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 April 2, 2004

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) 798-8800

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___

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

Common Shares, $.01 Par Value — 415,791,928 shares outstanding on April 2, 2004.

TELLABS, INC.

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flow	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	13
Item 4.	Controls and Procedures	13
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
Item 6.	Exhibits and Reports on Form 8-K	15
SIGNATURE		16

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TELLABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended
(In millions, except per-share data)	4/2/04		3/28/03
Revenue
Product and other	$       232	.1	$       186	.7
Services	31	.7	35	.8
	263	.8	222	.5
Cost of Revenue
Product and other	87	.9	98	.7
Services	25	.4	30	.3
	113	.3	129	.0
Gross Profit	150	.5	93	.5
Gross profit as a percentage of revenue	57	.1%	42	.0%
Operating Expenses
Selling, general and administrative	57	.7	64	.7
Research and development	61	.9	76	.9
Restructuring and other charges	16	.2		-
Intangible asset amortization	3	.9	2	.4
	139	.7	144	.0
Operating Earnings/(Loss)	10	.8	(50	.5)
Other Income/(Expense)
Interest income	6	.0	8	.7
Interest expense	(0	.1)		-
Other	(1	.0)	(1	.6)
	4	.9	7	.1
Earnings/(Loss) Before Income Tax	15	.7	(43	.4)
Income tax (expense)/benefit	(2	.3)	0	.5
Net Earnings/(Loss)	$        13	.4	$      (42	.9)
Net Earnings/(Loss) per Share
Basic	$          0	.03	$       (0	.10)
Diluted	$          0	.03	$       (0	.10)
Average number of common shares outstanding - Basic	415	.2	412	.3
Average number of common shares outstanding - Diluted	420	.9	412	.3

        The accompanying notes are an integral part of these statements.

3

TELLABS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS

	4/2/04		1/2/04
(In millions, except share amounts)	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$        263	.3	$        245	.9
Investments in marketable securities	916	.9	877	.1
	1,180	.2	1,123	.0
Accounts receivable, net	186	.4	196	.7
Inventories
Raw materials	8	.4	12	.5
Work in process		-	4	.1
Finished goods	34	.0	25	.2
	42	.4	41	.8
Income taxes	9	.1	22	.7
Miscellaneous receivables and other current assets	73	.9	114	.6
Total Current Assets	1,492	.0	1,498	.8
Property, Plant and Equipment	567	.9	643	.6
Less: accumulated depreciation	(268	.9)	(327	.8)
	299	.0	315	.8
Goodwill	551	.7	552	.3
Intangible assets, net	102	.1	107	.8
Other assets	127	.1	132	.8
Total Assets	$    2,571	.9	$    2,607	.5
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$         43	.2	$         47	.8
Accrued liabilities	93	.1	95	.2
Accrued restructuring and other liabilities	37	.0	64	.8
Total Current Liabilities	173	.3	207	.8
Long-term restructuring and other liabilities	39	.9	44	.8
Income taxes	100	.0	100	.1
Other long-term liabilities	33	.7	35	.5
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;
419,041,928 and 417,859,719 shares issued, including
treasury stock	4	.2	4	.2
Additional paid-in capital	559	.1	556	.8
Deferred compensation expense	(7	.6)	(9	.5)
Treasury stock, at cost: 3,250,000 shares	(129	.6)	(129	.6)
Accumulated other comprehensive income
Cumulative translation adjustment	76	.9	94	.1
Unrealized net gains on available-for-sale securities	6	.6	1	.4
Total accumulated other comprehensive income	83	.5	95	.5
Retained earnings	1,715	.4	1,701	.9
Total Stockholders' Equity	2,225	.0	2,219	.3
Total Liabilities and Stockholders' Equity	$    2,571	.9	$    2,607	.5

        The accompanying notes are an integral part of these statements.

4

TELLABS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)

	Three Months Ended
(In millions)	4/2/04		3/28/03
Operating Activities
Net earnings/(loss)	$       13	.4	$    (42	.9)
Adjustments to reconcile net earnings/(loss) to net cash
provided by operating activities:
Restructuring and other charges	7	.0		-
Depreciation and amortization	20	.5	31	.4
Gain on investments and other	5	.9	1	.2
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable	9	.0	62	.9
Inventories	(1	.1)	0	.1
Income tax receivable	11	.0		-
Miscellaneous receivables and other current assets	39	.5	(13	.1)
Long-term assets		-	(5	.5)
Accounts payable	(4	.2)	(18	.1)
Accrued liabilities	(5	.9)	4	.9
Accrued restructuring and other charges	(28	.3)	(24	.8)
Income taxes payable	(2	.1)	(6	.4)
Long-term liabilities	(5	.3)	(0	.9)
Net Cash Provided by/(Used for) Operating Activities	59	.4	(11	.2)
Investing Activities
Capital expenditures	(7	.9)	(8	.2)
Disposals of property, plant and equipment	13	.5	11	.0
Proceeds from sales and maturities of investments	537	.6	650	.7
Payments for purchases of investments	(584	.5)	(839	.0)
Payments for acquisitions, net of cash acquired		-	(13	.2)
Net Cash Used for Investing Activities	(41	.3)	(198	.7)
Financing Activities
Proceeds from issuance of common stock	2	.6	0	.1
Net Cash Provided by Financing Activities	2	.6	0	.1
Effect of Exchange Rate Changes on Cash	(3	.3)	13	.7
Net Increase/(Decrease) in Cash and Cash Equivalents	17	.4	(196	.1)
Cash and Cash Equivalents at Beginning of Year	245	.9	453	.5
Cash and Cash Equivalents at End of Period	$     263	.3	$     257	.4

        The accompanying notes are an integral part of these statements.

5

TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Our 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. Accordingly, the financial statements and notes herein should be read in conjunction with our Annual Report on Form 10-K for the year ended January 2, 2004.

In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) that are necessary for a fair presentation. Operating results for interim periods are not necessarily indicative of operating results for the full year. Certain amounts from prior periods may have been reclassified to conform to the current period presentation.

2. New Accounting Pronouncements

In December 2003, the FASB issued Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. This revised Statement was adopted during the first quarter of 2004 for interim period disclosures and did not have a material impact on our financial statements.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by an equity investor if that investor is subject to a majority of the risk of loss from the variable interest entity’s activities, is entitled to receive a majority of the entity’s residual returns, or both. This interpretation was adopted during the first quarter of 2004 and did not have a material impact on our financial statements.

3. Restructuring and Other Charges

In 2003, we approved plans to further restructure our operations due to the difficult market conditions in the telecommunications industry. The major components of the restructuring included the outsourcing of both of our manufacturing operations: North American manufacturing operations located in Bolingbrook, Illinois, and international manufacturing operations located in Espoo, Finland. Other major components of our restructuring activities included workforce reductions and the closure and consolidation of excess facilities. The major charges included in restructuring and other charges were for severance and related costs due to workforce reductions, accelerated depreciation of plant and equipment, the write-off of fixed assets, the revaluation and write-off of inventories, and an accrual for excess inventory purchase commitments. The outsourcing of our manufacturing operations resulted in the layoff of approximately 300 employees in the United States, the transfer of 200 employees from our international manufacturing operations to our outsourcer (the severance, if any, for which we are liable for a period of time), the above-mentioned accelerated depreciation on related plant and equipment, and the closure of our other North American manufacturing facility in Bolingbrook, Illinois. The remaining Bolingbrook employees were relocated to other Illinois facilities. The manufacturing operations in North America ceased at the end of October 2003 and the international manufacturing operations ceased at the beginning of January 2004. We recorded restructuring and other charges related to all of the above activities in the second, third and fourth quarters of 2003, and the first quarter of 2004. We expect to incur a total of approximately $2.0 million in additional restructuring and other charges during the second and third quarters of 2004 for previously announced restructuring and other activities. For further discussion of our restructuring activities, refer to our Annual Report on Form 10-K for the year ended January 2, 2004.

Below is an analysis of the restructuring and other charges recorded during the first quarter of 2004 and 2003 by major income statement classifications:

6

(in millions)
Income Statement Classification	Description	4/2/04		3/28/03
Cost of revenue	Inventory adjustments	$   2	.3	$	-
	Disposal of property, plant and equipment	0	.3		-
	Other obligations	0	.2		-
	Sub-total	2	.8		-
Adjustment to prior reserves	Reduction of excess purchase commitment accrual	(12	.0)		-
	Total in cost of revenue	(9	.2)		-
Restructuring and other charges	Severance and related expenses	4	.1		-
	Consolidation of excess leased facilities	1	.4		-
	Disposal of property, plant and equipment	12	.6		-
	Other obligations	2	.4		-
	Sub-total	20	.5		-
Adjustments to prior reserves	Proceeds from fixed asset disposals in excess of reserves	(4	.3)		-
	Total in operating expenses	16	.2		-
Net restructuring and other charges		$   7	.0		-

The following table displays our restructuring and other charges activity during the first quarter of 2004 and the status of the reserves at April 2, 2004:

							Consol. of		Disposal of
			Excess		Severance		Excess		Property,
	Inventory		Purchase		and Related		Leased		Plant and
(in millions)	Adjustments		Commitments		Expenses		Facilities		Equipment		Other		Total
Balance at 1/2/04	$	-	$     38	.4	$     13	.5	$     54	.8	$	-	$    2	.9	$     109	.6
Additional reserves	2	.3		-	4	.1	1	.4	12	.9	2	.6	23	.3
Cash paid		-	(14	.7)	(7	.6)	(3	.5)		-	(2	.5)	(28	.3)
Non-Cash activity	(2	.3)	(12	.0)		-	(0	.5)	(12	.9)		-	(27	.7)
Balance at 4/2/04	$	-	$     11	.7	$     10	.0	$     52	.2	$	-	$    3	.0	$       76	.9

Inventory adjustments and excess purchase commitments accrual

During the first quarter of 2004, we accrued an additional $2.3 million for the revaluation of inventories related to international manufacturing outsourcing. This charge was offset by a $12.0 million reduction to the accrual for excess purchase commitments, which was originally recorded in 2003, due to a more favorable settlement with a vendor during the first quarter of 2004 than was originally anticipated.

Severance and related expenses

During the first quarter of 2004, we recorded a $4.1 million charge for severance and related expenses for approximately 40 (primarily non-manufacturing) employees. Approximately $3.0 million related to additional personnel reductions beyond that contemplated at the end of fiscal 2003 in our estimate of restructuring and other charges for fiscal 2004.

7

Consolidation of excess leased facilities

During the first quarter of 2004, we charged $1.4 million for costs associated with excess leased facilities. These included charges for the Montreal research and development office, which was closed at the end of the first quarter of 2004, and additional net rental expenses not anticipated in the initial charges due to the overall weakness of the office rental market and delays in subleasing certain facilities.

Disposal of property, plant and equipment

During the first quarter of 2004, we recorded impairment charges of $12.9 million for property, plant and equipment to be disposed of or held for sale in accordance with SFAS No. 144. This was approximately $6.0 million more than we anticipated at the end of fiscal 2003 for our estimate of restructuring and other charges in 2004. The majority of the charges related to the closure of the Montreal research and development facility at the end of the first quarter of 2004, as most of the assets in the office will not be redeployed within the company as originally anticipated. Other charges were recorded for U.S. research and development and manufacturing assets, as well as a small amount for fixed assets sold to Elcoteq due to the international manufacturing outsourcing activity. Offsetting these new charges was $4.3 million related to the receipt of proceeds from the sale of property, plant and equipment in excess of our original estimate of restructuring and other charges for 2004.

Other obligations

During the first quarter of 2004, we charged $2.4 million for telecommunications contract buyout fees for not meeting minimum usage requirements under contracts due to workforce reductions. This charge was not anticipated in the estimate of 2004 restructuring and other charges at the end of fiscal 2003. In addition, we charged $0.2 million for international manufacturing transition costs that were incurred in the quarter.

Of the remaining $76.9 million reserves as of April 2, 2004, $37.0 million is classified as short-term as it is expected to be paid in the next 12 months. The long-term balance of $39.9 million will be paid over the remaining terms of the excess facility leases, which expire at various times through 2011.

4. Stock Options

We account for our stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25. Had compensation cost for our stock-based compensation plans been determined using the fair value at the grant dates for awards under those plans consistent with the method required by SFAS No. 123, our net earnings/(loss) and net earnings/(loss) per share would have been as follows:

	Three Months Ended
(In millions, except per-share amounts)	4/2/04		3/28/03
Net earnings/(loss), as reported	$      13	.4	$    (42	.9)
Add: stock-based employee compensation expense included in
reported net earnings, net of related tax effects	3	.5	2	.7
Less: total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects	(11	.9)	(16	.7)
Pro forma net earnings/(loss)	$        5	.0	$    (56	.9)
Net earnings/(loss) per share - Basic:
As reported	$        0	.03	$     (0	.10)
Pro forma	$        0	.01	$     (0	.14)
Net earnings/(loss) per share - Diluted:
As reported	$        0	.03	$     (0	.10)
Pro forma	$        0	.01	$     (0	.14)

8

The fair value of options was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 2004 and 2003:

	2004		2003
Expected volatility	72	.2%	72	.2%
Risk-free interest rate	3	.4%	2	.9%
Expected life	5.0	years	5.7	years
Expected dividend yield	0	.0%	0	.0%

The pro forma amounts disclosed above may not be representative of future disclosures because the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. In addition, the Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. It requires the use of assumptions that are subjective, such as the expected volatility of the exercise price and the expected remaining life of the option. Since our options have significantly different characteristics from traded options, and since the changes in the subjective input assumptions can result in materially different fair value estimates, in our opinion, the existing option pricing models do not necessarily provide a reliable single measure of the fair value of the options and do not give a meaningful comparison of companies in a given industry.

5. Retiree Medical Plan

The following table sets forth the components of the net periodic benefit costs for our retiree medical plan:

	Retiree Medical Plan
	Three Months Ended
(In millions)	4/2/04		3/28/03
Service cost	$    0	.2	$    0	.2
Interest cost	0	.1	0	.1
Expected return on plan assets	(0	.1)	(0	.1)
Amortization of prior service cost		-	0	.1
Amortization of net (gain)/loss		-		-
Net periodic benefit cost	$    0	.2	$    0	.3

At January 2, 2004, we estimated that we would contribute $1.6 million to our retiree medical plan in 2004. As of April 2, 2004, we have not contributed to the plan in 2004. We anticipate making a contribution to the plan in the third quarter of 2004.

6. Comprehensive Income/(Loss)

Comprehensive income/(loss) is an expression of our net income/(loss) adjusted for foreign currency translation adjustments and net unrealized gains or losses on available-for-sale securities. The comprehensive income/(losses) were as follows:

	Three Months Ended
(In millions)	4/2/04		3/28/03
Net earnings/(loss)	$     13	.4	$  (42	.9)
Other comprehensive income/(loss):
Cumulative translation adjustment	(17	.2)	25	.2
Unrealized net gain/(loss) on available-for-sale securities	5	.2	(1	.5)
Comprehensive income/(loss)	$      1	.4	$  (19	.2)

7. Product Warranties

We offer warranties for all of our products. The specific terms and conditions of those warranties vary depending upon the product sold. We provide a basic limited warranty, including parts and labor, for all products for a period up to five years. Factors that enter into our estimate of our warranty reserve include the number of units shipped, historical and anticipated rates of warranty claims, and cost per claim. The following table presents the changes in our product warranty reserve:

9

	Three Months Ended
(In millions)	4/2/04		3/28/03
Total product warranty reserve at the beginning of the period	$     19	.5	$     13	.9
Accruals for product warranties issued	0	.5	3	.2
Settlements made during the period	(1	.1)	(3	.1)
Total product warranty reserve at the end of the period	$     18	.9	$     14	.0

8. Income Taxes

SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. This valuation allowance, which totaled $248.3 million at the end of the first quarter 2004, offsets the value of tax assets related to the carry-forward of tax deductions, operating losses and tax credits. While we expect to realize these assets, we also expect to continue to record a full valuation allowance on future U.S. and certain non-U.S. tax benefits until an appropriate level of profitability is attained.

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

Introduction and Overview of Business

We deliver technology that transforms the way the world communicates. Our experts design, develop, deploy and support our solutions in telecom networks in more than 100 countries. More than two-thirds of telephone calls and Internet sessions in several countries, including the United States, flow through our equipment. Our product portfolio provides solutions in next-generation transport, managed access, broadband data, voice quality enhancement and cable telephony. Tellabs’ three strategies focus on energizing the core business, setting the standard in carrier-class data and expanding into adjacent markets.

We generate revenue principally through the sale of hardware and software, both as stand-alone products and as elements of integrated systems, to many of the world’s largest and strongest carriers. In addition, we generate revenue by providing installation and professional services related primarily to our own products and systems.

Within North America the majority of our revenue is derived from transport products, principally digital cross-connect systems. Demand for these products is and will be sensitive to end-user demand for bandwidth, industry capacity utilization and competing technologies.

Outside North America the majority of our revenue arises from managed access and transport systems. Demand for these products, as in North America, is and will be sensitive to end-user demand for bandwidth, industry capacity utilization and competing technologies.

Services revenue comes from two primary sources: network construction and professional services such as network deployment, traffic management, support services and training. Network construction revenue, which comprises over half of all revenue from services, primarily arises from sales of our transport products in North America. As a result, it has tended to increase or decrease in similar proportion to the increase or decrease in revenue from those products.

Following years of unprecedented growth, the demand for telecommunications equipment began to decline precipitously in early 2001 as a result of industry overcapacity, an unfavorable regulatory environment, and excessive debt loads among many carriers. As a consequence, we experienced a 71% revenue decline over the period 2001 to 2003, and we incurred a net loss in each of those years. As market conditions deteriorated, we responded with a series of restructuring plans designed to match our manufacturing capacity and expenses with demand in order to restore profitability and renew growth. We closed manufacturing facilities in Ireland and Texas in 2001 and facilities in Ireland and New York in 2002. We reduced headcount by 64% from 8,900 during 2001 to 3,200 at the end of the first quarter of 2004. We exited a significant portion of the office space that we leased and owned in the United States, and we consolidated the majority of our workforce into our headquarters facility in Naperville, Illinois. We also reviewed our product portfolio and cut-back or stopped development efforts on some products.

In the second-half of 2003, we committed to outsource the majority of our remaining manufacturing activities to take advantage of the purchasing power and lower labor rates of contract manufacturers. As a result, our remaining North American manufacturing operations, located in Illinois, ceased at the end of October 2003, and our remaining international manufacturing operations, located in Finland, were transferred to an outsourcer at the beginning of January 2004.

10

As a result of these restructuring activities, we recorded restructuring charges for severance costs, facilities shutdown costs and other obligations. Also, the decline in product demand over the recent 3-year period had a significant impact on the value of our inventory, resulting in the need to record reserves for excess and obsolete inventory and excess purchase commitments. We also recorded reserves for other impaired and surplus assets. These charges were significant in amount and we encourage readers to refer to our Annual Report on Form 10-K for the year ended January 2, 2004 for further details. We expected restructuring and other charges during the first quarter of 2004 to be between $8.0 million and $12.0 million. The actual net charges for the quarter were $7.0 million, including a $12.0 million reversal of a prior accrual for excess purchase commitments due to a more favorable settlement than was anticipated. We currently expect to incur a total of approximately $2.0 million in additional restructuring and other charges during the second and third quarters of 2004 from previously announced restructuring and other activities. See further discussion of restructuring and other charges in Note 3. We will continue to identify and implement actions to maintain and improve margins and control spending to maximize profitability within the current revenue environment. These efforts may require additional restructuring charges.

Our goal has been to return to profitable growth, and our first-quarter results reflect progress toward that goal. Our first-quarter 2004 profit was our first quarterly net earnings since the first quarter of 2002. We also increased our cash, cash equivalents and investments in marketable securities by $57.2 million during the quarter. During the quarter we experienced a continuation of the favorable revenue environment that emerged in 2003. Our margins improved due to volume, product mix, the previously mentioned outsourcing and reserve reversal and lower operating expenses reflecting our continuing focus on spending control.

New Product Categories

In the first quarter of 2004, we adjusted our product revenue categories to better reflect the changing dynamics of our business. The following is a summary of those new categories:

o Transport – The products in this category map directly to our former Optical Networking category, which includes Tellabs® 5500, Tellabs® 5300, Tellabs® 5500NGX, Tellabs® 6500 and Tellabs® 7100 systems.

o Managed Access – This category includes our core managed access products: Tellabs® 2300, Tellabs® 6300 and Tellabs® 8100 systems.

o Voice Quality Enhancement – This category primarily includes our echo cancellation products — Tellabs® 3000 series stand alone echo cancellers and integrated echo cancellations solutions, plus a small amount of miscellaneous product revenue.

o Broadband Data – This category was created to directly reflect Tellabs’ expansion into broadband data products. Products in this category include Tellabs® 8600 and Tellabs® 8800 systems.

o Services and Solutions – This category includes all service revenue, principally installation and professional services and support agreements.

RESULTS OF OPERATIONS

Quarter Ended April 2, 2004, Compared with the Quarter Ended March 28, 2003

Net earnings for the first quarter were $13.4 million or $0.03 per share compared with a net loss of $42.9 million or $0.10 per share in the first quarter of 2003. The $56.3 million net earnings improvement was driven by increased revenue, improved margins, and lower operating expenses as more fully described below.

Revenue

Total revenue in the first quarter of 2004 increased $41.3 million to $263.8 million from $222.5 million in the first quarter of 2003. We believe end-user demand is increasing which is driving an increase in capital expenditures by our customers, especially for our core transport products, and most notably by wireless carriers. Seventy percent of this increase occurred in North America as a result of higher orders from wireless customers. Revenue within North America for the first quarter of 2004 was $172.9 million, or 65% of revenue, compared with $144.0 million, or 65% of total revenue, in the first quarter of 2003. International revenue amounted to $90.9 million, or 35% of total revenue, compared with $78.5 million, or 35% of total revenue, in the first quarter of 2003.

Revenue from Transport products was $133.9 million in the first quarter of 2004, compared with $104.5 million in the first quarter of 2003. Revenue from these products increased $29.4 million or 28.1%, primarily due to an increase in revenue from our Tellabs 5500 systems.

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Revenue from Managed Access products was $69.4 million in the first quarter of 2004, compared with $73.5 million in the first quarter of 2003. Revenue from these products decreased $4.1 million or 5.6% due mainly to lower sales of Tellabs 2300 systems.

Revenue from Voice Quality Enhancement products was $24.9 million in the first quarter of 2004, compared with $8.7 million in the first quarter of 2003. The $16.2 million increase, or more than doubling of revenue, was driven by demand from wireless customers as well as demand for higher quality voice over internet protocol solutions.

Revenue from Broadband Data products was $3.9 million in the first quarter of 2004, we did not offer these products in the first quarter of 2003. These sales came from Tellabs 8800 systems.

Total Service and Solutions revenue was $31.7 million in the first quarter of 2004, compared with $35.8 million in the first quarter of 2003. The decrease in revenue was primarily due to timing of hardware shipments.

Gross Profit

Total gross profit for the quarter was $150.5 million or 57.1% of revenue, compared with $93.5 million or 42.0% of revenue for the first quarter of 2003. The increase in gross profit in 2004 was primarily due to volume and product mix which added approximately 8 percentage points to the gross profit, the benefits of outsourced manufacturing which added approximately 4 percentage points to the gross profit and a net credit of $9.2 million primarily due to the reduction in an accrual for excess purchase commitments in the first quarter of 2004 related to restructuring and other charges which added about 3 percentage points to the gross profit. See further discussion of the $9.2 million credit in Note 3.

Operating Expenses

Operating expenses for the first quarter of $139.7 million decreased $4.3 million from $144.0 million in the first quarter of 2003. The decrease was primarily due to spending efficiencies, partially offset by an additional $16.2 million in restructuring and other charges recorded during the first quarter of 2004 compared with the first quarter of 2003. See further discussion of the $16.2 million in restructuring and other charges in Note 3.

Other Income/Expense

Interest income for the first quarter of 2004 of $6.0 million was down $2.7 million from $8.7 million in the first quarter of 2003. The higher cash and cash equivalents and marketable securities during the first quarter of 2004, compared with that of the first quarter of 2003, could not offset the impact of lower prevailing interest rates between the periods.

Effective Tax Rate

The effective tax rate for the first quarter was a provision of 14.6% compared with a benefit of 1.2% in the first quarter of 2003. The tax rate for the first quarter 2004 reflects a tax benefit from the utilization of domestic net operating loss carry-forwards and a tax provision on income from international operations. The tax rate for the first quarter of 2003 reflected the absence of a tax benefit for operating losses incurred primarily in the United States and a small tax benefit from our international operations.

Financial Condition, Liquidity and Capital Resources

Our principal source of liquidity remained our cash and cash equivalents and investments in marketable securities, which increased by $57.2 million during the first quarter of 2004. The increase was due primarily to $31.0 million in payments from our outsourcers for inventory and fixed assets purchased as part of the outsourcing project, an $11.0 million U.S. tax refund, $6.0 million for the sale of our facilities in Lisle, Illinois as part of our restructuring efforts and increased collections on accounts receivable.

We believe that the current level of working capital, particularly cash and short-term investments, is sufficient to meet our normal operating requirements for the foreseeable future. Further, we believe that sufficient resources exist to support our future growth and strategic needs. Future sources of working capital may be from cash-on-hand, cash generated from future operations, short-term or long-term financing, equity offerings or any combination of these alternatives.

Our current policy is to retain our earnings to provide funds for operating and expanding our business. We do not anticipate paying a cash dividend in the foreseeable future.

12

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

There were no changes to our critical accounting policies during the quarter. Additionally, the initial adoption of new accounting policies during the quarter ended April 2, 2004, did not have a material impact on our condensed consolidated financial statements.

Outlook

While revenue visibility remains unclear, we expect enterprise and wireless demand to drive growth in our core products for the foreseeable future. Based on our first-quarter bookings, increased backlog and other internal indicators, we expect continuing sequential revenue growth in the second quarter comparable to the 5% sequential increase we saw last year. Gross margin for the second quarter is anticipated to be in the mid-50 percent range, plus or minus a point or two depending on product mix and other factors. We expect to hold the line on operating expenses with second quarter expected to be flat to slightly down from the first quarter.

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,” “target,” “expect,” “predict,” “plan,” “possible,” “intend,” “likely,” “will,” “should,” “could,” “may” 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; financial condition of telecommunication service providers and equipment vendors, including any impact of bankruptcies; the impact of customer and vendor consolidation; new product acceptance; product demand and industry capacity; competitive products and pricing; competitive pressures from new entrants to the telecommunications industry; 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 and capacity; foreign economic conditions, including currency rate fluctuations; 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 our filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.3 to Form 10-Q for the quarterly period ended March 28, 2003 filed with the SEC on May 9, 2003. Our 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 our securities. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the disclosures on this matter made in our Annual Report on Form 10-K for the year ended January 2, 2004.

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of April 2, 2004. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective. There have been no significant changes during the period covered by this Form 10-Q in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On June 18, 2002, a class action complaint was filed in the United States District Court of the Northern District of Illinois against Tellabs, Michael Birck, and Richard Notebaert (former CEO, President and Director of Tellabs). Thereafter, eight similar complaints were also filed in the United States District Court of the Northern District of Illinois. All nine of these actions were subsequently consolidated, and on December 3, 2002, a consolidated amended class action complaint was filed against Tellabs, Mr. Birck, Mr. Notebaert, and certain other of our current or former officers and/or directors. The consolidated amended complaint alleged that during the class period (December 11, 2000-June 19, 2001) the defendants violated the federal securities laws by making materially false and misleading statements, including, among other things, allegedly: providing revenue forecasts that were false and misleading, misrepresenting demand for our products, and reporting overstated revenues for the fourth quarter 2000 in our financial statements. Further, certain of the individual defendants were alleged to have violated the federal securities laws by trading our securities while allegedly in possession of material, non-public information about us pertaining to these matters.

On January 17, 2003, Tellabs and the other named defendants filed a motion to dismiss the consolidated amended class action complaint in its entirety. On May 19, 2003, the Court granted our motion and dismissed all counts of the consolidated amended complaint, while affording plaintiffs an opportunity to replead. On July 11, 2003, plaintiffs filed a second consolidated amended class action complaint against Tellabs, Messrs. Birck and Notebaert, and many (although not all) of the other previously named individual defendants, realleging claims similar to those contained in the previously dismissed consolidated amended class action complaint. We filed a second motion to dismiss on August 22, 2003, seeking the dismissal with prejudice of all claims alleged in the second consolidated amended class action complaint. On February 19, 2004, the Court issued an order granting that motion and dismissed the action with prejudice. On March 18, 2004, the plaintiffs filed a Notice of Appeal to the United States Federal Court of Appeal for the Seventh Circuit appealing the dismissal.

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

An annual meeting of stockholders was held on April 22, 2004. The following directors were re-elected to serve until the annual meeting of stockholders in 2007 and until the election and qualification of their respective successors:

Director	For	Withheld
Michael J. Birck	351,145,996	14,223,309
Frederick A. Krehbiel	350,510,716	14,858,589
Krish A. Prabhu	352,336,295	13,033,010

Our stockholders also voted to approve the proposal to adopt the Tellabs 2004 Incentive Compensation Plan in accordance with the following vote:

For	Against	Abstain	Broker Non-Votes
237,685,577	49,279,987	4,179,220	32,428,803

In addition, our stockholders voted to approve the proposal to ratify the appointment of Ernst & Young LLP, independent auditors, as our independent auditors for 2004 in accordance with the following vote:

For	Against	Abstain	Broker Non-Votes
348,184,367	14,076,247	3,108,691	32,428,803

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Item 6. Exhibits and Reports on Form 8-K

(A) Exhibits

10	.1	Tellabs, Inc. 2004 Incentive Compensation Plan
10	.2	Employment Agreement - President and Chief Executive Officer
10	.3	Employment Agreement - Chairman of the Board
11		Computation of Per Share Earnings
31	.1	CEO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31	.2	CFO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32	.1	CEO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32	.2	CFO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002

(B) Reports on Form 8-K:

The Registrant furnished a press release dated April 21, 2004, announcing its earnings for the quarter ended April 2, 2004.

See also our Annual Report on Form 10-K for the year ended January 2, 2004 listing any additional reports on Form 8-K filed during the first quarter of 2004.

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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 11, 2004

(Date)

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EXHIBIT INDEX

Exhibit		Description
10	.1	Tellabs, Inc. 2004 Incentive Compensation Plan
10	.2	Employment Agreement - President and Chief Executive Officer
10	.3	Employment Agreement - Chairman of the Board
11		Computation of Per Share Earnings
31	.1	CEO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31	.2	CFO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32	.1	CEO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32	.2	CFO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002

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EX-10.1

EXHIBIT 10.1

TELLABS, INC.
2004 INCENTIVE COMPENSATION PLAN

TELLABS, INC.
2004 INCENTIVE COMPENSATION PLAN

Table of Contents		Page
Article 1.	Establishment, Purpose and Duration
	1.1   Establishment of the Plan	1
	1.2   Purpose of the Plan	1
	1.3   Duration of the Plan	1
Article 2.	Definitions and Construction
	2.1   Definitions	1
	2.2   Gender and Number	4
	2.3   Severability	4
Article 3.	Administration
	3.1   Authority of the Committee	5
	3.2   Decisions Binding	5
	3.3   Delegation of Certain Responsibilities	6
	3.4   Procedures of the Committee	6
	3.5   Award Agreements	6
Article 4.	Stock Subject to the Plan
	4.1   Number of Shares	6
	4.2   Adjustments in Authorized Shares	7
Article 5.	Eligibility and Participation
	5.1   Eligibility	8
	5.2   Actual Participation	8
Article 6.	Options
	6.1   Grant of Options	8
	6.2   Option Price	8
	6.3   Payment	8
	6.4   Special Provisions Applicable to Incentive Stock Options	9
Article 7.	Stock Appreciation Rights
	7.1   Grant of Stock Appreciation Rights	9
	7.2   Payment of SAR Amount	9
	7.3   Form of Payment	9
Article 8.	Restricted Stock and Restricted Stock Units
	8.1   Grant of Restricted Stock and Restricted Stock Units	9
	8.2   End of Period of Restriction	9
Article 9.	Performance Units and Performance Shares
	9.1   Grant of Performance Units or Performance Shares	10
	9.2   Value of Performance Units and Performance Shares	10
	9.3   Payment of Performance Units and Performance Shares	10
Article 10.	Annual and Other Incentive Awards
	10.1   Annual Incentive Awards	10
	10.2   Grant of Other Incentive Awards	11
	10.3   Limitations	11

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Article 11.	Performance Goals
	11.1   Performance Goals	12
Article 12.	Beneficiary Designation
Article 13.	Rights of Participants
	13.1   Employment of Service	13
	13.2   Participation	13
	13.3   No Right to Company Assets	13
	13.4   Rights as Stockholder; Fractional Shares	13
	13.5   Nontransferability of Awards	13
	13.6   Election to Defer	14
	13.7   Other Restrictions and Limitations	14
	13.8   Awards to Participants Outside the United States	14
Article 14.	Change in Control
	14.1   Stock-Based Awards	14
	14.2   Performance-Based Awards	14
Article 15.	Amendment, Modification and Termination
	15.1   Amendment, Modification and Termination of Plan	14
	15.2   Amendment or Modification Awards	15
	15.3   Effect on Outstanding Awards	15
Article 16.	Withholding
	16.1   Tax Withholding	15
	16.2   Stock Delivery or Withholding	15
Article 17.	Successors
Article 18.	Requirements of Law
	18.1   Requirements of Law	15
	18.2   Governing Law	15

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Article 1. Establishment, Purpose and Duration

1.1 Establishment of the Plan. On February 20, 2004, the Board of Directors of Tellabs, Inc. (the “Company”) adopted, subject to the approval of stockholders, this incentive compensation plan known as the “Tellabs, Inc. Incentive Compensation Plan” (hereinafter referred to as the “Plan”), which permits the grant of short-term and long-term incentive and other stock and cash awards.

1.2 Purpose of the Plan. The purpose of the Plan is to promote the success of the Company and its Subsidiaries by providing incentives to Employees, Directors and Consultants of the Company and its Subsidiaries that will link their personal interests to the financial success of the Company and its Subsidiaries and to growth in stockholder value. The Plan is designed to provide flexibility to the Company and its Subsidiaries in their ability to motivate, attract, and retain the services of Employees, Directors and Consultants upon whose judgment, interest, and special effort the successful conduct of their operations is largely dependent.

1.3 Duration of the Plan. The Plan was approved by the Board on February 20, 2004, shall become effective on the date it is approved by the Company’s stockholders (the “Effective Date”), and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 15 herein, until all Shares subject to it shall have been purchased or acquired according to the provisions herein. However, in no event may an Award be granted under the Plan on or after the tenth (10th) anniversary of the Effective Date of the Plan.

Article 2. Definitions and Construction

2.1 Definitions. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized:

(a) “Award” includes, without limitation, Options, Stock Appreciation Rights, Performance Share or Unit Awards, Dividend or Dividend Equivalent Rights, Stock Awards, Restricted Stock or Unit Awards, Cash Awards, Annual Incentive Awards or Other Incentive Awards as described in or granted under this Plan.

(b) “Award Agreement” means the agreement or other writing (which may be framed as a plan or program) that sets forth the terms and conditions of each Award under the Plan, including any amendment or modification thereof.

(c) “Change in Control” shall be deemed to have occurred the first to occur of:

(i) Any “person” (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), excluding for this purpose, the Company or any subsidiary of the Company, or any employee benefit plan of the Company or any subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan which acquires beneficial ownership of voting securities

of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities; provided, however, that no Change in Control will be deemed to have occurred as a result of a change in ownership percentage resulting solely from an acquisition of securities by the Company; and provided further that no Change in Control will be deemed to have occurred if a person inadvertently acquires an ownership interest of 20% or more but then promptly reduces that ownership interest below 20%;

(ii) During any two consecutive years, individuals who at the beginning of such two-year period constitute the Board and any new director (except for a director designated by a person who has entered into an agreement with the 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;

(iii) 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,

(A) 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 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) (the “Resulting Company”) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Company;

(B) no person (as defined in Section 13(d) and 14(d) of the Exchange Act) (other than the Company, the Resulting Company or any employee benefit plan (or related trust) of the Company or such Resulting Company) beneficially owns, directly or indirectly, 20% or more of, respectively, the then combined voting power of the then outstanding voting securities of the Resulting Company, except to the extent that such ownership resulted solely from ownership of securities of the Company prior to the Business Combination; and

(C) at least a majority of the members of the board of directors of the Resulting Company 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.

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(iv) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company; or

(v) 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 voting securities of the Company, and then the first to occur of:

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

(B) Three (3) business days before the offer is to terminate unless the offer is withdrawn first if the person making the offer could own, by the terms of the offer plus any shares owned by the person, stock with 50% or more of total voting power of the Company’s securities when the offer terminates.

(d) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

(e) “Committee” means the Tellabs, Inc., Compensation Committee, or such other committee designated by the Board of Directors to administer this Plan. The Committee shall be appointed by the Board, shall consist of three or more outside, independent members of the Board, and in the judgment of the Board, shall be qualified to administer the Plan as contemplated by (i) Rule 16b-3 of the Securities Exchange Act of 1934 (or any successor rule), (ii) Section 162(m) of the Code, as amended, and the regulations thereunder (or any successor Section and regulations), and (iii) any rules and regulations of the NASDAQ Stock Market (or such other stock exchange on which the Common Stock is traded). Any member of the Committee who does not satisfy the qualifications set out in the preceding sentence may recuse himself or herself from any vote or other action taken by the Committee. The Board may, at any time and in its complete discretion, remove any member of the Committee and may fill any vacancy in the Committee.

(f) “Common Stock,” “Shares” or “Stock” means the common stock, par value $.01 per share, of the Company.

(g) “Company” means Tellabs, Inc., a Delaware corporation, or any successor thereto as provided in Article 15 herein.

(h) “Consultant” means any person, including an advisor (other than a person who is an Employee or a Director), or any entity that renders services to the Company and/or a Subsidiary.

(i) “Covered Employee” means any Participant who is or may be a “covered employee” within the meaning of Section 162(m)(3) of the Code in the year in which an Award becomes taxable to such Participant.

(j) “Director” means a director of the Company or a Subsidiary.

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(k) “Effective Date” means the date this Plan is approved by the Company’s stockholders.

(l) “Employee” means an employee of the Company or any of its Subsidiaries, including an employee who is an officer or a Director.

(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

(n) As used in this Plan (unless a different method of calculation is required by applicable law) “Fair Market Value” on or as of any date shall mean (i) the closing price of the Stock as reported by the Nasdaq Stock Market (or, if the Stock is not listed for trading on the NASDAQ Stock Market, then on such other national exchange upon which the Stock is then listed) for such date, or if there are no sales on such date, on the next preceding day on which there were sales, or (ii) in the event that the Stock is no longer listed for trading on a national exchange, an amount determined in accordance with standards adopted by the Committee.

(o) “Participant” means an Employee, a Director or a Consultant who has been granted an Award under the Plan.

(p) “Plan” means this Tellabs, Inc. 2004 Incentive Compensation Plan, as herein described and as hereafter from time to time amended.

(q) “Predecessor Plans” means the 1984 Incentive Stock Option Plan, as amended and restated, 1986 Non-Qualified Stock Option Plan, as amended and restated, 1987 Stock Option Plan for Non-Employee Corporate Directors, as amended and restated, 1989 Stock Option Plan, as amended and restated, 1991 Stock Option Plan, as amended and restated, 1994 Stock Option Plan, Tellabs, Inc., 1998 Stock Option Plan, 1999 Tellabs, Inc., Stock Bonus Plan, and the Tellabs, Inc., 2001 Stock Option Plan.

(r) “Previously Acquired Shares” means shares of Stock acquired by the Participant or any beneficiary of a Participant, which Shares have been held for a period of not less than six months, or such longer or shorter period as the Committee may require or permit.

(s) “Subsidiary” shall mean any corporation which is a subsidiary corporation of the Company, as that term is defined in Section 424(f) of the Code.

2.2 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural.

2.3 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

4

Article 3. Administration

3.1 Authority of the Committee. The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have all powers vested in it by the terms of the Plan, such powers to include the authority to:

(i) Select the persons to be granted Awards under the Plan;

(ii) Determine the terms, conditions, form and amount of Awards to be made to each person selected;

(iii) Determine the time when Awards are to be made and any conditions which must be satisfied before an Award is made;

(iv) Establish objectives and conditions for earning Awards;

(v) Determine the terms of each Award Agreement and any amendments or modifications thereof (which shall not be inconsistent with the Plan);

(vi) Determine whether the conditions for earning an Award have been met and whether an Award will be paid at the end of the Performance Period;

(vii) Determine if and when an Award may be deferred;

(viii) Determine whether the amount or payment of an Award should be reduced or eliminated; and

(ix) Determine guidelines and/or procedures for the payment or exercise of Awards; and

(x) Make such other determinations and take such other actions relating to Awards as the Committee deems necessary or appropriate.

Notwithstanding the foregoing, no action of the Committee (other than pursuant to Sections 4.2, 9.3, 10.1 or Article 11) may, without the consent of the person or persons entitled to exercise any outstanding Option or Stock Appreciation Right or to receive payment of any other outstanding Award, adversely affect the rights of such person or persons with respect to such Awards.

3.2 Decisions Binding. The Committee shall have full power and authority to administer and interpret the Plan and to adopt or establish such rules, regulations, agreements, guidelines, procedures and instruments, which are not contrary to the terms of the Plan and which, in its opinion, may be necessary or advisable for the administration and operation of the Plan. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board of Directors shall be final, conclusive and binding on all persons, including the Company and its Subsidiaries, its stockholders, employees, and Participants and their estates and beneficiaries, and such determinations and decisions shall not be reviewable.

5

3.3 Delegation of Certain Responsibilities. The Committee may, subject to the terms of the Plan and applicable law, appoint such agents as it deems necessary or advisable for the proper administration of the Plan under this Article 3; provided, however, that except as provided below, the Committee may not delegate its authority to grant Awards under the Plan or to correct errors, omissions or inconsistencies in the Plan. The Committee may delegate to the Company’s Chief Executive Officer and/or to other officers of the Company its authority under this Article 3, provided that such delegation shall not extend to the grant of Awards or the exercise of discretion with respect to Awards to Employees who, at the time of such action, are (a) Covered Employees or (b) officers of the Company or its Subsidiaries who are subject to the reporting requirements of Section 16(a) of the Exchange Act. All authority delegated by the Committee under this Section 3.3 shall be exercised in accordance with the provisions of the Plan and any guidelines for the exercise of such authority that may from time to time be established by the Committee.

3.4 Procedures of the Committee. Except as may otherwise be provided in the charter or similar governing document applicable to the Committee, (a) all determinations of the Committee shall be made by not less than a majority of its members present at the meeting (in person or otherwise) at which a quorum is present; (b) a majority of the entire Committee shall constitute a quorum for the transaction of business; and (c) any action required or permitted to be taken at a meeting of the Committee may be taken without a meeting if a unanimous written consent, which sets forth the action, is signed by each member of the Committee and filed with the minutes for proceedings of the Committee.

3.5 Award Agreements. Each Award under the Plan shall be evidenced by an Award Agreement which shall be signed by an authorized officer of the Company and, if required, by the Participant, and shall contain such terms and conditions as may be authorized or approved by the Committee. Such terms and conditions need not be the same in all cases.

Article 4. Stock Subject to the Plan

4.1 Number of Shares.

(a) Subject to adjustment as provided in Section 4.2 herein, the aggregate number of shares of Common Stock that may be delivered under the Plan at any time shall not exceed (i) 10,000,000 Shares, plus (ii) the number of Shares that remain available for issuance under the Predecessor Plans as of the Effective Date (increased by any Shares subject to any award (or portion thereof) outstanding under the Predecessor Plans on the Effective Date which are not issued upon or due to the subsequent exercise, termination, expiration or lapse of such award). Stock delivered under the Plan may consist, in whole or in part, of authorized and unissued Shares or treasury Shares. To the extent that shares of Stock subject to an outstanding Award or an award under the Predecessor Plan are not issued by reason of the forfeiture, termination, surrender, cancellation or expiration while unexercised of such award, by reason of the tendering or withholding of Shares (by either actual delivery or by attestation) to pay all or a portion of the purchase price or to satisfy all or a portion of the tax with holding obligations relating to an Award, by reason of being settled in cash in lieu of Stock or settled in a manner such that some or all of the Shares covered by the Award are not issued to a Participant, or being exchanged for a grant under this Plan that does not involve Stock, then such shares shall immediately again be available for issuance under this Plan. The Committee may from time to time adopt and observe such procedures concerning the counting of Shares against the Plan maximum as it may deem appropriate.

6

(b) Shares of Common Stock issued in connection with awards that are assumed, converted or substituted pursuant to a merger, acquisition or similar transaction entered into by the Company or any of its Subsidiaries shall not reduce the number of Shares available for issuance under this Plan.

(c) Subject to Section 4.2, the following limitations shall apply to Awards under the Plan:

(i) All of the Shares that may be issued under this Plan may be issued pursuant to SARs, Options or other Awards hereunder, provided, however, that the number of shares of Common Stock that may be issued under this Plan pursuant to Options which are Incentive Stock Options shall be limited to 10,000,000, and provided, further, that not more than 9,000,000 shares of Common Stock may be delivered pursuant to Awards of Restricted Stock or Restricted Stock Units.

(ii) The maximum number of Shares that may be covered by Awards granted under this Plan to any single Participant shall be 1,000,000 Shares during any one calendar year. For purposes of applying the limitations set forth in this paragraph (ii), if an Award, including, but not limited to Options, SARs, Restricted Stock, Restricted Stock Units and Performance Shares, is denominated in Shares or the amount of the payment to be made thereunder shall be determined by reference to the value of Shares, then such Award shall be counted in the year the Award is granted as covering the number of Shares set forth in the Award. If an Award is granted in tandem with a Stock Appreciation Right, such that the exercise of the Award right or Stock Appreciation Right with respect to a share of Common Stock cancels the tandem Stock Appreciation Right or Award right, respectively, with respect to such share, the tandem Award right and Stock Appreciation Right with respect to each share of Stock shall be counted as covering but one share of Stock for purposes of applying the limitations of this paragraph (ii).

4.2 Adjustments in Authorized Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, Common stock dividend, split-up, share combination, or other change in the corporate structure of the Company affecting the Common stock, such adjustment shall be made in the number and class of shares which may be delivered under the Plan, in the maximum number of Shares set forth in paragraph 4.1(c) above, and in the number and class of and/or price of shares subject to outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of shares subject to any Award shall always be a whole number. Any adjustment of an Incentive Stock Option under this paragraph shall be made in such a manner so as not to constitute a modification within the meaning of Section 424(h)(3) of the Code.

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Article 5. Eligibility and Participation

5.1 Eligibility. Persons eligible to participate in this Plan include all Employees, Directors and Consultants.

5.2 Actual Participation. Subject to the provisions of the Plan, the Committee may from time to time select those Employees, Directors and Consultants to whom Awards shall be granted and determine the nature and amount of each Award.

Article 6. Options

6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Employees, Directors, and/or Consultants at any time and from time to time as shall be determined by the Committee. The Committee may grant any type of Option to purchase Stock that is permitted by law at the time of grant including, but not limited to Incentive Stock Options (“ISOs”) or Nonqualified Stock Options (“NQSOs”). However, only Employees may receive an Award of Incentive Stock Option. Unless the Award Agreement shall specify that the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, the Option shall be a Nonqualified Stock Option whose grant is not intended to be subject to the provisions of Code Section 422. Each Option shall expire at such time as the Committee shall determine in the Award Agreement, however, no Option shall be exercisable later than the tenth (10th) anniversary date of its grant.

6.2 Option Price. The purchase price per share of Stock covered by an Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of such Stock on the date the Option is granted. Notwithstanding the authority granted to the Committee pursuant to Section 3.1 of the Plan, once an Option is granted, the Committee shall have no authority to reduce the Option price, nor may any Option granted under the Plan be surrendered to the Company as consideration for the grant of a new Option with a lower exercise price without the approval of the Company’s stockholders, except pursuant to Section 4.2 of the Plan related to an adjustment in the number of Shares.

6.3 Payment. Options shall be exercised by the delivery of a written notice to the Company setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option price of any Option shall be payable to the Company in full either (a) in cash or its equivalent, including, but not limited to, delivery of a properly completed exercise notice, together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale proceeds from the sale of the Shares subject to the Option exercise or to deliver loan proceeds from such broker to pay the exercise price and any withholding taxes due, (b) by delivery or deemed delivery through attestation of Previously Acquired Shares having a Fair Market Value at the time of exercise equal to the total Option price, (c) by a combination of (a) or (b) or (d) such other methods as the Committee may permit.

6.4 Special Provisions Applicable to Incentive Stock Options. To the extent provided or required under Section 422 of the Code or regulations thereunder (or any successor section or regulations) the Award of Incentive Stock Options shall be subject to the following:

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(a) In the event that the aggregate Fair Market Value of the Common Stock (determined at the time the Options are granted) subject to ISOs held by a Participant that first becomes exercisable during any calendar year exceeds $100,000 then the portion of such ISOs equal to such excess shall be NQSOs.

(b) An Incentive Stock Option granted to an employee who, at the time of grant, owns (within the meaning of Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of Stock of the Company, shall have an exercise price which is at least 110% of the Fair Market Value of the Common Stock subject to the Option, and shall be exercisable no later than the fifth (5th) anniversary date of its grant.

Article 7. Stock Appreciation Rights

7.1 Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, stock appreciation rights (“SARs”) may be granted to Employees, Directors and/or Consultants at any time and from time to time, at the discretion of the Committee. Each SAR shall expire at such time as the Committee shall determine in the Award Agreement, however, no SAR shall be exercisable later than the tenth (10th) anniversary of the date of its grant.

7.2 Payment of SAR Amount. Upon exercise of the SAR, the holder shall be entitled to receive payment of an amount determined by multiplying:

(a) The difference between the Fair Market Value of a Share on the date of exercise over the price fixed by the Committee at the date of grant (which price shall not be less than 100% of the Fair Market Value of a Share on the date of grant); by

(b) The number of Shares with respect to which the SAR is exercised.

7.3 Form of Payment. Payment to a Participant of the amount due upon SAR exercise will be made in Shares having a Fair Market Value as of the date of exercise equal to the amount determined under Section 6.2 above, except as the Committee may otherwise provide for the payment in cash in the applicable Award Agreement or any amendment or modification thereof.

Article 8. Restricted Stock and Restricted Stock Units

8.1 Grant of Restricted Stock and Restricted Stock Units. Subject to the terms and conditions of the Plan, the Committee, at any time and from time to time, may grant restricted stock (“Restricted Stock”) and restricted stock units (“Restricted Stock Units”) under the Plan to such Employees, Directors and/or Consultants and in such amounts and on such terms and conditions as it shall determine.

8.2 End of Period of Restriction. Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee determines, including, without limitation, prohibition against sale, transfer, assignment or encumbrance for a specified period, and a requirement to forfeit or return Restricted Stock or Restricted Stock Units in the event of termination of employment or service during the specified period. After the last day of the period of restriction, (a) Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant, and (b) the Participant shall be entitled to receive one Share of Common Stock with respect to each Restricted Stock Unit.

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Article 9. Performance Units and Performance Shares

9.1 Grant of Performance Units or Performance Shares. Subject to the terms and conditions of the Plan, performance units (“Performance Units”) or performance shares (“Performance Shares”) may be granted to Employees, Directors and/or Consultants at any time and from time to time as shall be determined by the Committee.

9.2 Value of Performance Units and Performance Shares. With respect to each grant of Performance Units or Performance Shares, the Committee shall establish an initial value for each Performance Unit and an initial number of Shares for each Performance Share granted to each Participant, the performance goals that will be used to determine the extent to which the Participant receives a payment of the value of the Performance Units or number of Shares for the Performance Shares awarded, and the period over which such performance will be measured (“Performance Period”). These goals will be based on the attainment, by the Company or its Subsidiaries, of one or more certain performance criteria and objectives described in Article 11 herein. With respect to each such performance measure utilized during a Performance Period, the Committee shall assign percentages to various levels of performance which shall be applied to determine the extent to which the Participant shall receive a payout of the values of Performance Units and number of Performance Shares awarded. Subject to limitations applicable to payments to Covered Employees, the Committee shall have the authority to modify, amend or adjust the terms and conditions of any Performance Unit award or Performance Share award, at any time or from time to time, including but not limited to the performance goals.

9.3 Payment of Performance Units and Performance Shares. After a Performance Period has ended, the holder of a Performance Unit or Performance Share shall be entitled to receive the value thereof as determined by the Committee. The Committee shall make this determination by first determining the extent to which the performance goals set pursuant to Section 9.2 have been met. It will then determine the applicable percentage to be applied to, and will apply such percentage to, the value of Performance Units or number of Performance Shares to determine the payout to be received by the Participant. In addition, with respect to Performance Units and Performance Shares granted to any Covered Employee, no payout shall be made hereunder except upon written certification by the Committee that the applicable performance goal or goals have been satisfied to a particular extent. The payment described in this Section 9.3 herein shall be made in cash, Common Stock, or a combination thereof as determined by the Committee.

Article 10. Annual and Other Incentive Awards

10.1 Annual Incentive Awards. The Committee may from time to time, subject to the provisions of the Plan and such other terms and conditions as the Committee may determine, grant annual incentive awards (“Annual Incentive Awards”) to Employees, including, but not limited to, Covered Employees. Each such Award shall be subject to the following provisions.

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(a) Amounts earned by and paid to Participants under Annual Incentive Awards will be based upon achievement of performance goals established pursuant to Article 11 over a one-year Performance Period, subject to the Committee’s authority to reduce, but not increase, such amount;

(b) The maximum amount any Participant may earn under an Annual Incentive Award for any calendar year shall not exceed $3,000,000;

(c) Annual Incentive Awards shall be paid in cash, subject to the Committee providing that all or a portion of any such amount may be paid in Shares.

10.2 Grant of Other Incentive Awards. In addition to Awards under Sections 6 through 9, and Section 10.1 above, the Committee may grant other incentive awards (“Other Incentive Awards”) payable in cash or in Common Stock under the Plan as it determines in its sole discretion. Other Incentive Awards may be granted to Employees, Directors and/or Consultants at any time and from time to time as shall be determined by the Committee. Such Awards may include, but are not limited to:

(a) Dividend or Dividend Equivalent Right. A right to receive dividends or their equivalent in value in Stock, cash or in a combination of both with respect to any new or previously existing Award;

(b) Stock Award. An unrestricted transfer of ownership of Stock;

(c) Awards under Deferred Compensation or Similar Plans. The right to receive Stock or a fixed or variable share denominated unit granted under this Plan or any deferred compensation or similar plan established from time to time by the Company;

(d) Cash Award. An award denominated in cash, subject to the achievement of performance goals set forth in Section 11.1 during a Performance Period determined by the Committee, or that may be earned under a Company or Subsidiary bonus or incentive plan or program;

(e) Other Incentive Awards. Other Incentive Awards which are related to or serve a similar function to those Awards set forth in this Section 10.2.

10.3 Limitations. The number of Shares covered by Other Incentive Awards granted to a Participant during a calendar year shall be taken into account for purposes of the annual limitation set forth in Section 4.1(c)(ii) above. The maximum amount that may be earned under the Plan during any calendar year with respect to any Cash Award or Other Incentive Award described in Section 10.2, shall be $3,000,000. Any amount earned with respect to which performance is measured over a period greater than one year shall be deemed to have been earned ratably over the full and partial calendar years in such period.

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Article 11. Performance Goals

11.1 Performance Goals. For purposes of this Plan, including, but not limited to, Awards of Performance Shares and Performance Units under Article 9, and of Annual Incentive Awards or other performance-based Awards under Article 10, “performance goals” shall mean the criteria and objectives, determined by the Committee, which shall be satisfied or met during the applicable period of restriction or Performance Period, as the case may be, as a condition to the Participant’s receipt, of Shares or cash with respect to such Award. The criteria or objectives for an Award shall be determined by the Committee in writing, shall be measured for achievement or satisfaction during the Performance Period or period of restriction in which the Committee established for such Participant to satisfy or achieve such criteria and objectives and may be absolute in their terms or measured against or in relationship to other companies comparably, similarly or otherwise situated or other external or internal measure and may be based on or adjusted for any other objective goals, events, or occurrences established by the Committee, provided that such criteria and objectives relate to one or more of the following: total stockholder return, earnings, earnings per share, net income, gross margin, earnings before interest, taxes, depreciation and/or amortization, revenues, expenses, cash flow, indebtedness, market share, return on assets, return on equity, economic value added, assets, Fair Market Value of the Common Stock, value of assets, regulatory compliance, satisfactory internal or external audits, improvement of financial ratings, achievement of balance sheet or income statement objectives, or other financial, accounting or quantitative objective established by the Committee. Performance criteria and objectives may include or exclude extraordinary charges, losses from discontinued operations, restatements and accounting changes and other unplanned special charges such as restructuring expenses, acquisitions, acquisition expenses, including expenses related to goodwill and other intangible assets, stock offerings and stock repurchases. Such performance criteria and objectives may be particular to a line of business, Subsidiary or other unit or the Company generally, and may, but need not be, based upon a change or an increase or positive result. In interpreting Plan provisions applicable to performance criteria and objectives and to performance-based Awards to Participants who are Covered Employees, it is the intent of the Plan to conform with the standards of Section 162(m) of the Code and the regulations thereunder. The Committee, in establishing performance criteria and objectives applicable to such performance-based Awards, and in interpreting the Plan, shall be guided by such standards, including, but not limited to providing that the performance-based Award shall be paid, vested or otherwise delivered solely as a function of attainment of objective performance criteria and objectives based on one or more of the specific criteria and objectives set forth in this Article 11 established by the Committee not later than 90 days after the Performance Period or Period of Restriction applicable to the Award has commenced (or, if such period of service is less than one year, not later than the date on which 25% of such period has elapsed). Prior to the payment of any compensation based on achievement of performance criteria and objectives to any such Covered Employee, the Committee must certify in writing the extent to which the applicable performance criteria and objectives were, in fact, achieved and the amounts to be paid, vested or delivered as a result thereof, provided the Committee may reduce, but not increase, such amount.

Article 12. Beneficiary Designation

Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively and who may include a trustee under a will or living trust) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation or if all designated beneficiaries predecease the Participant, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.

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Article 13. Rights of Participants

13.1 Employment or Service. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate any Participant’s employment or service as a Director or Consultant at any time, nor confer upon any Participant any right to continue in the employ or to so serve as a Director or Consultant of the Company or any of its Subsidiaries.

13.2 Participation. No Employee, Director or Consultant shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant.

13.3 No Right to Company Assets. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Company or any of its Subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company or any of its Subsidiaries, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company or the applicable Subsidiary.

13.4 Rights as Stockholder; Fractional Shares. Except as otherwise provided under the Plan, a Participant or Beneficiary shall have no rights as a holder of Shares with respect to Awards hereunder, unless and until Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). Fractional Shares shall not be issued or transferred under an Award, but the Committee may authorize payment of cash in lieu of a fraction, or round the fraction down. To the extent the Common Stock is uncertificated, references in this Plan to certificates shall be deemed to include references to any book-entry evidencing such Shares.

13.5 Nontransferability of Awards. The Committee may permit the transfer of Awards, and may impose such restrictions on transferability, and establish such operational procedures regarding transferability, as it may deem appropriate, necessary, or advisable. Except as the Committee may permit, no Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Further, all Awards granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant.

13.6 Election to Defer. The receipt of payment of cash or delivery of Shares that would otherwise be due to a Participant pursuant to an Award hereunder may be deferred at the election of the Participant pursuant to an applicable deferral plan established by the Company or a Subsidiary. Such deferrals shall be made in accordance with such rules and procedures as the Committee may establish under this Plan or the applicable deferral plan.

13.7 Other Restrictions and Limitations. The Committee may impose such restrictions and limitations on any Awards and/or any amounts payable thereunder as it may deem advisable, including, without limitation, restrictions intended to comply with applicable Federal or state securities laws, Share ownership or holding period requirements, or requirements to enter into or to comply with confidentiality, non-competition and/or other restrictive or similar covenants (including provisions relating to forfeiture of awards for violation of such covenants, and may legend the certificates issued in connection with an Award to give appropriate notice of any such restrictions).

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13.8 Awards to Participants Outside the United States. In the event any Award under this Plan is granted to a Participant who is employed or providing services outside the United States and who is not compensated from a payroll maintained in the United States, the Committee may, in its discretion, modify the provisions of this Plan as they pertain to such individuals to comply with applicable law, regulation or accounting rules.

Article 14. Change in Control

14.1 Stock-Based Awards. Notwithstanding any other provisions of the Plan, and except as otherwise provided in the Award Agreement, in the event of a Change in Control, all Stock-based Awards granted under this Plan shall immediately vest 100% in each Participant, including Options, SARs, Restricted Stock and Restricted Stock Units.

14.2 Performance-Based Awards. Notwithstanding any other provisions of the Plan, and except as otherwise provided in the Award Agreement, in the event of a Change in Control, all Awards granted under this Plan which are subject to performance goals shall be immediately paid out, including Performance Units and Performance Shares. The amount of the payout shall be based on the higher of: (i) the extent, as determined by the Committee, to which performance goals, established for the Performance Period then in progress have been met up through and including the effective date of the Change in Control, or (ii) 100% of the value on the date of grant of the Performance Units or number of Performance Shares.

Article 15. Amendment, Modification and Termination

15.1 Amendment, Modification and Termination of Plan. The Board may terminate the Plan or any portion thereof at any time, and may amend or modify the Plan from time to time in such respects as the Board may deem advisable in order that any Awards thereunder shall conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no such amendment or modification shall, without stockholder approval, (i) except as provided in Section 4.2, increase the number of shares of Stock which may be issued under the Plan, (ii) expand the types of Awards available to Participants under the Plan, (iii) materially expand the class of persons eligible to participate in the Plan; (iv) delete or limit the provisions in Section 6.2 prohibiting the repricing of Options or reduce the price at which Shares may be offered under Options; or (v) extend the termination date for making Awards under the Plan. In addition, the Plan shall not be amended without approval of such amendment by the Company’s stockholders if such amendment is required under (1) the rules and regulations of the NASDAQ Stock Market or any other national exchange on which the Stock is then listed, or (2) other applicable law, rules or regulations.

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15.2 Amendment or Modification Awards. The Committee may amend or modify any outstanding Awards in any manner to the extent that the Committee would have had the authority under the Plan initially to make such Award as so modified or amended, including without limitation, to change the date or dates as of which Awards may be exercised, to remove the restrictions on Awards, or to modify the manner in which Awards are determined and paid.

15.3 Effect on Outstanding Awards. No such amendment, modification or termination of the Plan pursuant to Section 15.1 above, or amendment or modification of an Award pursuant to Section 15.2 above, shall materially adversely alter or impair any outstanding Awards without the consent of the Participant affected thereby.

Article 16. Withholding

16.1 Tax Withholding. The Company and any of its Subsidiaries shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company or any of its Subsidiaries, an amount sufficient to satisfy Federal, state and local taxes (including the Participant’s FICA obligation) required by law to be withheld with respect to any grant, exercise or payment made under or as a result of this Plan.

16.2 Stock Delivery or Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock or Restricted Stock Units, or upon any other taxable event arising as a result of Awards granted hereunder, Participants may elect to satisfy the withholding requirement, in whole or in part, by having the Company withhold shares of Common Stock having a Fair Market Value on the date the tax is to be determined equal to the minimum (or such greater amount as the Committee may permit) statutory total tax which would be imposed on the transaction. All such elections shall be subject to any procedures, restrictions or limitations that the Committee, in its sole discretion, deems appropriate.

Article 17. Successors

All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company.

Article 18. Requirements of Law

18.1 Requirements of Law. The granting of Awards and the issuance of Shares of Stock under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

18.2 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware.

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EX-10.2

EXHIBIT 10.2

EMPLOYMENT AGREEMENT
(PRESIDENT AND CHIEF EXECUTIVE OFFICER)

        THIS AGREEMENT, made and entered into as of February 11, 2004, by and between Krish Prabhu (the “Executive”) and Tellabs, Inc., a Delaware corporation (the “Company”);

WITNESSETH THAT:

        WHEREAS, the parties desire to enter into this Agreement pertaining to the employment of the Executive by the Company;

        NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by the Executive and the Company as follows:

1. Employment. Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive as its President and Chief Executive Officer during the Agreement Term (as defined below), with the authority, responsibilities and duties customarily exercised by a person holding that position, with such additions or modifications thereto which are consistent with his authority, responsibilities and duties hereunder, as the Board of Directors of the Company (the “Board”) may, from time to time, in its discretion and after consultation with the Executive, adopt. The “Agreement Term” shall be the period beginning on February 11, 2004 (the “Effective Date”) and ending on the second anniversary of the Effective Date, subject to earlier termination as provided herein; provided, however, that Executive’s term as President and Chief Executive Officer shall commence on February 12, 2004; and provided, further, the Agreement Term will be automatically extended by twelve (12) months on the first anniversary of the Effective Date and on each anniversary thereof, unless one party to this Agreement provides written notice of non-renewal to the other party at least thirty (30) days prior to the date of such automatic extension.

2. Performance of Duties. The Executive agrees that during his employment with the Company, he shall devote his full business time, energies and talents to serving as its President and Chief Executive Officer and that he shall perform his duties faithfully and efficiently subject to the directions of the Board. Notwithstanding the foregoing provisions of this Section 2, the Executive may (i) serve as a director, trustee or officer or otherwise participate in not-for-profit educational, welfare, social, religious and civic organizations; (ii) after consultation with, and approval by, the Board, serve as a director of not more than two for-profit businesses which do not compete with the Company or any of its subsidiaries or affiliates, and (iii) acquire passive investment interests in one or more entities; provided, that such activities described in clauses (i), (ii) and (iii) are not prohibited under the Company’s Integrity Policy and do not inhibit or interfere with the performance of the Executive’s duties under this Agreement.

3. Initial Equity-Based Awards.

(a) Promptly upon the Executive’s commencement of employment, the Executive shall be granted an option under the Company’s existing stock option plan to acquire 400,000 shares of the Company’s common stock (“Common Stock”) in accordance with the form of stock option agreement attached hereto as Exhibit A.

(b) The Company has advised the Executive that the Board plans to establish a new incentive compensation plan to be submitted to the stockholders for approval at the 2004 Annual Meeting of Stockholders. Following approval by the Board, the Company shall grant 100,000 restricted stock units to Executive under such plan, which grant shall be subject to stockholder approval of the new plan and to terms and conditions as set forth in the form of restricted stock unit agreement attached hereto as Exhibit B.

4. Compensation. Subject to the terms of this Agreement, during the Agreement Term, while the Executive is employed by the Company, the Company shall compensate him for his services as follows:

(a) Base Salary. The Executive shall receive a Base Salary of not less than $800,000 per annum payable in 26 bi-weekly installments. The Executive’s Base Salary shall be reviewed and may be increased, but not decreased, annually by the Compensation Committee of the Board (the “Committee”), in its discretion, pursuant to its normal performance review policies for senior executives, with the first such review occurring in 2005.

(b) Annual Bonus. For each calendar year, the Executive shall be eligible to receive an Annual Bonus payment in accordance with the Company’s annual bonus plans as in effect from time to time. The target level for each Annual Bonus shall not be less than 50% of the Executive’s Base Salary for the year, provided that the Company achieves the applicable financial and strategic objectives established for the year. Commencing with calendar year 2005, such objectives will be established by the Committee, in consultation with the Executive and other senior officers. The Executive shall be eligible to receive a bonus for calendar year 2004, based on the Company’s achievement of financial and strategic goals established for the year 2004. The amount of the bonus shall be prorated to reflect the Executive’s partial year of service from the Effective Date through the end of the calendar year. The actual Annual Bonus, if any, paid to the Executive shall be based on achievement of performance criteria, as determined by the Committee.

(c) Annual Equity Awards. Commencing with 2005, the Executive shall be entitled to annual stock option grants and, to the extent applicable, other stock based compensation on a basis no less favorable than the awards granted to other senior executives of the Company. Such awards shall be in addition to the initial stock option and restricted stock unit awards under Section 3 above.

(d) Employee Benefits, Fringe Benefits and Perquisites. The Executive shall participate in all other incentive, compensation, employee benefit, fringe benefit and perquisite plans and programs on a basis no less favorable than such benefits and perquisites are generally provided by the Company from time to time to the Company’s other senior executives, including without limitation the Company’s relocation program.

(e) Expense Reimbursement. The Company will reimburse the Executive for all reasonable expenses incurred by him in the performance of his duties in accordance with the Company’s policies applicable to senior executives.

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5. Indemnification. The Company agrees that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that he is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive’s alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent legally permitted or authorized by the Company’s certificate of incorporation or bylaws or resolutions of the Company’s Board of Directors or, if greater, by the laws of the State of Delaware, against all cost, expense, liability and loss (including, without limitation, attorneys’ fees, judgments, fines, ERISA excise taxes or other liabilities or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director, member, employee or agent of the Company or other entity, with respect to acts or omissions which occurred prior to his cessation of employment with the Company, and shall inure to the benefit of the Executive’s heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within twenty (20) calendar days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. Nothing in this Section 5 shall operate to limit or extinguish any right to indemnification, advancement of expenses, or contribution that Executive might otherwise have (including, but not limited to, under insurance or by agreement with the Company or under applicable law). The Executive shall also be covered by the Company’s directors’ and officers’ insurance policies to the extent the Company maintains such policies for its directors and senior executive officers generally.

6. Termination of Employment. Upon termination of the Executive’s employment for any reason, the Executive or, in the event of death, the Executive’s estate shall be entitled to the Executive’s Base Salary prorated through the date of termination. Any Annual Bonus awarded to the Executive for a prior award period, but not yet paid to the Executive, and any employee benefits to which the Executive is entitled by reason of his employment shall be paid to the Executive or his estate at such time as is provided by the terms of the applicable Company plan or policy. If the Executive’s employment is terminated during the Agreement Term, the Executive’s right to additional payments and benefits under this Agreement for periods after his date of termination shall be determined in accordance with the following provisions of this Section 6.

(a) Death or Disability. If the Executive’s employment is terminated by reason of death or by reason of the Executive’s Disability, the Executive, or, in the event of his death, his estate, shall be entitled to a prompt cash payment of a prorated Annual Bonus for the year in which such termination occurs, based on the target Annual Bonus for such year. The Executive or the Company shall be entitled to terminate the Executive’s employment because of the Executive’s Disability during the Agreement Term. “Disability” means that the Executive is disabled within the meaning of the Company’s long-term disability policy or, if there is no such policy in effect, that (i) the Executive has been substantially unable, for 120 business days within a period of 180 consecutive business days, to perform the Executive’s duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and reasonably acceptable to the Executive or the Executive’s legal representative, has determined that the Executive is disabled. A termination of the Executive’s employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Time”), unless the Executive returns to full-time performance of the Executive’s duties before the Disability Effective Time.

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(b) Termination for Cause or Voluntary Resignation. If the Executive’s employment is terminated by the Company for Cause or if the Executive voluntarily resigns from the employ of the Company, other than pursuant to a Constructive Discharge, all payments and benefits to which the Executive would otherwise be entitled under this Agreement shall immediately cease, except as otherwise specifically provided above in this Section 6 with respect to his prorated Base Salary through the date of termination, his Annual Bonus, if any, awarded for a prior award period but not yet paid and his previously earned employee benefits. For purposes of this Agreement, the term “Cause” shall mean:

(i) The Executive is convicted of a felony or of any crime involving moral turpitude, dishonesty, fraud, theft or financial impropriety; or

(ii) A reasonable determination by a vote of directors comprising two-thirds of the entire Board, after giving the Executive notice and an opportunity to be heard, that, (A) the Executive has willfully and continuously failed to perform substantially his duties as contemplated by Section 2 above (other than such failure resulting from incapacity due to physical or mental illness), after a written demand for corrected performance is delivered to the Executive by the Board which specifically identifies the manners in which the Board believes the Executive has not substantially performed his duties, (B) the Executive has engaged in gross neglect or gross misconduct, or (C) the Executive has knowingly violated a material requirement of the Company’s Integrity Policy, code of conduct, the Sarbanes Oxley Act of 2002 or other material provision of federal securities law.

(c) Termination Without Cause. If the Company terminates the Executive without Cause, the Executive shall be entitled to a prompt lump sum cash payment equal to the Base Salary and Annual Bonus to which he would otherwise would have been entitled if he had remained in the employ of the Company for a period of eighteen (18) months following such termination, subject to the Executive’s execution of a general release and waiver in form and substance acceptable to the Company. For purposes of the preceding sentence, the Annual Bonus component shall be equal to 1.5 times the Executive’s target bonus for the calendar year of termination plus a prorated target bonus for the partial calendar year ending on the date of termination.

(d) Resignation for Constructive Discharge. The Executive’s voluntary resignation for Constructive Discharge shall be treated for all purposes of this Agreement as a termination by the Company without Cause. For purposes of this Agreement, “Constructive Discharge” shall mean the occurrence of any of the following circumstances:

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(i) A reduction by the Company in the Executive’s Base Salary or Annual Bonus target to an amount that is less than required under Section 4 above;

(ii) The removal of the Executive from the position of President and Chief Executive Officer or the failure of the Executive to be nominated or reelected to the Company’s Board of Directors;

(iii) Any action by the Company which results in significant diminution in the Executive’s authority, power, responsibilities or duties from those contemplated by Sections 1 and 2 above, or the assignment to the Executive without his written consent of any duties inconsistent with the Executive’s position and status as President and Chief Executive Officer of the Company as contemplated by Sections 1 and 2 above, which action or assignment continues after written notice thereof and a reasonable opportunity to cure of not less than fifteen (15) days has been given by the Executive to the Company; or

(iv) Any other breach by the Company of any of its material obligations to the Executive under this Agreement, which breach continues after written notice thereof and a reasonable opportunity to cure of not less than thirty (30) days has been given by the Executive to the Company.

(e) Change in Control. The term “Change in Control” of the Company means the first to occur of:

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

(ii) During any two consecutive years, individuals who at the beginning of such two-year period constitute the Board and any new director (except for a director designated by a person who has entered into an agreement with the 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;

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(iii) 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,

(1) 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 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) (the “Resulting Company”) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Company;

(2) no person (as defined in Section 13(d) and 14(d) of the Exchange Act)(other than the Company, the Resulting Company or any employee benefit plan (or related trust) of the Company or such Resulting Company) beneficially owns, directly or indirectly, 20% or more of, respectively, the then combined voting power of the then outstanding voting securities of the Resulting Company, except to the extent that such ownership resulted solely from ownership of securities of the Company prior to the Business Combination; and

(3) at least a majority of the members of the board of directors of the Resulting Company 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;

(iv) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company; or

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

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

(2) Three (3) business days before the offer is to terminate unless the offer is withdrawn first if the person making the offer could own, by the terms of the offer plus any shares owned by the person, stock with 50% or more of total voting power of the Company’s securities when the offer terminates.

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7. No Mitigation; No Offset. In the event of any termination of employment, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain.

8. Change in Control Benefits. In lieu of coverage under the standard Change in Control Agreement provided by the Company to its senior executive officers, the Executive shall instead be entitled to the following upon the occurrence of a Change in Control (as defined below):

(a) The Company hereby agrees to continue the Executive in its employ and the Executive hereby agrees to remain in the employ of the Company, for the period commencing on the date on which a Change in Control occurs, and this Section 8 shall not have any force and effect whatsoever prior to that date, and ending on the third anniversary of such date (the “employment period”), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the effective date of this Section 8, which services shall be performed at a location within the metropolitan area in which the Executive was employed immediately prior to the effective date of this Section 8 or such other location as the Company may reasonably request. The Executive agrees that during the employment period he shall devote his full business time exclusively to his executive duties and shall perform such duties faithfully and efficiently.

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

(i) The Executive shall receive an annual salary at a rate which is not less than his rate of annual salary immediately prior to the effective date of this Section 8, with the opportunity for increases from time to time thereafter which are in accordance with the Company’s regular practices.

(ii) The Executive shall be eligible to participate on a reasonable basis in the Company’s stock option plans, the annual incentive bonus program and any other bonus and incentive compensation plans (whether now or hereinafter in effect) in which senior executive officers of the Company are eligible to participate, which plans must provide opportunities to receive compensation which are at least as great as the opportunities under the plans in which the Executive was participating immediately prior to the effective date of this Section 8.

(iii) The Executive shall be entitled to receive employee benefits and perquisites which are the greater of the employee benefits and perquisites provided by the Company to senior executive officers of the Company or the employee benefits and perquisites to which he was entitled immediately prior to the effective date of this Section 8. Such benefits and perquisites shall include, but not be limited to, the benefits and perquisites included under the Tellabs Advantage Program, and the Tellabs, Inc. Employee Welfare Benefits Plan.

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(c) Termination Following Change in Control.

(i) For purposes of this Section 8, the term “termination” shall mean (i) termination by the Company of the employment of the Executive with the Company and all of its subsidiaries for any reason other than death, Disability or “cause” (as defined in Section 8(c)(iii) below), or (ii) resignation of the Executive for “good reason” (as defined in Section 8(c)(ii) below).

(ii) For purposes of this Section 8, the term “good reason” shall mean:

(1) the material reduction or material adverse modification of the Executive’s authority or duties, such as a substantial diminution or adverse modification in the Executive’s title, status, or responsibilities;

(2) any reduction in the Executive’s Base Salary (other than as may be permitted under Section 8(b)(i));

(3) any failure to provide to the Executive the opportunities to receive compensation as required to be provided under Section 8(b)(ii);

(4) any failure to pay or provide the benefits and perquisites required to be provided under Section 8(b)(iii);

(5) any requirement that Executive relocate his principal place of employment by more than a 50-mile radius from its location immediately prior to the effective date of this Section 8;

(6) any material breach of this Section 8 by the Company; or

(7) a reasonable determination by the Executive that, as a result of a Change in Control and a change in circumstances thereafter significantly affecting his position, he is unable to exercise the authorities, powers, function or duties attached to his position and contemplated by Section 8(a).

Notwithstanding the foregoing, any of the circumstances described in this Section 8(c)(ii) may not serve as a basis for resignation for “good reason” by the Executive unless the Executive has provided written notice to the Company that such circumstance exists and the Company has failed to cure such circumstance within fifteen (15) days following such notice.

(iii) For purposes of this Section 8, the term “cause” shall have the same meaning as “Cause” set forth in subsection 6(b).

(d) Severance Allowance.

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(i) In the event of termination of the Executive during the employment period, the Executive shall not be entitled to any payments described in Sections 6(c) or (d) above but shall be entitled to receive a lump sum severance allowance within five (5) days of such termination, in an amount which is equal to the sum of the following:

(1) The amount equivalent to salary payments for 36 calendar months, at the rate required by Section 8(b)(i) and in effect immediately prior to termination (or, if greater, at the highest rate in effect under Section 8(b)(i) at any time during the period commencing on the effective date of this Section 8 and ending on the termination date), plus a pro rata share of the estimated amount of any bonus which would have been payable for the bonus period which includes the termination date (which amount shall be a pro rata share of the Executive’s target bonus or the actual bonus which would have been awarded to the Executive based on year-to-date performance, whichever is greater); and

(2) The amount equivalent to 36 calendar months of bonus at the target rate for the year which includes his termination date.

(ii) In addition to such amount under Section 8(d)(i) above, the Executive shall also receive in cash the value of the incentive compensation (including, but not limited to, employer contributions to the Tellabs Advantage Program and the right to receive stock awards and to exercise stock options and other bonus and similar incentive compensation benefits) to which he would have been entitled under all incentive compensation plans maintained by the Company if he had remained in the employ of the Company for 36 months after such termination. The amount of such payment shall be determined as of the date of termination and shall be paid as promptly as practicable and in no event later than thirty (30) days after such termination.

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

(e) Interest, Indemnification.

(i) In the event any payment to the Executive under this Section 8 is not paid within five (5) business days after it is due, such payment shall thereafter bear interest at the prime rate from time to time as published in The Wall Street Journal, Midwest Edition.

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(ii) The Company hereby indemnifies the Executive for all legal fees and expenses incurred by the Executive in contesting any action of the Company with respect to this Section 8, including the termination of the Executive’s employment hereunder, or incurred by the Executive in seeking to obtain or enforce any right or benefit provided by this Section 8. The final two sentences of Section 19 shall not apply to any contest or other action described in this paragraph.

9. Adjustments in Case of “Excess Parachute Payments”. If any payments or benefits received or to be received by the Executive in connection with the Executive’s employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, or any person affiliated with the Company) (the “Payments”), will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (or any similar tax that may hereafter be imposed), the Company shall pay to the Executive prior to the time any such Excise Tax is payable, an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Payments and any federal, state and local income or other applicable tax and Excise Tax upon the payment provided for by this paragraph, shall be equal to the Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the Executive’s highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the Executive’s highest marginal rate of taxation in the state and locality of the Executive’s residence on the date on which the Excise Tax is determined, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The determination of whether the Payments are subject to the Excise Tax and, if so, the Gross Up Payment to be provided to Executive and the time of payment pursuant to this Section 9, shall be made by the independent public accountants not then regularly retained by the Company, in consultation with tax counsel selected by them and acceptable to the Executive. The Company shall provide the Executive with sufficient tax and compensation data to enable the Executive or his tax advisor to verify such computations and shall reimburse the Executive for reasonable fees and expenses incurred with respect thereto. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, the Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by the Executive) plus interest on the amount of such repayment from the date the Gross-Up Payment was initially made to the date of repayment at the rate provided in Section 1274(b)(2)(B) of the Code (the “Applicable Rate”). In the event that the Excise Tax is determined by the Internal Revenue Service or by such independent public accountants to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties, fines or additions to tax payable with respect to such excess) at the time that the amount of such excess if finally determined. Any payment to be made under this Section 9 shall be payable within five (5) days of the determination that such a payment is required hereunder.

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10. Confidential Information. The Executive agrees that, during his employment by the Company and at all times thereafter, he shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries or affiliates, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or during his consultation with the Company after his termination of employment, and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). Except in the good faith performance of his duties for the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it.

11. Protective Covenants. During his employment by the Company and for a period of two years following the termination of Executive’s employment for any reason (the “Restricted Period”), the Executive shall not, without the written consent of the Board, directly or indirectly:

(a) engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business which is in direct competition with the Company or of any of its subsidiaries in providing data, voice or video transport, switching/routing, network access system and/or voice quality enhancement solutions to service providers or end users;

(b) hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring; or

(c) solicit, entice, persuade or induce any person or entity doing business with the Company and its subsidiaries or affiliates, to terminate such relationship or to refrain from extending or renewing the same.

        The Executive is prohibited from engaging in the above activities in any state of the United States and in any country outside the United States in which the Company does business. Nothing in subparagraph (a) above will prohibit the Executive from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle the Executive to no more than one percent of the total outstanding votes entitled to be cast by security holders of such business in matters on which such security holders are entitled to vote.

12.     Remedies.

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(a) The Executive acknowledges that the restraints and agreements herein provided are fair and reasonable, that enforcement of the provisions of Sections 10 and 11 will not cause the Executive undue hardship and that said provisions are reasonably necessary and commensurate with the need to protect the Company and its subsidiaries and affiliates and their legitimate and proprietary business interests and property from irreparable harm. The Executive acknowledges and agrees that (i) a threatened or actual breach of any of the covenants and provisions contained in Sections 10 or 11 above, will result in irreparable harm to the business of the Company or its subsidiaries and affiliates, (ii) a remedy at law in the form of monetary damages for any threatened or actual breach by the Executive of any of the covenants and provisions contained in Sections 10 and 11 is inadequate, (iii) in addition to any remedy at law or equity for such breach, the Company shall be entitled to institute and maintain appropriate proceedings in equity, including a suit for injunction to enforce the specific performance by the Executive of the obligations hereunder and to enjoin the Executive from engaging in any activity in violation hereof and (iv) the covenants on the Executive’s part contained in Sections 10 and 11, shall be construed as agreements independent of any other provisions in this Agreement, and the existence of any claim, setoff or cause of action by the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense or bar to the specific enforcement by the Company of said covenants. In the event of a breach or a violation by the Executive of any of the covenants and provisions of this Agreement, the running of the Restricted Period (but not of Executive’s obligation thereunder) shall be tolled during the period of the continuance of any actual breach or violation.

(b) The parties hereto agree that the covenants set forth in Sections 10 and 11 are reasonable with respect to their duration, geographical area and scope. If the final judgment of a court of competent jurisdiction declares that any term or provision of Section 10 or 11 is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed.

13.     Assignability, Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law.

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14.     Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. So long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof except that in the event of the Executive’s Disability so as to render him incapable of such action, his legal representative may be substituted for purposes of such amendment.

15.     Applicable Law. The provisions of this Agreement shall be construed in accordance with the internal laws of the State of Illinois, without regard to the conflict of law provisions of any state.

16.     Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified).

17.     Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party of any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues.

18.     Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice):

      to the Company:

          Tellabs, Inc.
          One Tellabs Center
          1415 W. Diehl Center
          Naperville, IL 60563
          Attn:General Counsel

        or to the Executive:

           Krish Prabhu
          One Tellabs Center
          1415 W. Diehl Road
          Naperville, IL 60563

        Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. Such notices, demands, claims and other communications shall be deemed given in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; or in the case of certified or registered U.S. mail, five (5) days after deposit in the U.S. mail; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received.

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19.     Arbitration of Disputes and Reimbursement of Legal Costs. In the event of any dispute between the Company and the Executive, whether arising out of or relating to this Agreement, the breach of this Agreement, or otherwise, the Executive and the Company hereby agree that such dispute shall be resolved by binding arbitration administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration shall be held before a single arbitrator who shall be selected by the mutual agreement of the Company and the Executive, unless the parties are unable to agree to an arbitrator, in which case, the arbitrator will be selected under the procedures of the AAA. The arbitrator shall be experienced in the resolution of disputes under employment agreements for CEOs of major corporations and shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction, and the parties hereby agree to the emergency procedures of the AAA. However, either party may, without inconsistency with this arbitration provision, apply to any court having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Company and the Executive. The arbitration proceeding shall be conducted in the Chicago, Illinois metropolitan area. In the event of any such proceeding, the losing party shall reimburse the prevailing party upon entry of a final award resolving the subject of the dispute for all reasonable legal expenses incurred, unless the arbitrator determines that to do so would be unjust. Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys’ fees and expenses) and shall share the fees of the AAA equally.

20.     Survivorship. Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement.

21.     Entire Agreement. Except as otherwise noted herein, this Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the parties relating to the subject matter hereof.

22.     Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

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        IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Company has caused this Agreement to be executed in its name and on its behalf, and its corporate seal to be hereunto affixed, all as of the day and year first above written.

	EXECUTIVE:
	Krish Prabhu
	COMPANY:
	TELLABS, INC., a Delaware corporation
	Name: Michael J. Birck
	Its:      Chairman of the Board
ATTEST:
James M. Sheehan, Secretary

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Exhibit A to Employment Agreement

NONQUALIFIED STOCK OPTION AGREEMENT

1.     Tellabs, Inc. (the “Company”) hereby grants to Krish Prabhu (“Participant”), effective February 11, 2004 (the “Grant Date”), an option to purchase 400,000 shares of the Company’s Common Stock (the “Options”) at a price of $10.20 per share (the “Exercise Price”) (such price being the closing price on the date hereof for sales of shares as reported by the Nasdaq Stock Market), purchasable as set forth herein. The Options shall be governed by the terms and conditions in this Stock Option Agreement and the Company’s 2001 Stock Option Plan (the “Plan”). Unless otherwise indicated, all capitalized terms not defined in this Stock Option Agreement shall have the meanings ascribed to such terms in the Employment Agreement between Participant and the Company dated as of February 11, 2004 (the “Employment Agreement”).

2.     The Options shall not be exercisable until vested. The Options shall be exercisable during the period February 11, 2005, through February 10, 2014 (the “Exercise Period”), subject to the vesting schedule described in the next sentence and the provisions regarding termination set forth in paragraphs 3 and 4 below and, to the extent not inconsistent with the terms and conditions of this Stock Option Agreement, in the Plan. Twenty percent (20%) of the total Options granted to Participant on the Grant Date (the “Total Grant”) will become vested on the first anniversary of the Grant Date; an additional twenty percent (20%) of the Total Grant will become vested on the second anniversary of the Grant Date; and the remaining sixty percent (60%) of the Total Grant will become vested on the third anniversary of the Grant Date. During the Exercise Period, vested Options may be exercised in whole or in part, on one or more than one occasion, provided that the Options must be exercised for a minimum of 100 shares on any one occasion, or for the remaining number of shares covered by the Options if less than such minimum. The Options may be exercised in accordance with any method applicable to options granted under the Plan and the purchase price of any shares as to which the Options shall be exercised shall be paid in full at the time of such exercise in the manner provided in the Plan.

3.     In the event Participant’s employment with the Company is terminated (the date upon which such termination occurs is the “Date of Termination”) for any reason other than the occurrence of an event described in paragraph 4 below, whether voluntarily or involuntarily, the Options to the extent not vested under paragraph 2 above on or before the Date of Termination shall terminate immediately upon the Date of Termination and may not be exercised after such date, and to the extent vested as of the Date of Termination shall terminate three months after the Date of Termination and may not be exercised after such date; provided, however, that if termination is by the Company for Cause, then the vested Options shall terminate immediately upon the Date of Termination and may not be exercised after such date.

4.     In the event of a Change in Control (as defined in the Employment Agreement) any unvested Options shall be fully vested and exercisable immediately prior to such Change in Control. Upon the occurrence of Participant’s death, Disability, or termination of Participant’s employment by the Company without Cause or by Participant due to Constructive Discharge, any unvested Options shall be fully vested and exercisable as of the Date of Termination and remain exercisable for one (1) year following the Date of Termination, three years if termination was due to Disability. In no event, however, shall any post-termination exercise period extend beyond February 10, 2014.

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5.     The Options may not be assigned, transferred, pledged or hypothecated in any way whether by operation of law or otherwise by Participant and the Options shall not be subject to execution, attachment or similar process; provided, however that the Participant is authorized to transfer the Options in the manner described in Section 6.9 of the Plan. Other than as permitted by this paragraph 5, any attempted assignment, transfer, pledge, hypothecation or other disposition of the Options or the rights or benefits, under this Stock Option Agreement, and the levy of any execution, attachment or similar process upon such Options, or such rights and benefits shall be null and void and without effect.

6.     Any dispute or disagreement arising out of or relating to this Stock Option Agreement shall be resolved by binding arbitration in accordance with Section 19 of the Employment Agreement. Notwithstanding the foregoing, any dispute or disagreement which shall arise under, as a result of, or in any way relate to the interpretation, construction or administration of the Plan shall be determined in all cases and for all purposes by the Committee, or any successor committee, and any such determination shall be final, binding and conclusive for all purposes.

7.     The Options shall be subject to adjustment (including, without limitation, as to the number of shares of Common Stock covered by the Options) pursuant to Section 4.3 of the Plan in connection with the occurrence of any of the events described in Section 4.3 of the Plan following the Date of Grant.

8.     All notices and other communications relating to this Stock Option Agreement shall be given as provided in Section 18 of the Employment Agreement.

9.     (a)     This Stock Option Agreement is personal to Participant and, except as otherwise provided in paragraph 5 above, shall not be assignable by Participant otherwise than by will or the laws of descent and distribution, without the prior written consent of the Company. This Stock Option Agreement shall inure to the benefit of and be enforceable by Participant’s legal representatives.

       (b)     This Stock Option shall inure to the benefit of and be binding upon the Company and its successors. It shall not be assignable except in connection with the sale or other disposition of all or substantially all of the assets or business of the Company.

10.     Together with the Plan, this Stock Option Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may be amended, modified or changed only be a written instrument executed by Participant and the Company. No provision of this Stock Option Agreement may be waived except by a writing executed and delivered by the party sought to be charged. Any such written waiver will be effective only with respect to the event or circumstance described therein and not with respect to any other event or circumstance, unless such waiver expressly provides to the contrary.

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11.     The grant of Options and all terms and conditions related thereto, including those of the Plan, shall be governed by the laws of the State of Illinois, without reference to principles of conflict of laws. In the event there is a conflict between the Plan as from time to time in effect and the terms and conditions in this Stock Option Agreement, this Stock Option Agreement shall govern.

12.     This Stock Option Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Signatures delivered by facsimile shall be effective for all purposes.

PARTICIPANT	TELLABS, INC.:
Krish Prabhu	Name: Michael J. Birck
	Its:      Chairman of the Board

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Exhibit B To Employment Agreement

TELLABS RESTRICTED STOCK UNIT AWARD AGREEMENT

        This Restricted Stock Unit Award Agreement (herein called the “Agreement”) is made and entered into as of                           , 2004, by and between Tellabs, Inc., a Delaware corporation (the “Company”), and Krish Prabhu (“Employee”). The Restricted Stock Unit Award (as defined below) is governed by this Agreement.

1.     Award of Restricted Stock Unit Award. In order to encourage Employee’s contribution to the successful performance of the Company, and in consideration of the covenants and promises of Employee herein contained, the Company hereby awards to Employee as of the date first written above (the “Date of Grant”), 100,000 Restricted Stock Units representing the right to receive 100,000 shares of Common Stock, subject to the conditions, restrictions and limitations set forth below (the “Restricted Stock Unit Award”). Employee hereby acknowledges and accepts such grant of Restricted Stock Units and agrees that he shall receive the shares of Common Stock covered thereby upon such terms and subject to such conditions, restrictions and limitations as set forth below. Employee also acknowledges and agrees that the grant of Restricted Stock Units has been made under the Company’s 2004 Incentive Compensation Plan and is subject to such Plan and to approval thereof by the Company’s stockholders at the 2004 Annual Meeting of Stockholders.

2.     Vesting.

       (a)     Subject to the termination of the Restricted Stock Unit Award pursuant to Paragraph 3, below, or the acceleration of the vesting of the Units covered pursuant to Paragraph 2(b), below, on the first, second and third Annual Vesting Dates (as hereinafter defined) following the Date of Grant, Employee shall become vested in twenty percent (20%), twenty percent (20%) and sixty percent (60%), respectively, of the total number of Units covered by this Restricted Stock Unit Award, and such Units shall become Vested Units (as hereinafter defined).

       (b)     Subject to the termination of the Restricted Stock Unit Award pursuant to the first sentence of Paragraph 3, below, in all other events, Employee shall become vested in all Units not yet vested under this Agreement, and such Units shall become Vested Units, no later than the earliest of (i) the third Annual Vesting Date following the Date of Grant, (ii) the Date of Termination (as hereinafter defined) upon Employee’s Disability (as hereinafter defined), death, termination of Employee’s employment by the Company without Cause (as hereinafter defined) or by Employee for Good Reason (as hereinafter defined) or (iii) upon the occurrence of a Change in Control.

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3.     Effect of Certain Events. In the event the 2004 Incentive Compensation Plan is not approved by the stockholders of the Company at the 2004 Annual Meeting of Stockholders (including any adjournment or continuation thereof), this Restricted Stock Unit Award and Employee’s right to receive shares hereunder shall terminate without payment of consideration by the Company to the Executive. If Employee’s employment with the Company is terminated by the Company for Cause or by Employee without Good Reason prior to the first date upon which all shares covered by the Restricted Stock Unit Award shall have become Vested Units pursuant to Paragraph 2, above, then the Restricted Stock Unit Award and Employee’s right to receive shares hereunder (other than as to Units which are Vested Units at the Date of Termination) shall terminate, without any payment of consideration by the Company to Employee, unless expressly determined otherwise by the Committee, in its sole discretion.

4.     Restrictions on Transfer. The Restricted Stock Unit Award granted hereunder to Employee may not be sold, assigned, transferred, pledged or otherwise encumbered, whether voluntarily or involuntarily, by operation of law or otherwise. No right or benefit under this Agreement shall be subject to transfer, anticipation, alienation, sale, assignment, pledge, encumbrance or charge, whether voluntary, involuntary, by operation of law or otherwise, and any attempt to transfer, anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void.

5.     Delivery of Shares.

       (a)     Except to the extent delivery has been deferred under an applicable deferred compensation plan of the Company, not less than thirty (30) days and not more than forty (40) days after each of the Annual Vesting Dates, the Company shall deliver to Employee one (1) share of Common Stock for each Unit which became a Vested Unit on the immediately preceding Annual Vesting Date.

       (b)     Within ten (10) days after the Units shall become Vested Units pursuant to Paragraph 2(b)(ii) or (iii), above, the Company shall deliver to Employee one (1) share of Common Stock for each Unit covered by the Restricted Stock Unit Award which has become a Vested Unit but only with respect to which a share of Common Stock has not yet been delivered.

       (c)     In the event shares of the Company’s Common Stock are uncertificated, such delivery may be evidenced by the appropriate book-entry by the transfer agent for the shares.

6.     Withholding Tax Requirements. Except to the extent delivery has been deferred under an applicable deferred compensation plan of the Company, prior to the date on which shares of Common Stock are to be delivered pursuant to Paragraph 5, above, the Company shall deliver to Employee a notice specifying such amounts as Employee is required to pay to satisfy applicable tax withholding requirements. In the event that the Company does not exercise its right to withhold shares of stock at the time of vesting to cover such tax withholding requirements, Employee hereby agrees that Employee shall either: (i) deliver to the Company by the due date specified in such notice a check equal to the amount set forth in such notice, or (ii) direct the Company to withhold, at the time of delivery of shares pursuant to Paragraph 5, above, an appropriate number of shares to satisfy the applicable tax withholding requirements (with such shares valued based on their Fair Market Value on the day the Company delivers the shares pursuant to Paragraph 5, above), or (iii) make other appropriate arrangements acceptable to or required by the Company to satisfy such tax withholding requirements. Failure by Employee to comply with the foregoing shall entitle the Committee, in its sole discretion, to authorize the retention of sufficient number of shares of Common Stock owned by Employee in order to satisfy such withholding requirements. Upon the payment of any dividend equivalents payable pursuant to Paragraph 10 hereof, Employee agrees that the Company shall be entitled to deduct therefrom such amounts as are necessary to satisfy applicable tax withholding requirements.

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7.     Sale and Issuance of Common Stock. Employee agrees that Employee shall not sell Award shares, and that the Company shall not be obligated to deliver any shares of Common Stock if counsel to the Company reasonably determines that such sale or delivery would violate any applicable law rule or regulation of any governmental authority or any applicable rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Common Stock is listed or quoted. In the event of any such restriction (other than one due to insider trading issues), the Company shall take all such action as may be necessary or appropriate to eliminate such restriction at the earliest practicable date. All Award Shares, when issued, shall be duly authorized and shall be (a) validly issued, fully paid and nonassessable, (b) registered for sale, and for resale, by Employee under federal and state securities laws and shall remain registered so long as the shares may not be freely sold in the absence of such registration and (c) listed, or otherwise qualified, for trading in the United States on each national securities exchange or national securities market system on which the Common Stock is listed or qualified.

8.     Limitation of Rights. Nothing contained in this Agreement, and no action of the Company with respect hereto, shall confer or be construed to confer on Employee any right to continue in the employment or service of the Company, or affect the right of the Company to terminate the employment or service of Employee at any time for any reason.

9.     Prerequisites to Benefits. Neither Employee nor any person claiming through Employee shall have any right or interest in the Units awarded hereunder, unless and until all of the terms, conditions and provisions of this Agreement which affect Employee or such other person shall have been complied with as specified herein.

10.     No Rights as a Stockholder Prior to Delivery; Payment of Dividend Equivalents; Adjustment. Employee shall not have any right, title or interest in, or be entitled to vote or receive distributions in respect of, or otherwise be considered the owner of, any of the shares of Common Stock covered by the Restricted Stock Unit Award, except to the extent that such shares are Award Shares. Notwithstanding the foregoing, upon the Units becoming Vested Units pursuant to Paragraph 2, above, Employee shall be entitled to receive a cash payment in an amount equal to each cash dividend the Company would have paid to Employee during the term of the Units as if Employee had been the owner of record of the shares of Common Stock covered by such Units on the record date for the payment of such dividend. In lieu of receiving such payment at the time of such Units becoming Vested Units, all or any portion of such payment may be deferred by Employee pursuant to an applicable deferred compensation plan with the approval of the Committee. The Restricted Stock Unit Award shall be subject to adjustment (including, without limitation, as to the number of shares of Common Stock covered by the Award) in accordance with the Plan.

11.     Certain Definitions. For purposes of this Agreement, the following definitions shall be applicable:

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        “Annual Vesting Date” shall mean February 11, 2005, February 11, 2006 and February 11, 2007.

        “Award Shares” shall mean shares of Common Stock covered by the Restricted Stock Unit Award which have been delivered pursuant to Paragraph 5, above.

        “Cause” shall have the same meaning as in the Employment Agreement.

        “Change in Control” shall have the same meaning as in the Employment Agreement.

        “Committee” means the Compensation Committee of the Board of Directors of the Company (or any successor or similar committee).

        “Common Stock” means the common stock, $.01 par value per share, of the Company.

        “Date of Termination” means the date upon which Employee’s employment with the Company is terminated pursuant to Section 6 of the Employment Agreement.

        “Disability” shall have the same meaning as in the Employment Agreement.

        “Employment Agreement” shall mean the Employment Agreement dated as of February 11, 2004, between the Company and Employee.

        “Fair Market Value” shall mean an amount equal to the closing price on the applicable date for sales of shares of Common Stock made and reported through the Nasdaq Stock Market or such national stock exchange on which the Common Stock may then be listed and which constitutes the principal market for the Common Stock, or, if no sales of Common Stock shall have been reported with respect to that date, on the next preceding date with respect to which sales were reported.

        “Good Reason” shall have the same meaning as ascribed to the term “Constructive Discharge” in the Employment Agreement.

        “Plan” shall mean the Company’s 2004 Incentive Compensation Plan.

        A “Unit” covered by the Restricted Stock Unit Award shall mean the right to receive, pursuant to the terms of this Agreement, a share of Common Stock, and any other amount or property payable with respect thereto, covered by the Restricted Stock Unit Award.

        “Vested Units” shall mean units corresponding to shares of Common Stock covered by the Restricted Stock Unit Award which at the time in question have become Vested Units pursuant to Paragraph 2 hereof.

12. Miscellaneous Provisions. For purposes of this Agreement, the following miscellaneous provisions shall be applicable:

(a) Successors.

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(i) This Agreement is personal to Employee and, except as otherwise provided in Paragraph 4 above, shall not be assignable by Employee otherwise than by will or the laws of descent and distribution, without the written consent of the Company. This Agreement shall inure to the benefit of and be enforceable by Employee’s legal representatives.

(ii) This Agreement shall inure to the benefit of and be binding upon Company and its successors. It shall not be assignable except in connection with the sale or other disposition of all or substantially all the assets or business of the Company.

(b) Notice. All notices and other communications relating to this Agreement shall be given as provided in Section 18 of the Employment Agreement.

(c) Severability. If any provision of this Agreement for any reason should be found by any court of competent jurisdiction to be invalid, illegal or unenforceable, in whole or in part, such declaration shall not affect the validity, legality or enforceability of any remaining provision or portion thereof, which remaining provision or portion thereof shall remain in full force and effect as if this Agreement had been adopted with the invalid, illegal or unenforceable provision or portion thereof eliminated.

(d) Headings. The headings, captions and arrangements utilized in this Agreement shall not be construed to limit or modify the terms or meaning of this Agreement.

(e) Arbitration; Equitable Relief. Any dispute or disagreement arising out of or relating to this Agreement shall be resolved by binding arbitration in accordance with Section 19 of the Employment Agreement. Notwithstanding the foregoing, either party shall be entitled to enforce the terms and provisions of this Agreement by an action for injunction and/or specific performance, and any such action may be brought in any federal or state court located in the county where the Company has its principal business headquarters.

(f) Governing Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Illinois without reference to conflict of laws principles. Subject to Paragraph 12(e), above, any action, suit or proceeding arising out of any claim against the Company pursuant to this Agreement shall be brought exclusively in the federal or state courts located in the state in which the Company has its principal business headquarters.

(g) Determinations by Committee. All references in this Agreement to determinations to be made by the Committee shall be deemed to include determinations by any person or persons to whom the Committee may delegate such authority in accordance with the rules adopted thereby.

(h) Entire Agreement; Amendment or Waiver. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may be amended, modified or changed only by a written instrument executed by Employee and the Company. No provision of this Agreement may be waived except by a writing executed and delivered by the party sought to be charged. Any such written waiver will be effective only with respect to the event or circumstance described therein and not with respect to any other event or circumstance, unless such waiver expressly provides to the contrary.

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(i) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Signatures delivered by facsimile shall be effective for all purposes.

        IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written by an officer of the Company and by Employee.

EMPLOYEE:	TELLABS, INC.:
Krish Prabhu	Name: Michael J. Birck
	Its:      Chairman of the Board

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EX-10.3

EXHIBIT 10.3

EMPLOYMENT AGREEMENT

(Chairman of the Board)

        THIS AGREEMENT, made and entered into as of February 12, 2004, by and between Michael J. Birck (the "Executive") and Tellabs, Inc., a Delaware corporation (the "Company");

        W I T N E S S E T H   T H A T:

        WHEREAS, the parties desire to enter into this Agreement pertaining to the continuing employment of the Executive by the Company as the Chairman of the Board;

        WHEREAS, this Agreement replaces and supersedes the employment agreement dated June 16, 2002, between the Executive and the Company;

        NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by the Executive and the Company as follows:

1. Employment. Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive as its Chairman of the Board of Directors during the Agreement Term (as defined below), with such additions or modifications thereto which are consistent with his authority, responsibilities and duties hereunder, as the Board of Directors of the Company (the “Board”) may, from time to time, in its discretion and after consultation with the Executive, adopt. The “Agreement Term” shall be the period beginning on February 12, 2004 (the “Effective Date”) and ending on the first anniversary of the Effective Date, subject to earlier termination as provided herein; provided, however, that the Agreement Term will be automatically extended by twelve months on the first anniversary of the Effective Date and on each anniversary thereof, unless one party to this Agreement provides written notice of non-renewal to the other party at least 30 days prior to the date of such automatic extension.

2. Performance of Duties. The Executive agrees that during his employment with the Company, he shall devote his full business time, energies and talents to serving as its Chairman of the Board of Directors and that he shall perform his duties faithfully and efficiently subject to the directions of the Board. Notwithstanding the foregoing provisions of this Section 2, the Executive may (i) serve as a director, trustee or officer or otherwise participate in not-for-profit educational, welfare, social, religious and civic organizations; (ii) after consultation with, and approval by, the Board, serve as a director of any for-profit business which does not compete with the Company or any of its subsidiaries or affiliates, and (iii) acquire passive investment interests in one or more entities; provided, that such activities described in clauses (i), (ii) and (iii) are not prohibited under the Company’s Integrity Policy and do not inhibit or interfere with the performance of the Executive’s duties under this Agreement.

3. Compensation. Subject to the terms of this Agreement, during the Agreement Term, while the Executive is employed by the Company, the Company shall compensate him for his services as follows:

(a) Base Salary. The Executive shall receive a Base Salary of $500,000 per annum payable in 26 bi-weekly installments. The Executive’s Base Salary shall be reviewed and subject to increase or decrease annually by the Board pursuant to its normal performance review policies for senior executives, with the first such review occurring in 2005.

(b) Annual Bonus. For each calendar year, the Executive shall be eligible to receive an Annual Bonus payment in accordance with the Company’s annual bonus plans as in effect from time to time. The target level for each Annual Bonus shall not be less than 50% of the Executive’s Base Salary for the year, provided that the Company achieves the applicable financial and strategic objectives established for the year. Commencing with calendar year 2004, such objectives will be established by the Compensation Committee of the Board, in consultation with the Executive and other senior officers.

(c) Employee Benefits, Fringe Benefits and Perquisites. The Executive shall be provided with employee benefits, fringe benefits and perquisites on a basis no less favorable than such benefits and perquisites are provided by the Company from time to time to the Company’s other senior executives. In the event of the Executive’s termination of employment with the Company for any reason other than termination by the Company for Cause, the Executive shall be entitled to reimbursement of tax and financial planning costs and an office and secretarial assistance on the same basis as provided during the Agreement Term through the tenth anniversary of the date of termination of employment.

(d) Expense Reimbursement. The Company will reimburse the Executive for all reasonable expenses incurred by him in the performance of his duties in accordance with the Company’s policies applicable to senior executives.

(e) Change in Control Benefits. Following the Effective Date, the Executive and the Company shall continue to be a party to the change of control agreement which the Company has entered into with Executive, it being understood that the Executive shall only receive whatever incremental payments or benefits are provided under such change of control agreement and that there shall be no duplication of payments or benefits under this Agreement and such change of control agreement.

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(f) Additional Payments. If any payments or benefits received or to be received by the Executive in connection with the Executive’s employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, or any person affiliated with the Company) (the “Payments”), will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (or any similar tax that may hereafter be imposed), the Company shall pay to the Executive prior to the time any such Excise Tax is payable, an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Payments and any federal, state and local income or other applicable tax and Excise Tax upon the payment provided for by this paragraph, shall be equal to the Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the Executive’s highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the Executive’s highest marginal rate of taxation in the state and locality of the Executive’s residence on the date on which the Excise Tax is determined, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The determination of whether the Payments are subject to the Excise Tax, and, if so, the Gross-Up Payment to be provided to the Executive and the time of the payment pursuant to this paragraph, shall be made by independent public accountants not then regularly retained by the Company, in consultation with tax counsel selected by them and acceptable to the Executive. The Company shall provide the Executive with sufficient tax and compensation data to enable the Executive or his tax advisor to verify such computations and shall reimburse the Executive for reasonable fees and expenses incurred with respect thereto. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, the Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by the Executive) plus interest on the amount of such repayment from the date the Gross-Up Payment was initially made to the date of repayment at the rate provided in Section 1274(b)(2)(B) of the Code (the “Applicable Rate”). In the event that the Excise Tax is determined by the Internal Revenue Service or by such independent public accountants to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties, fines or additions to tax payable with respect to such excess) at the time that the amount of such excess is finally determined. Any payment to be made under this paragraph shall be payable within five (5) days of the determination of the accountants that such a payment is required hereunder.

4. Indemnification. The Company agrees that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that he is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive’s alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent legally permitted or authorized by the Company’s certificate of incorporation or bylaws or resolutions of the Company’s Board of Directors or, if greater, by the laws of the State of Delaware, against all cost, expense, liability and loss (including, without limitation, attorneys’ fees, judgments, fines, ERISA excise taxes or other liabilities or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director, member, employee or agent of the Company or other entity, with respect to acts or omissions which occurred prior to his cessation of employment with the Company, and shall inure to the benefit of the Executive’s heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 calendar days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses.

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5. Termination of Employment. Upon termination of the Executive’s employment for any reason, the Executive or, in the event of death, the Executive’s estate shall be entitled to the Executive’s Base Salary prorated through the date of termination. Any Annual Bonus awarded to the Executive for a prior award period, but not yet paid to the Executive, and any employee benefits to which the Executive is entitled by reason of his employment shall be paid to the Executive or his estate at such time as is provided by the terms of the applicable Company plan or policy. If the Executive’s employment is terminated during the Agreement Term, the Executive’s right to additional payments and benefits under this Agreement for periods after his date of termination shall be determined in accordance with the following provisions of this Section 5.

(a) Death or Disability. If the Executive’s employment is terminated by reason of death or by reason of the Executive’s Disability, the Executive, or, in the event of his death, his estate, shall be entitled to a prompt cash payment of a prorated Annual Bonus for the year in which such termination occurs, based on the target Annual Bonus for such year. The Executive or the Company shall be entitled to terminate the Executive’s employment because of the Executive’s Disability during the Agreement Term. “Disability” means that the Executive is disabled within the meaning of the Company’s long-term disability policy or, if there is no such policy in effect, that (i) the Executive has been substantially unable, for 120 business days within a period of 180 consecutive business days, to perform the Executive’s duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and reasonably acceptable to the Executive or the Executive’s legal representative, has determined that the Executive is disabled. A termination of the Executive’s employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Time”), unless the Executive returns to full-time performance of the Executive’s duties before the Disability Effective Time.

(b) Termination for Cause or Voluntary Resignation. If the Executive’s employment is terminated by the Company for Cause or if the Executive voluntarily resigns from the employ of the Company, other than pursuant to a Constructive Discharge, all payments and benefits to which the Executive would otherwise be entitled under this Agreement shall immediately cease, except as otherwise specifically provided above in this Section 5 with respect to his prorated Base Salary through the date of termination, his Annual Bonus, if any, awarded for a prior award period but not yet paid and his previously earned employee benefits. For purposes of this Agreement, the term “Cause” shall mean:

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(i) The Executive is convicted of a felony or any crime involving moral turpitude, dishonesty, fraud, theft or financial impropriety; or

(ii) A reasonable determination by a vote of directors comprising two-thirds of the entire Board, after giving the Executive notice and an opportunity to be heard, that,

(A) Executive has willfully and continuously failed to perform substantially his duties as contemplated by Section 2 above (other than such failure resulting from incapacity due to physical or mental illness), after a written demand for corrected performance is delivered to Executive by the Board which specifically identifies the manners in which the Board believes the Executive has not substantially performed his duties, or

(B) the Executive has engaged in gross neglect or gross misconduct, or

(C) the Executive has knowingly violated a material requirement of the Company’s Integrity Policy, code of conduct, the Sarbanes Oxley Act of 2002 or other material provision of federal securities law.

(c) Termination Without Cause. If the Company terminates the Executive without Cause, the Executive shall be entitled to a prompt lump sum cash payment equal to the Base Salary and Annual Bonus to which he would otherwise would have been entitled if he had remained in the employ of the Company through the last day of the Term of this Agreement. For purposes of the preceding sentence, the Annual Bonus component shall be based upon the target bonus for the year of termination and shall include a prorated bonus for the partial year ending on the last day of the Agreement Term.

(d) Resignation for Constructive Discharge. The Executive’s voluntary resignation for Constructive Discharge shall be treated for all purposes of this Agreement as a termination by the Company without Cause. For purposes of this Agreement, “Constructive Discharge” shall mean the occurrence of any of the following circumstances:

(i) A reduction by the Company in the Executive’s Base Salary or Annual Bonus target to an amount that is less than required under Section 3 above;

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(ii) The removal of the Executive from the position of Chairman of the Board of Directors or the failure of the Executive to be nominated or reelected to the Company’s Board of Directors;

(iii) Any action by the Company which results in significant diminution in the Executive’s authority, power, responsibilities or duties from those contemplated by Sections 1 and 2 above, or the assignment to Executive without his written consent of any duties inconsistent with the Executive’s position and status as Chairman of the Board of Directors, as contemplated by Sections 1 and 2 above, which action or assignment continues after written notice thereof and a reasonable opportunity to cure of not less than fifteen (15) days has been given by Executive to the Company; or

(iv) Any other breach by the Company of any of its material obligations to the Executive under this Agreement, which breach continues after written notice thereof and a reasonable opportunity to cure of not less than thirty (30) days has been given by Executive to the Company.

(e) Change in Control. The term “Change in Control” of the Company means the first to occur of:

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

(ii) During any two consecutive years, individuals who at the beginning of such two-year period constitute the Board and any new director (except for a director designated by a person who has entered into an agreement with the 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;

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(iii) 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, (1) 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 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) (“Resulting Company”) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Company; (2) no person (as defined in Section 13(d) and 14(d) of the Exchange Act)(other than the Company, the Resulting Company or any employee benefit plan (or related trust) of the Company or such Resulting Company) beneficially owns, directly or indirectly, 20% or more of, respectively, the then combined voting power of the then outstanding voting securities of the Resulting Company except to the extent that such ownership resulted solely from ownership of securities of the Company prior to the Business Combination; and (3) at least a majority of the members of the board of directors of the Resulting Company 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;

(iv) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company; or

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

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

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

6. No Mitigation; No Offset. In the event of any termination of employment, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain.

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7. Confidential Information. The Executive agrees that, during his employment by the Company and at all times thereafter, he shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries or affiliates, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or during his consultation with the Company after his termination of employment, and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). Except in the good faith performance of his duties for the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it.

8. Protective Covenants. For a period of two years following the termination of Executive’s employment for any reason, the Executive shall not, without the written consent of the Board, directly or indirectly,

(a) engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business which is in direct competition with the Company or of any of its subsidiaries in providing data, voice or video transport, switching/routing, network access system and/or voice quality enhancement solutions to service providers or end users;

(b) hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring; or

(c) solicit, entice, persuade or induce any person or entity doing business with the Company and its subsidiaries or affiliates, to terminate such relationship or to refrain from extending or renewing the same.

Nothing in subparagraph (a) above, will prohibit the Executive from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle the Executive to no more than one percent of the total outstanding votes entitled to be cast by security holders of such business in matters on which such security holders are entitled to vote.

9. Remedies. The Executive agrees that the restrictions set forth in Sections 7 and 8 hereof are reasonably and necessary to protect the legal interests of the Company. The Executive further agrees that the Company shall be entitled to injunctive relief in the event of any actual or threatened breach of such restrictions.

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10. Assignability, Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law.

11. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. So long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof except that in the event of the Executive’s Disability so as to render him incapable of such action, his legal representative may be substituted for purposes of such amendment.

12. Applicable Law. The provisions of this Agreement shall be construed in accordance with the internal laws of the State of Illinois, without regard to the conflict of law provisions of any state.

13. Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified).

14. Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party of any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues.

15. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice):

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      to the Company:

                Tellabs, Inc.
                One Tellabs Center
                1415 W. Diehl Road
                Naperville, Illinois 60563
                Attention: General Counsel

        or to the Executive:

                Michael J. Birck
                One Tellabs Center
                1415 W. Diehl Road
                Naperville, Illinois 60563

Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. Such notices, demands, claims and other communications shall be deemed given in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; or in the case of certified or registered U.S. mail, five days after deposit in the U.S. mail; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received.

16. Arbitration of Disputes and Reimbursement of Legal Costs. Any dispute between the Company and the Executive, whether arising out of or relating to this Agreement, the breach thereof, or otherwise, shall be resolved by final and binding arbitration in the Chicago, Illinois metropolitan area administered by the American Arbitration Association (the “Association”) in accordance with its Commercial Arbitration Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration shall be held before a single arbitrator who shall be selected by the mutual agreement of the Company and the Executive, unless the parties are unable to agree on an arbitrator, in which case, the arbitrator will be selected under the procedures of the Association. The arbitrator shall be experienced in the resolution of disputes under employment agreements for CEOs of major corporations and shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including without limitation, the issuance of an injunction, and the parties hereby agree to the emergency procedures of the Association. However, either party may, without inconsistency with this arbitration provision, apply to any court having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Company and the Executive. In the event of any such proceeding, the losing party shall reimburse the prevailing party upon entry of a final award resolving the subject of the dispute for all reasonable legal expenses incurred, unless the arbitrator determines that to do so would be unjust. Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys’ fees and expenses) and shall share the fees of the Association equally.

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17. Survivorship. Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement.

18. Entire Agreement. Except as otherwise noted herein, this Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the parties relating to the subject matter hereof.

19. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

        IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Company has caused this Agreement to be executed in its name and on its behalf, and its corporate seal to be hereunto affixed, all as of the day and year first above written.

EXECUTIVE:	COMPANY:
	TELLABS, INC,. a Delaware
	corporation
	By:
Michael J. Birck	Krish A. Prabhu
	Its:    President and Chief Executive Officer
	ATTEST:
	James M. Sheehan
	Secretary

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EX-11

EXHIBIT 11

TELLABS, INC.
COMPUTATION OF PER SHARE EARNINGS

(In millions, except per share amounts)

	Three Months Ended
	4/2/04	3/28/03
Numerator:
Net earnings/(loss)	$       13.4	$      (42.9)
Denominator:
Denominator for basic earnings per share-
Weighted-average shares outstanding	415.2	412.3
Effect of dilutive securities:
Employee stock options and awards	5.7	-
Denominator for diluted earnings per share-
adjusted weighted-average shares outstanding
and assumed conversions	420.9	412.3
Net earnings/(loss) per share - Basic	$         0.03	$         (0.10)
Net earnings/(loss) per share - Diluted	$         0.03	$         (0.10)

Under GAAP, dilutive securities are not included in the computation of diluted earnings per share when a company is in a net loss position.

EX-31

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Krish Prabhu, certify that:

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

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

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

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

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

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

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

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

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

Dated: May 11, 2004

/s/ Krish Prabhu                     

Krish Prabhu

Chief Executive Officer

EX-31

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy J. Wiggins, certify that:

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

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

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

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

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

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

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

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

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

Dated: May 11, 2004

/s/ Timothy J. Wiggins                     

Timothy J. Wiggins

Chief Financial Officer

EX-32

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tellabs, Inc. (the “Company”) on Form 10-Q for the quarter ended April 2, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Krish Prabhu, the Chief Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Krish Prabhu           

Krish Prabhu

Chief Executive Officer

May 11, 2004

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tellabs, Inc. (the “Company”) on Form 10-Q for the quarter ended April 2, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy J. Wiggins, the Chief Financial Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Timothy J. Wiggins           

Timothy J. Wiggins

Chief Financial Officer

May 11, 2004

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.