of Directors of the Company.

1.15    “Change in Control” shall mean the first to occur of any of the following events:

1. Any “person” (as defined in Section 13(d) and 14(d) of the Securities Exchange Act as amended from time to time, or any successor act thereto, hereinafter referred to as 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 twenty percent (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 secur ities by the Company; and provided further that no Change in Control will be deemed to have occurred if a person inadvertently acquires an ownership interest of twenty percent (20%) or more but then promptly reduces that ownership interest below twenty percent (20%); or
2. During any two (2) consecutive years (not including any period beginning prior to the Effective Date), individuals who at the beginning of such two (2) year period constitute the Board of Directors of the Company and any new director (except for a director designated by a person who has entered into an agreement with the Company to effect a transaction described elsewhere in this definition of Change in Control) whose election by the Board or nomination for election by the Company’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; or
3. Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (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 Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (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 company resulting from such Business Combination (including, without limitation, a company which as a result of such transaction owns the Company or all or substantially all of the Company’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 Company; (ii) no person (excluding any company resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such company resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then combined voting power of the then outstanding voting securities of such company 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 company 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; or,
4. Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company; or,
5. 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 Exchange Act and the corresponding SEC rules) is made for the outstanding voting securities of the Company, then the first to occur of: (i) any time during the offer when the person making the offer owns or has accepted for payment securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company’s then outstanding 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 securities owned by such person, securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities when the offer terminates.

1.16    “Claimant” shall have the meaning set forth in Section 14.1.

1.17    “Code” shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.

1.18    “Committee” shall mean the committee described in Article 12.

1.19    “Company” shall mean Tellabs, Inc., a Delaware corporation, and any successor to all or substantially all of the Company’s assets or business.

1.20     “Deduction Limitation” shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are “subject to the Deduction Limitation” under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited/debited w ith additional amounts in accordance with Section 3.13 below, even if such amount is being paid out in installments. The amounts so deferred and amounts credited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant’s death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control.

1.21     “Director" shall mean any member of the Board of Directors of the Employer who is not also an Employee.

1.22    “Director Fees” shall mean the annual fees paid by any Employer, including retainer fees and meeting fees, as compensation for serving on the Board of Directors.

1.23    “Disability” shall mean a period of disability during which a Participant suffers from a physical or mental condition that prevents the Participant, in the sole determination of the Committee, from satisfactorily performing the Participant’s usual duties for any Employer. The Committee shall determine the existence of Disability, in its sole discretion, and may rely on a determination of disability under a disability plan maintained by any Employer or on advice from a medical examiner satisfactory to the Committee.

1.24    “Disability Benefit” shall mean the benefit set forth in Article 8.

1.25    “Election Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan, identifying the element of compensation to deferred under the terms of this Plan and the appropriate Account to be credited with respect to such deferral.

1.26    “Eligible Stock Option” shall mean one or more non-qualified stock option(s) exercisable after the effective date of this Plan under a plan or arrangement of any Employer, and which is designated by the Committee, in its sole discretion, as being eligible to have the gain with respect to such option(s) deferred under this Plan.

1.27    “Employee” shall mean a person who is an employee of any Employer.

1.28    “Employer(s)” shall mean the Company, Tellabs Operations, Inc. and/or any other subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor.

1.29    “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

1.30    “Excess/Qualified Benefit Limitations” shall mean the limits set forth in Code Section 401(a)(17), 401(k) (3) and 402(g), as amended from time to time, which limit the amount of contributions the Company may make to the Qualified Plan on behalf of a given Participant.

1.31    “Excess Vacation Hours” shall be calculated on the Participant’s Vacation Effective Date and shall mean the following, for up to a maximum of one-hundred and twenty (120) hours: (i) the number of vacation hours accrued by such Participant, less (ii) the number of annual vacation hours allocated for the Participant.

1.32    “First Plan Year” shall mean the period beginning September 2, 2001 and ending December 31, 2001.

1.33    “Hourly Salary Rate” shall be determined by dividing the bi-weekly salary of the Participant on the last day of the Plan Year by eighty (80).

1.34    “Initial Account Balance” shall mean, with respect to those Participants who participated in the Predecessor Nonqualified Deferred Income Plan, the amount initially credited as of the effective date of this Plan to a Participant’s Retirement Account and In-Service Account as reasonably determined by the Committee, in its sole discretion. The sum of the amounts credited to a Participant’s Retirement Account and the In-Service Account as the Initial Account Balances shall be equal to the Account Balance as of that same date in the Predecessor Nonqualified Deferred Income Plan. In determining the Initial Account Balance for the In-Service Account, the distribution date selected by a Participant in connection with such election(s) under the Predecessor Nonqualified Deferred Income Plan shall become the date of payment for the In-Service Account. The Initial Account Balances shall be subject to the terms and conditions of this Plan and any Part icipant with an initial Account Balance shall have no right to demand distribution of such amounts other than as provided for herein.

1.35    “In-Service Account” shall mean, with respect to each Participant, the credit on the records of the Employer equal to the Initial Account balance assigned to the In-Service Account, plus amounts deferred from Base Annual Salary, and Annual Bonus, or Director Fees, if applicable, except that no deferral amount shall be credited to an In-Service Account during a Plan Year in which a distribution is to be made, plus amounts credited in accordance with all the applicable crediting provisions of this Plan, less any distributions made to the Participant pursuant to this Plan.

1.36    “In-Service Benefit” shall mean the benefit set forth in Section 4.1

1.37    “Participant” shall mean any Employee or Director (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant’s benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce.

1.38    “Plan” shall mean the Tellabs Deferred Income Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time.

1.39    “Plan Agreement” shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant’s Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant.

1.40    “Plan Year” shall, except for the First Plan Year, mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year.

1.41    “Pre-Retirement Survivor Benefit” shall mean the benefit set forth in Article 6.

1.42    “Predecessor Nonqualified Deferred Income Plan” shall mean the Tellabs Operations, Inc. Deferred Income Plan, dated April 1, 1992, as amended.

1.43    “Qualified Plan” shall be the Tellabs Advantage Program, as amended and restated as of January 1, 1999, adopted by Tellabs Operations, Inc., as may be further amended and/or any successor plan thereto.

1.44    “Qualifying Gain” shall mean the incremental value inuring to a Participant upon the exercise of an Eligible Stock Option, and eligible to be deferred under the provisions of this Plan pursuant to procedures and guidelines established by the Committee.

1.45     “Restricted Stock” shall mean unvested shares of restricted stock units or restricted stock as awarded to the Participant under any Company stock incentive or bonus plan after the effective date of this Plan and identified therein or by the Committee as being eligible for deferral under the provisions of this Plan.

1.46    “Retirement”, “Retire(s)” or “Retired” shall mean, with respect to an Employee, severance from employment from all Employers, on or after the attainment of age fifty-five (55) or such earlier date as approved by the Committee, for any reason other than death or Disability; and shall mean with respect to a Director who is not an Employee, severance of his or her directorships with all Employers on or after such date as determined in the sole discretion of the Committee.

1.47    “Retirement Account” shall mean, with respect to each Participant, a credit on the records of the Employer equal to the Initial Account balance assigned to the Retirement Account, plus amounts deferred or credited from Base Annual Salary, Annual Bonus, Annual Vacation Rollover Contribution Amounts, Annual Company Contributions Amounts, Annual Restoration Contribution Amounts, Annual Restricted Stock Amount, Annual Stock Option Gain Amount, or Director Fees, if applicable, plus amounts credited in accordance with all the applicable crediting provisions of this Plan, less any distributions made to the Participant pursuant to this Plan.

1.48    “Retirement Benefit” shall mean the benefit set forth in Article 5.

1.49     “Stock” shall mean the common stock, $.01 par value per share of Tellabs, Inc., or any other equity securities of the Company designated by the Committee.

1.50    “Termination Benefit” shall mean the benefit set forth in Article 7.

1.51    “Termination of Employment” shall mean the severing of employment with all Employers, or service as a Director of all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, or death. If a Participant is both an Employee and a Director, a Termination of Employment shall be determined in the sole discretion of the Committee.

1.52    “Trust” shall mean the Master Trust Agreement associated with the plan document as entered into between the Company and the trustee named therein and as amended from time to time.

1.53    “Unforeseeable Financial Emergency” shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant’s property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.

1.54    “Vacation Effective Date” shall mean the date from which Employer calculates a Participant’s effective date for the purposes of vacation when the Participant has a break in service which is eligible to be bridged under the Tellabs vacation bridging administrative guidelines. Employer calculates this date by restoring the initial service to the second period of service without considering the break. For example, if a Participant initially works for Employer from Jan. 1, 2001 through Mar. 31, 2001, takes a break from April 1, 2001 through May 31, 2001 and returns June 1, 2001 her Vacation Effective Date is June 1 plus 3 months of initial service, or March 1, 2001.

1.55     “Years of Service” shall mean the total number of years in which a Participant has been employed by one or more Employers. For purposes of this definition, “Service” shall have the meaning provided for such term for purposes of vesting under the Qualified Plan, whether or not the Participant is a participant in such plan.

ARTICLE 2
Selection, Enrollment, Eligibility

2.1    Selection by Committee. Participation in the Plan shall be limited to a select group of management and highly compensated Employees, as determined by the Committee in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees eligible to participate in the Plan. Directors shall also be Participants in the Plan.

2.2    Enrollment Requirements. As a condition to participation, each selected Employee or Director shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within thirty (31) days after he or she is selected to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.

2.3    Eligibility; Commencement of Participation. Provided an Employee or Director selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee or Director shall commence participation in the Plan on the first day of the month following the month in which the Employee or Director completes all enrollment requirements. If an Employee or a Director fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee or Director shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents.

2.4    Termination of Participation and/or Deferrals. If the Committee determines in good faith that an Employee no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant’s membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant’s then Account Balances as a Termination Benefit and terminate the Participant’s participation in the Plan.

ARTICLE 3
Deferral Commitments/Credit to Accounts/Vesting/Valuation Funds/Taxes

3.1    Minimum Deferrals.

1. Base Annual Salary, Annual Bonus and Director Fees. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary, Annual Bonus and/or Director Fees in the following minimum amount:

Deferral	Minimum Percentage
Base Annual Salary and/or Annual Bonus	1%
Director Fees	1%

If an election is made for less than such minimums, the amount deferred shall be zero.

2. Annual Restricted Stock Amount. For each grant of Restricted Stock, a Participant may elect to defer, as his or her Annual Restricted Stock Amount, Restricted Stock in the following minimum amount:

Deferral	Minimum Percentage
Restricted Stock	10%

If an election is made for less than stated minimum amount, the amount deferred shall be zero.
3. Annual Stock Option Gain Amount. For each Eligible Stock Option, a Participant may elect to defer, as his or her Annual Stock Option Gain Amount, the following minimum percentage of Qualifying Gain with respect to exercise of the Eligible Stock Option:

Deferral	Minimum Percentage
Qualifying Gain	10%

If an election is made for less than stated minimum amount, or if no election is made, the amount deferred shall be zero.

4. Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the First Plan Year of the Plan itself, the minimum Annual Deferral Percentage shall apply to any Base Annual Salary to be paid during the remainder of the Plan Year.

3.2    Maximum Deferral.

1. Base Annual Salary, Annual Bonus and Directors Fees. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary, Annual Bonus and/or Directors Fees up to the following maximum percentages for each deferral elected:

Deferral	Maximum Amount
Base Annual Salary	75%
Annual Bonus	100%
Directors Fees	100%

2. Annual Restricted Stock Amount. For each Plan Year, a Participant who is an Employee may elect to defer, as his or her Annual Restricted Stock Amount, Restricted Stock in the following maximum percentage:

Deferral	Maximum Percentage
Restricted Stock	100%

3. Annual Stock Option Gain Amount. For each Eligible Stock Option, a Participant may elect to defer, as his or her Annual Stock Option Gain Amount, Qualifying Gain up to the following maximum percentage with respect to exercise of the Eligible Stock Option:

Deferral	Maximum Percentage
Qualifying Gain	100%

Annual Stock Option Gain Amounts may also be limited by other terms or conditions set forth in the stock option plan or agreement under which such options are granted.

4. Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the First Plan Year of the Plan itself, the maximum Annual Deferral Amount with respect to Base Annual Salary, and/or Director Fees shall be limited to the amount to be paid during the remainder of the Plan Year, or to the Annual Bonus to be awarded and paid with respect to the calendar year ending on the same date as the Short Plan Year.

3.3    Election to Defer; Effect of Election Form.

1. First Plan Year. In connection with a Participant’s commencement of participation in the Plan, the Participant may make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee.
2. Subsequent Plan Years. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, may be made by timely delivering to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Election Form in effect for the prior Plan Year shall remain in effect until amended or revoked in accordance with the rules and procedures established by the Committee.
3. Stock Option Deferral. For an election to defer gain upon an Eligible Stock Option exercise to be valid: (i) a separate Election Form must be completed and signed by the Participant with respect to the Eligible Stock Option; (ii) the Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date the Participant elects to exercise the Eligible Stock Option; (iii) the Eligible Stock Option must be exercised using an actual Stock-for-Stock payment method; and (iv) the Stock actually or constructively delivered by the Participant to exercise the Eligible Stock Option must have been owned by the Participant during the entire six (6) month period prior to its delivery.
4. Restricted Stock. For an election to defer Restricted Stock to be valid: (i) a separate irrevocable Election Form must be completed and signed by the Participant, with respect to such Restricted Stock; and (ii) such Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date such Restricted Stock vests under the terms of the award thereof.

3.4    Withholding of Annual Deferral Amounts. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Annual Bonus and/or Directors Fees portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus or Directors Fees are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself.

3.5    Annual Company Contribution Amount. For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Retirement Account under this Plan, which amount shall be for that Participant the Annual Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Company Contribution Amount for that Plan Year. The Annual Company Contribution Amount, if any, shall be credited as of the last day of the Plan Year. If a Participant is not employed by an Employer as of the last day of a Plan Year other than by reason of his or her Retirement or death while employed, the Annual Company Contribution Amount for that Plan Year shall be zero.

3.6    Annual Restricted Stock Amount. Subject to any terms and conditions imposed by the Committee, Participants may elect to defer, under the Plan, Restricted Stock, which amount shall be for that Participant the Annual Restricted Stock Amount for that Plan Year. The portion of any Restricted Stock deferred shall, at the time the Restricted Stock would otherwise vest under the terms of the award thereof, but for the election to defer, be reflected on the books of the Company as an unfunded, unsecured promise to deliver to the Participant a specific number of actual shares of Stock in the future.

3.7    Annual Restoration Contribution Amount. For each Plan Year during which the Company maintains the Qualified Plan, an Employer shall credit a Participant's Retirement Account an amount equal to the difference between (i) the amount the Employer contributed on behalf of such Employee Participant under the Qualified Plan during such Plan Year and (ii) the amount that would have been contributed by the Employer under the Qualified Plan during such Plan Year without regard to the Excess/Qualified Benefit Limitations, which amount shall be for that Participant the Annual Restoration Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Restoration Contribution Amount for that Plan Year. The Annual Restoration Contribution Amount, if any, shall be credited as soon as practical, but in no event later than the last day of the second month immediately following the close of the Plan Year. If a Participant is not employed by an Employer, or is no longer providing services as a Director, as of the last day of a Plan Year other than by reason of his or her Retirement or death while employed, the Annual Restoration Contribution Amount for that Plan Year shall be zero.

3.8    Annual Stock Option Gain Amount. Subject to any terms and conditions imposed by the Committee, Participants may elect to defer, under the Plan, all or some portion of Qualifying Gains attributable to an Eligible Stock Option exercise, which amount shall be for that Participant the Annual Stock Option Gain Amount for that Plan Year. The portion of any Qualifying Gains shall be reflected on the books of the Company as an unfunded, unsecured promise to deliver to the Participant a specific number of actual shares of Stock in the future. Such shares of Stock would otherwise have been delivered to the Participant, pursuant to the Eligible Stock Option exercise, but for the Participant’s election to defer.

3.9    Annual Vacation Rollover Contribution Amount. For each Plan Year, an Employer may, in its discretion, credit to the Participant’s Retirement Account an amount equal to the number of Excess Vacation Hours on a Participant’s Vacation Effective Date, multiplied by the Participant’s Hourly Salary Rate on the last day of the current year. The annual contribution shall be credited to the Retirement Account, during the first quarter of the following Plan Year, which amount shall be for that Participant the Annual Vacation Rollover Contribution for that Plan Year. However, the Participant shall not receive any Annual Vacation Rollover Contribution Amount for a Plan Year if the Participant becomes entitled to payment under Article 5, 6, 7, or 8 prior to the time such Annual Vacation Rollover Contribution Amount could have been credited to her Retirement Account in the discretion of the Employer. By way of example, if a Participant has 120 vacation hours allocated to him each year, and he has a balance of 320 vacation hours on his employment anniversary date during the 2001 Plan Year, 120 hours will be available to be utilized by the Participant prior to the Participant’s employment anniversary date in 2002. Of the 200 hours remaining from the Participants 320-hour balance, an amount equal to 120 vacation hours (the maximum Excess Vacation Hours allowed) will be multiplied by the participant’s Hourly Salary Rate on the last day of the current year and shall be credited to the Retirement Account during the first quarter of the 2002 Plan Year. However, if that Participant becomes eligible to receive benefits under Article 5 prior to the first quarter of 2002, he or she would not have any Annual Vacation Rollover Contribution Amount credited to their account with respect to the 2001 Plan Year.

3.10    Investment of Trust Assets. The Trustee of the Trust shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of Stock and reinvestment of the proceeds in one or more investment vehicles designated by the Committee.

3.11    Sources of Stock. If Stock is credited under the Plan in the Trust pursuant to Section 3.6 in connection with a deferral of Restricted Stock or in connection with an Eligible Stock Option exercise, the shares so credited shall be deemed to have originated, and shall be counted against the number of shares reserved, under such other plan, program or arrangement.

3.12    Vesting.

1. A Participant shall at all times be 100% vested in his or her Annual Deferral Amount, Annual Restricted Stock Amount, Annual Stock Option Gain Amount, and Annual Vacation Rollover Contribution Amount, and amounts credited thereon pursuant to Section 3.13.
2. The Committee, in its sole discretion, will determine over what period of time and in what percentage increments a Participant shall vest in his or her Annual Company Contribution Amount and amounts credited thereon pursuant to Section 3.13. The Committee may credit some Participants with larger or smaller vesting percentages than other Participants, and the vesting percentage credited to any Participant for a Plan Year may be zero, even though one or more other Participants have a greater vesting percentage credited to them for that Plan Year.
3. A Participant shall at all times be 100% vested in his or her Annual Restoration Contribution Amount, and amounts credited thereon pursuant to Section 3.13.
4. Notwithstanding anything to the contrary contained in this Section 3.12, in the event of a Change in Control and/or the Participant’s attainment of age sixty-five (65), a Participant’s Annual Company Contribution Amount, and amounts credited thereon pursuant to Section 3.13, shall immediately become 100% vested (if it is not already vested in accordance with the above vesting schedules).

3.13    Crediting/Debiting of Account Balances. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant’s Account Balance in accordance with the following rules:

1. Election of Valuation Funds. Subject to the restrictions found in Sections 3.13(d) and 3.13(e) below, a Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Valuation Fund(s) (as described in this Section 3.14(c) below) to be used to determine the amounts to be credited or debited to his or her Account Balance for the first day on which the Participant commences participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the next sentence. Commencing with the first business day that follows the Participant’s commencement of participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, no later than the close of business on such day, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Valuation Fund(s) to be used to determine the amounts to be credited or debited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Valuation Fund. If an election is made in accordance with the previous sentence, it shall apply no later than the close of business on the next business day and continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence.
2. Proportionate Allocation. In making any election described in Section 3.13(a) above, the Participant shall specify on the Election Form, in increments of one percentage point (1%), the percentage of his or her Account Balance to be allocated to a Valuation Fund (as if the Participant was making an investment in that Valuation Fund with that portion of his or her Account Balance).
3. Valuation Funds. The Committee shall designate one or more valuation funds based on certain mutual or other collective investment funds which, along with the funds described in Sections 3.13(d) and 3.13(e) below, shall constitute the Valuation Funds. Subject to Sections 3.13(d) and 3.13(e) below, the Participant may elect one or more of the Valuation Funds for purposes of crediting additional amounts to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Valuation Fund. Each such action will take effect as of date determined by the Committee.
4. Restricted Fixed Rate Valuation Fund. For each Participant who has been credited with an Initial Account Balance in either his or her Retirement Account or In-Service Account, such Initial Account Balance will automatically be credited using the Restricted Fixed Rate Valuation Fund as the Valuation Fund. Participants may subsequently elect another Valuation Fund to be used to determine the amounts to be credited or debited with respect to their Initial Account Balance; provided, however, that any portion of the Initial Account Balance allocated from the Restricted Fixed Rate Valuation Fund to any other Valuation Fund(s) cannot be re-allocated back to the Restricted Fixed Rate Valuation Fund. Furthermore, no other portion of the Participant’s Retirement or In-Service Account Balances can be either initially allocated or re-allocated to the Restricted Fixed Rate Valuation Fund, at anytime.
5. Tellabs, Inc. Stock Unit Fund. A Participant’s Annual Restricted Stock Amount and Annual Stock Option Gain Amount will be automatically reflected in the Tellabs, Inc. Stock Unit Fund as the Valuation Fund. Participants may not select any other Valuation Fund to be used with respect to their Annual Restricted Stock Amount or Annual Stock Option Gain Amount, and no other portion of the Participant’s Accounts can be either initially allocated or re-allocated to the Tellabs, Inc. Stock Unit Fund.
6. Crediting or Debiting Method. The performance of each elected Valuation Fund (either positive or negative) will be determined by the Committee, in its reasonable discretion, based on the performance of the Valuation Funds themselves. A Participant’s Account Balance(s) shall be credited or debited on a daily basis based on the performance of each Valuation Fund selected by the Participant, as though (i) a Participant’s Account Balance(s) were invested in the Valuation Fund(s) selected by the Participant, at the closing price on such date; (ii) the portion of the Annual Deferral Amount, Company Contribution Amount, Qualifying Gain, Restricted Stock, Restoration Contribution, and/or Vacation Rollover Amount that was actually deferred or contributed during any business day was invested in the Valuation Fund(s) selected by the Participant or as otherwise provided by this Section 3.13, in the percentages applicable to such business day, no later than the close of business on the first business day after the day on which such amounts are actually deferred or contributed, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant’s Account Balance ceased being invested in the Valuation Fund(s), in the percentages applicable to such business day, no earlier than one business day prior to the distribution, at the closing price on such date.
7. No Actual Investment. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Valuation Funds are to be used for measurement purposes only, and a Participant’s election of any such Valuation Fund, the allocation to his or her Account Balance(s) thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant’s Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Valuation Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Valuation Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant’s Account Balance(s) shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company.

3.14    FICA and Other Taxes.

1. Annual Deferral Amounts. For each Plan Year in which an Annual Deferral Amount is being withheld from an Employee Participant or Vacation Rollover Amount is being deferred on behalf of an Employee Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Annual Salary and Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.14.
2. Other Amounts. When an Employee Participant becomes vested in a portion of his or her Annual Company Contribution Amounts, Annual Restoration Contribution Amounts, and/or Annual Vacation Rollover Contribution Amounts, the Participant’s Employer(s) shall withhold from the Participant’s Base Annual Salary and/or Annual Bonus that is not deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant’s aforementioned amounts in order to comply with this Section 3.14.
3. Annual Restricted Stock Amounts and Annual Stock Option Gain Amounts. For each Plan Year in which an Annual Restricted Stock Amount or Annual Stock Option Gain Amount is being first withheld from an Employee Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Annual Salary, Bonus, Qualifying Gains and Restricted Stock that are not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Annual Stock Option Gain Amount or Annual Restricted Stock Amount. If necessary, the Committee may reduce the Annual Stock Option Gain Amount or Annual Restricted Stock Amount in order to comply with this Section 3.14.

3.15    Distributions. The Participant’s Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust.

ARTICLE 4
In-Service Benefits; Unforeseeable Financial Emergencies;
Withdrawal Election

4.1    In-Service Benefit. Subject to the Deduction Limitation, a Participant shall receive, as an In-Service Benefit, his or her In-Service Account Balance, at the time selected by the Participant in an Election Form, or if applicable, the time determined by the Committee, in its sole discretion in determining the Initial Account Balance pursuant to Section 1.33. Notwithstanding the foregoing, the Participant may subsequently amend the intended date of payment to a date later than that date initially chosen, by filing such amendment with the Committee no later that thirteen (13) months prior to the originally intended date of payment. The Participant may file this amendment to defer the receipt of benefits under this paragraph only twice, and each amendment must provide for a payout under this paragraph at a date later than the election in force immediately prior to a filing of such amendment.

4.2    Payment of In-Service Benefit. . A Participant, in connection with his or her deferral into the In-Service Account, shall elect on an Election Form to receive the In-Service Benefit in a lump sum or pursuant to the Annual Installment Method of up to 5 years. The Participant may change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted no later than thirteen (13) months prior to the date of payment as provided in Section 4.1, and is accepted by the Committee, in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the In-Service Benefit. If a Participant does not make any election with respect to the payment of the In-Service Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60)& nbsp;days after the first day of the month of the Plan Year selected by the Participant or otherwise provided by this Plan. Any payment made shall be subject to the Deduction Limitation.

4.3    Other Benefits Take Precedence Over In-Service. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, the In-Service Account shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article.

4.4    Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant to his or her Accounts and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance(s), calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within sixty (60) days of the date of approval. The payment of any amount under this Section 4.4 shall not be subject to the Deduction Limitation.

4.5    Withdrawal Election. A Participant (or, after a Participant’s death, his or her Beneficiary) may elect, at any time, to withdraw all or a portion of his or her vested Account Balance(s), excluding the portion of the Retirement Account attributable to the Annual Restricted Stock Amount and the Annual Stock Option Gain Amount, calculated as if there had occurred a Termination of Employment as of the day of the election, less a withdrawal penalty equal to 10% of the portion of the Account Balance so elected for withdrawal (the net amount shall be referred to as the “Withdrawal Amount”). Notwithstanding the prior sentence, Participants who have Retired may only elect to withdraw their entire Account Balance(s) excluding the portion of the Retirement Account attributable to the Annual Restricted Stock Amount and the Annual Stock Option Gain Amount. The election can be made at any time, before or after Retirement, Disability, death or Te rmination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within sixty (60) days of his or her election. Once the Withdrawal Amount is paid, the Participant’s participation in the Plan shall be suspended for the remainder of the Plan Year in which the withdrawal is elected and for the two (2) full Plan Years thereafter. The payment of this Withdrawal Amount shall be subject to the Deduction Limitation.

ARTICLE 5
Retirement Benefit

5.1    Retirement Benefit. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance.

5.2    Payment of Retirement Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to the Annual Installment Method of up to 10 years, or as may otherwise be permitted by the Committee. The Participant may change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least thirteen (13) months prior to the Participant’s Retirement and is accepted by the Committee, in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the last day of the Plan Year in which the Participant Retires. Any payment made shall be subject to the Deduction Limitation.

5.3    Settlement in Stock. The portion of the Retirement Account attributable to the Annual Restricted Stock Amount and the Annual Stock Option Gain amount shall only be satisfied by the distribution of actual shares of stock.

5.4    Death Prior to Completion of Retirement Benefit. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant’s unpaid Retirement Benefit payments shall continue and shall be paid to the Participant’s Beneficiary over the remaining number of years and in the same amounts as that benefit would have been paid to the Participant had the Participant survived.

ARTICLE 6
Pre-Retirement Survivor Benefit

6.1    Pre-Retirement Survivor Benefit. Subject to the Deduction Limitation, the Participant’s Beneficiary shall receive a lump sum, Pre-Retirement Survivor Benefit equal to the Participant's Account Balance(s) if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability.

ARTICLE 7
Termination Benefit

7.1    Termination Benefit. Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant’s Account Balance(s) if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability.

7.2    Payment of Termination Benefit. The Participant shall receive his or her Termination Benefit in a lump sum payment no later than thirty (30) days after the date on which the Committee determines that the Participant is owed such benefits. Any payment made shall be subject to the Deduction Limitation.

ARTICLE 8
Disability Waiver and Benefit

8.1    Disability Waiver.

1. Waiver of Deferral. A Participant who is determined by the Committee to be suffering from a Disability may be (i) excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant’s Base Annual Salary, Annual Bonus and/or Directors Fees for the Plan Year during which the Participant first suffers a Disability and (ii) excused from fulfilling any existing unvested Restricted Stock or unexercised Eligible Stock Option commitments. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan.
2. Return to Work. If a Participant returns to employment, or service as a Director, with an Employer, after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount, Annual Stock Option Gain Amount and Annual Restricted Stock Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above.

8.2    Disability Benefit; Continued Eligibility. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed, or in the service of an Employer as a Director, and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right to, in its sole and absolute discretion and for purposes of this Plan only, and must in the case of a Participant who is otherwise eligible to Retire, deem the Participant to have experienced a Termination of Employment, or in the case of a Participant who is eligible to Retire, to have Retired, at any time (or in the case of a Participant who is eligible to Retire, as soon as practicable) after such Participant is determined to be suffering a Disability, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee’s determination; provided, however, that should the Participant otherwise have been eligible to Retire, he or she shall be paid in accordance with Article 5. Otherwise, the Disability Benefit shall be paid in a lump sum within sixty (60) days of the Committee’s exercise of such right. Any payment made shall be subject to the Deduction Limitation.

ARTICLE 9
Beneficiary Designation

9.1    Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee (or its designee) prior to his or her death.

9.2    Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.

9.3    No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 9.1 and 9.2 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant’s estate.

9.4    Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant’s Employer to withhold such payments until this matter is resolved to the Committee’s satisfaction.

9.5    Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant’s Plan Agreement shall terminate upon such full payment of benefits.

ARTICLE 10
Leave of Absence

10.1    Paid Leave of Absence. If a Participant is authorized by the Participant’s Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3, unless the Committee allows an exception pursuant to Section 8.1.

10.2    Unpaid Leave of Absence. If a Participant is authorized by the Participant’s Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld.

ARTICLE 11
Termination, Amendment or Modification

11.1    Termination. Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan at any time with respect to any or all of its participating Employees and Directors, by action of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer, or in the service of that Employer as Directors, shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or sh e had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or pursuant to the Annual Installment Method of up to 10 years, but not longer than as the Participant may have elected previously, with amounts credited and debited during the installment period as provided herein. If the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Emplo yer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the balance of the Account(s) in a lump sum or pursuant to the Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). After a Change in Control, the effect of termination of the Plan shall be governed by Section 11.3 below.

11.2    Amendment. Subject to Section 11.3 below relating to amendments made after a Change in Control, any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the action of its board of directors; provided, however, that: (i) no amendment or modification shall be effective to decrease or restrict the value of a Participant’s Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification, and (ii) no amendment or modification of this Section 11.2 or Section 11.3 of the Plan shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the balance of the Account(s) in a lump sum or pursuant to the Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule).

11.3    Effect of Change in Control. Despite the provisions of Sections 11.1 and 11.2 above, following a Change in Control, the provisions of this Plan or any Participant’s Plan Agreement may not be amended or terminated in any manner with respect to a Participant or Beneficiary if such amendment or termination would have an adverse effect in any way upon the computation or amount of or entitlement to benefits of such Participant or Beneficiary under the Plan as in effect immediately prior to the Change in Control, including, but not limited to, any adverse change in or to the crediting or debiting of amounts to the Account Balances or the time or manner of payment of the Account Balances to any Participant or Beneficiary, unless the Participant or Beneficiary has given written consent to such amendment or termination. An “adverse effect” for purposes of this Section 11.3 shall include, but not be limited to, any acceleration of the paymen t of the Account Balances payable to the Participant or Beneficiary or a change in the composition of the risk and return characteristics represented by the available Valuation Funds or the Participant’s or Beneficiary’s ability to allocate his or her Account Balances among such Valuation Funds.

11.4    Plan Agreement. Despite the provisions of Sections 11.1 and 11.2 above, if a Participant’s Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the consent of the Participant.

11.5    Effect of Payment. The full payment of the applicable benefit under Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant’s Plan Agreement shall terminate.

ARTICLE 12
Administration

12.1    Committee Duties. Except as otherwise provided in this Article 12, this Plan shall be administered by a Committee, which shall consist of the Compensation Committee of the Board, or such other committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company.

12.2    Agents. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer.

12.3    Binding Effect of Decisions. The decision or action of the Committee, and any Employee to whom the duties of the Committee may be delegated, with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

12.4    Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee, and any Employee to whom the duties of the Committee may be delegated against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee.

12.5    Employer Information. To enable the Committee to perform its functions, the Company and each Employer shall supply full and timely information to the Committee as the case may be, on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require.

ARTICLE 13
Other Benefits and Agreements

13.1    Coordination with Other Benefits. The benefits provided for a Participant and Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant’s Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

ARTICLE 14
Claims Procedures

14.1    Presentation of Claim. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred, or such claim is waived. The claim must state with particularity the determination desired by the Claimant.

14.2    Notification of Decision. The Committee shall consider a Claimant’s claim within a reasonable time, and shall notify the Claimant in writing:

1. that the Claimant’s requested determination has been made, and that the claim has been allowed in full; or
2. that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant:
1. the specific reason(s) for the denial of the claim, or any part of it;
2. specific reference(s) to pertinent provisions of the Plan upon which such denial was based;
3. a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and
4. an explanation of the claim review procedure set forth in Section 14.3 below.

14.3    Review of a Denied Claim. Within sixty (60) days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than thirty (30) days after the review procedure began, the Claimant (or the Claimant’s duly authorized representative):

1. may review pertinent documents;
2. may submit written comments or other documents; and/or
3. may request a hearing, which the Committee, in its sole discretion, may grant.

14.4    Decision on Review. The Committee shall render its decision on review promptly, and not later than sixty (60) days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain:

1. specific reasons for the decision;
2. specific reference(s) to the pertinent Plan provisions upon which the decision was based; and
3. such other matters as the Committee deems relevant.

14.5    Legal Action. A Claimant’s compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan.

ARTICLE 15
Trust

15.1    Establishment of the Trust. The Company shall establish the Trust, and each Employer shall at least annually transfer over to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Company Contribution Amounts, Annual Deferral Amounts, Annual Restoration Contribution Amounts, Annual Restricted Stock Amounts, Annual Vacation Rollover Contribution Amounts, and Annual Stock Option Gain Amounts for such Employer’s Participants for all periods prior to the transfer, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer.

15.2    Interrelationship of the Plan and the Trust. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan.

15.3    Distributions From the Trust. Each Employer’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan.

ARTICLE 16
Miscellaneous

16.1    Status of Plan. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employee” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent.

16.2    Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer’s assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

16.3    Employer’s Liability. An Employer’s liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement.

16.4    Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise.

16.5    Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time.

16.6    Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.

16.7    Terms. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

16.8    Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

16.9    Governing Law. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Delaware without regard to its conflicts of laws principles.

16.10    Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Deferred Income Plan Committee

Attention: Legal Department

1415 W. Diehl Road

Naperville, Illinois 60563

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

16.11    Successors. The provisions of this Plan shall bind and inure to the benefit of the Participant’s Employer and its successors and assigns and the Participant and the Participant’s designated Beneficiaries.

16.12    Spouse’s Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession.

16.13    Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.

16.14    Incompetent. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person’s property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

16.15    Court Order. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant’s benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse’s or former spouse’s interest in the Participant’s benefits under the Plan to that spouse or former spouse.

16.16    Distribution in the Event of Taxation.

1. In General. If, for any reason, all or any portion of a Participant’s benefits under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant’s Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant’s unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within ninety (90) days of the date when the Participant’s petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Pl an.
2. Trust. If the Trust terminates in accordance with the terms of the Trust Agreement and benefits are distributed from the Trust to a Participant in accordance with the terms thereof, the Participant’s benefits under this Plan shall be reduced to the extent of such distributions.

16.17    Insurance. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.

16.18    Legal Fees To Enforce Rights After Change in Control. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of a Participant’s Employer (which might then be composed of new members) or a shareholder of the Company or the Participant’s Employer, or of any successor corporation might then cause or attempt to cause the Company, the Participant’s Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant’s Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant’s Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant’s Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant’s Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant’s Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant’s Employer or any successor thereto in any jurisdiction.

IN WITNESS WHEREOF, the Company has signed this Plan document as of __________, 2001.

“Company”

Tellabs, Inc., a Delaware corporation

By: __________________________________

Title: __________________________________