10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2004

o 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 or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
One Tellabs Center, 1415 West Diehl Road, Naperville, Illinois	60563
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (630) 798-8800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

The approximate aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed as of July 2, 2004 was $3,234,000,000. (Solely for the purpose of calculating the preceding amount, all directors and executive officers of the Registrant are deemed to be affiliates.)

As of March 4, 2005, there were 447,668,511 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2004, are incorporated by reference into Parts I and II, and portions of the Registrant’s Proxy Statement dated March 17, 2005, are incorporated by reference into Part III.

TELLABS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3-12
Item 2.	Properties	13
Item 3.	Legal Proceedings	13-14
Item 4.	Submission of Matters to a Vote of Security Holders	14
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	15
Item 7.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	15
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	15-17
Item 8.	Financial Statements and Supplementary Data	18
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	18
Item 9A.	Controls and Procedures	18
Item 9B.	Other Information	18
PART III
Item 10.	Directors and Executive Officers of the Registrant	18
Item 11.	Executive Compensation	18
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	18
Item 13.	Certain Relationships and Related Transactions	18
Item 14.	Principal Accountant Fees and Services	18
PART IV
Item 15.	Exhibits and Financial Statement Schedules	19-21
	Signatures	22-23
	Schedule II – Valuation and Qualifying Accounts and Reserves	24
	Exhibit Index	25
Stock Purchase Agreement
Asset and Sale Agreement
Amended and Restated By-Laws
2004 Amendment to Advantage Plan
Forms of Stock Award Statement and Stock Award Agreement
1993 Stock Option/Stock Issuance Plan
Form of Stock Option Agreement
Form of Notice of Grant of Stock Option
Form of Stock Purchase Agreement
1996 Stock Incentive Plan
Form of Stock Option Agreement
Form of Automatic Stock Option Agreement
Form of Notice of Grant of Stock Option
Form of Notice of Grant of Non-Employee Director Automatic Stock Option
Form of Stock Issuance Agreement
Form of Addendum to Stock Option Agreement
Statement re: Computation of Per Share Earnings
Annual Report to Shareholders
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Section 302 Certification of CEO
Section 302 Certification of CFO
Section 906 Certification of CEO
Section 906 Certification of CFO
Forward-Looking Statements and Risks

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PART I

ITEM I. BUSINESS

Industry and technical terms used in this Form 10-K are described in the Glossary, which appears at the end of this Item 1.

Tellabs, Inc. was incorporated in 1975 as an Illinois corporation and was subsequently converted to a Delaware corporation in 1992. We design and market equipment to providers of telecommunications services worldwide. We also provide installation and professional services that support our product offerings.

Our products and services provide solutions for wireline services to business and residential customers, wireless services, and broadband data networking. We sell our products in the domestic and international marketplaces (under both the Tellabs name and trademarks and under private labels) through our field sales force and selected distributors. Our customer base includes incumbent local exchange carriers (ILECs) including regional Bell operating companies (RBOCs), independent telephone companies (ITCs), cellular and other wireless service companies, interexchange carriers (IXCs), local telephone administrations (PTTs-post telephone and telegraph administrations), original equipment manufacturers (OEMs), cable operators, alternate service providers, competitive local exchange carriers (CLECs), Internet service providers and system integrators.

The markets for our products have undergone dynamic change over the last few years. Following years of unprecedented growth in our industry, the demand for telecommunications equipment began a precipitous decline in early 2001. Deregulation had spawned hundreds of new competitive service providers, overcrowding the market. Expectations of unrelenting growth had pushed capital spending by telecommunications service providers to unsustainable levels. The result was industry overcapacity, excessive debt loads that led to a number of bankruptcies, restructurings and aggressive spending reductions by most of our customers. As a consequence, we experienced a 71% revenue decline over the period 2001 through 2003, and we incurred a net loss in each of those years. Some stability appeared in 2003 and continued into 2004, fueled in significant part by growing demand for mobile services. By having the right products, Tellabs was able to achieve revenue growth in each consecutive quarter of 2003 and revenue for all of 2004 grew by 26% (20% without Advanced Fibre Communications, Inc. (AFC) revenue) over the level of 2003.

As market conditions deteriorated, we took actions to match capacity and expenses with demand to restore profitability and renew growth. We closed portions of our manufacturing facilities in each of 2001 and 2002 and we reduced our workforce by more than half over the period 2001 to 2003. With fewer employees we were able to vacate a significant portion of the office space that we leased and owned in the United States, and we consolidated the majority of our then U.S.-based workforce into our headquarters facility in Naperville, Illinois. We also reviewed our product portfolio and cut-back or stopped development efforts on some products. At the end of 2003, we outsourced the majority of our remaining manufacturing operations to contract manufacturers.

As market conditions improved in 2003, Tellabs set a three-part strategy for achieving sustainable and profitable long-term growth: energize our core business, establish a presence in data and expand into adjacent markets. We made progress on these strategies in both 2003 and 2004.

In June 2003, we acquired Vivace Networks, Inc., a developer of flexible, high performance multi-service routers. This acquisition brought us two complementary data networking products that enable us to expand into the global service provider multi-service router market. We expect the market for these products to take time to develop as our customers determine optimal network configurations and the potential role for our products in their networks.

In February 2004, our board of directors appointed Krish Prabhu as CEO, president and director of Tellabs. Mr. Prabhu is a seasoned executive whose 24 years of telecommunications experience includes roles as chief operating officer of Alcatel Telecom and CEO of Alcatel USA. Michael Birck continues to serve as Tellabs Chairman.

In November 2004, we expanded into adjacent markets by acquiring AFC, a leading supplier of access products in North America. We believe this acquisition gives us a leadership position in the developing market for delivering residential voice, data and video services over fiber optic facilities. In addition, in December 2004, we acquired Vinci Systems Inc. (Vinci), a privately held developer of Optical Networking Terminals (ONTs) for Fiber to the Premise (FTTP) access systems. We expect this acquisition to accelerate our ability to deliver cost-reduced and feature-enhanced components of the FTTP solution we acquired with AFC.

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We expect capital spending by our customers to be up in North America and stable internationally in 2005. On a global basis, wireless carriers will continue to build out next-generation networks to deliver new, data-oriented services. In North America, we expect the ILECs to upgrade the access portion of their networks with fiber technology as a means to deliver broadband services to their customers. We also expect that customers will begin to accelerate spending on broadband data infrastructure equipment globally. We have products either currently available or in development to take advantage of these opportunities.

During 2004 we re-categorized our product offerings into four areas to better reflect our business dynamics: transport, managed access, voice quality enhancement and broadband data. In December 2004, we added a fifth product category, access, to incorporate the access products we obtained through our acquisitions of AFC and Vinci.

TRANSPORT SYSTEMS

Optical networking both increases the capacity and optimizes the usage of the fiber in a network, enabling service providers to carry more of their customers’ voice, data and video signals over the same infrastructure. Optical networking relies on wavelengths and fibers to move massive amounts of voice, video and data traffic. A wavelength can carry this traffic from an optical carrier OC-3 or synchronous transfer mode (STM)-1 (up to two thousand simultaneous phone conversations or Internet connections) up to OC-768 or STM-256 using SONET/SDH standards, or from a 10 megabit/second to a 10 gigabit/second Ethernet data stream. A fiber can carry anywhere from one to 160 wavelengths, depending on the type of equipment used to terminate the fiber.

Our transport systems are designed to help service providers manage optical bandwidth. These transmission systems are designed to meet or exceed domestic and international industry standards. Product offerings include the Tellabs® 5000 series of digital-cross connect systems, the Tellabs® 5500NGX (formerly the Tellabs® 6400) series of transport products, the Tellabs® 6500 transport switch and the Tellabs® 7100 series of optical transport systems.

A digital cross-connect system is a high-speed data channel switch that connects transmission paths based on network needs, rather than call-by-call. Digital cross-connect systems manage and route network traffic and combine, consolidate and segregate signals to maximize efficiency. They also provide a centralized point of control for such things as network performance monitoring and testing, as well as transformation of traffic payload format. The Tellabs 5000 series of digital cross-connect systems operate under software control and are typically used to build and control the narrowband and wideband transmission infrastructure of telecommunication service providers, and have evolved to integrate Layer 2 Ethernet transmission as well. These products augment the ability of service providers to provide current, emerging and future wireline and wireless services to business and residential customers given the ubiquity of their presence in the network as well as the continued importance of the narrowband and wideband layers.

Telecommunication managers utilize the digital cross-connect systems to generate revenue and to reduce cycle time while minimizing capital and operating expense. Key applications include centralized and remote testing of transmission facilities, grooming of voice, data, and video signals, automated provisioning of new services and restoration of failed facilities.

The Tellabs 5000 series of digital cross-connect systems vary in switching rate and facility interface speed. The Tellabs® 5300 line of narrowband cross-connect systems is the highest density narrowband system on the market with the ability to satisfy small cross-connect application requirements. More than 1,000 Tellabs 5300 systems have been implemented in wireless/mobile networks. Our flagship Tellabs® 5500 digital cross-connect system is one of the industry’s highest capacity wideband (T1-speed granularity) digital cross-connects. The system efficiently grooms voice and data traffic over a SONET-based network. More than 4,200 Tellabs 5500 systems have been deployed in a variety of networks including local telephone, long distance, wireless, private and emerging data networks predominantly in the United States. With its scalability and carrier-class architecture, the Tellabs 5500 system helps service providers reduce equipment and maintenance costs while maximizing network profitability. Further evolution of this product line will incorporate both Ethernet transport capabilities as well as integrated voice-quality enhancement technology from the Tellabs® 3000 product line.

The Tellabs 5500NGX product line also is designed for use in optical networks. The Tellabs 5500NGX transport switch increases network utilization efficiency by integrating cross-connect technology, add-drop multiplexing (ADM) and data switching.

The Tellabs 6500 transport switch is a broadband transport platform that performs ADM and cross-connections at higher speeds than the Tellabs 5500 series products. The Tellabs 6500 system’s redundant, carrier-class architecture ensures reliability during operation and service continuity during system expansion.

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The Tellabs 7100 optical transport system is designed for use in the metro optical networking market, to enable service providers to deliver high-speed wavelength services, helping to alleviate bandwidth bottlenecks. The system accomplishes this capability by utilizing dense wavelength-division multiplexing (DWDM) technology to increase the capacity of a network. DWDM is the process of increasing the amount of traffic a single fiber can carry by carrying simultaneous data streams over different wavelengths. The Tellabs 7100 system utilizes DWDM to increase an individual fiber’s capacity up to 32 times and enables end-to-end fiber and light-path management.

Transport systems products accounted for approximately 48%, 43%, and 44% of revenue for 2004, 2003 and 2002, respectively.

MANAGED ACCESS SYSTEMS

Our managed access and transport systems are used to deliver wireless and business services. These products include the Tellabs® 8100 series and Tellabs® 6300 series of managed access and transport systems. Also included in this category is the Tellabs® 2300 cable telephony distribution system. The 8100 and 6300 systems are designed to accommodate ETSI (European Telecommunications Standards Institute) interface standards not generally used in North America. The 2300 product can be used anywhere in the world.

The Tellabs 8100 series of managed access systems is designed for the connectivity services segment of the overall Europe, Middle East, Africa, Asia Pacific and Latin America business services market, which includes business-class Internet connectivity and managed data networks for enterprises and service providers. The Tellabs 8100 managed access system is also a leading mobile transmission system, used primarily for cell site aggregation and backhaul. It is currently deployed in more than 400 networks around the world, providing intelligent transport for mobile services and multi-service platforms for a broad range of business services. Additionally, the Tellabs 8100 network manager provides full-featured network management and real-time control over the Tellabs 8100 and Tellabs 6300 network elements.

The Tellabs 6300 series includes edge nodes (the Tellabs® 6310 and the Tellabs® 6320 product lines); the Tellabs® 6330 core node; the Tellabs® 6340 switch node, a next-generation multi-service provisioning platform (MSPP) that meets carriers’ needs for new high-speed data solutions; and the Tellabs® 6350 transport switch, a multipurpose platform offering faster services, including high-capacity 4/4/1 cross-connection suited for various data, voice and leased line applications, and offers interfaces such as Gigabit Ethernet and integrated DWDM. It also provides the ability to apply IP/MPLS labels to the constituent traffic for multiservice network integration and traffic engineering. One key application for this platform is to provide SDH capacity extensions to embedded Tellabs 8100 networks, facilitated by the fully integrated management capabilities. The Tellabs 6370 optical transport system is an ETSI-based DWDM platform, which enables operators to reduce operational costs and simplify network planning. It provides multi-wavelength optical add/drop, integrated SDH interfaces, and open transponder interfaces that support Gigabit Ethernet, ESCON, ATM and IP applications. Additionally, the Tellabs 6300 network manager integrates the full range of Tellabs third-generation Ethernet, SDH, and DWDM network elements.

The Tellabs® 2300 cable telephony distribution system is a multiple services delivery system that enables cable television providers, alternate access carriers and competitive access providers to build flexible communication networks that support the integrated delivery of video and circuit-switched voice and data services.

Managed access systems products accounted for approximately 27%, 34% and 35% of revenue in 2004, 2003 and 2002, respectively.

VOICE-QUALITY ENHANCEMENT PRODUCTS

Our voice-quality enhancement systems consist primarily of the Tellabs 3000 family of broadband and narrowband echo cancellers and Tellabs voice-quality enhancement solutions. These products enable service providers to improve voice quality in wireless, long distance, and private communications networks. The Tellabs 3000 series of echo cancellers operate in a variety of network environments to ensure that a subscriber’s phone call is echo-free and removes other voice impairments. Wireless operators have been able to directly attribute revenue accretion to this higher quality service; it also holds promise for more advanced services like voice over IP (VoIP).

In addition to standalone echo canceller systems, Tellabs provides integrated echo cancellation and voice quality-enhancement products to the manufacturers of telecommunications products worldwide, who integrate these solutions into third-party systems such as voice switches.

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More than 300 customers in 70 countries rely on Tellabs echo canceller and VQE solutions. Voice-quality enhancement products accounted for approximately 7% of revenue in each of 2004, 2003 and 2002.

BROADBAND DATA SYSTEMS

The Tellabs® 8800 series of multi-service routers (MSRs) enables carriers to leverage existing infrastructure to seamlessly and cost-effectively integrate Frame Relay, ATM, Ethernet, and IP data networks onto a converged MPLS infrastructure. These capabilities afford operators the ability to leverage their existing services while enabling new ones, and to have full service interoperability while honoring the specific service demands of each individual customer. The series includes the Tellabs® 8820, the Tellabs® 8840 and Tellabs® 8860 MSRs, which are unique in their ability to traverse IP routing, Ethernet switching, and ATM/Frame Relay service interworking.

The Tellabs® 8600 managed edge system is a new IP/MPLS based platform with advanced service management tools. It is optimized for use as an aggregation platform for next-generation wireless services and holds particular advantages for existing Tellabs 8100 and Tellabs 6300 users given the full management integration with these platforms.

Broadband data systems products accounted for approximately 1% of revenue in both 2004 and 2003. These products were not available for sale in 2002.

ACCESS PRODUCTS

Tellabs’ access portfolio includes the Tellabs® 1000 Multi-service Access series, the Tellabs® 1100 Multi-service Access series, and the Tellabs® 1600 Fiber to the Premise Optical Networking Terminal series. These products enable carriers to deliver the “triple play” of bundled voice, video and high-speed Internet/data services over copper and/or fiber-based networks. The Tellabs® 1000 series can be configured as a digital loop carrier (DLC), a digital subscriber loop access multiplexer (DSLAM), or a passive optical network (PON)-based Fiber to the Premise (FTTP) solution. The Tellabs 1100 series can be configured as a DLC, or a remote DSLAM in a Fiber to the Curb (FTTC) architecture. Finally, the Tellabs 1600 series are the remote terminal devices located at the premise in an FTTP architecture. These devices are used in conjunction with the Tellabs 1000 series.

Access products, which were included in our results of operations beginning in December 2004, accounted for approximately 4% of revenue in 2004. These products were not available for sale until December of 2004.

SERVICES

Tellabs generates revenue from the services and solutions that support its product portfolio. The global service organization provides customers with high quality technical and administrative product support. This group focuses on meeting the expanding needs of our global customer base with a wide range of services, such as network deployment, traffic management, support services, professional services and training.

Tellabs’ network deployment services enable our specialists to be a single point of contact for the customers, focusing on program management, engineering, material procurement, installation labor and supervision, and acceptance testing.

Traffic management services include our network modernization program, which includes software tools and processes designed to support network upgrades and the transfer of live telecommunications traffic, and our element provisioning program, which gives service providers the ability to accelerate their time-to-market by up to 50 percent.

Support services offer network service providers a wide range of options for technical assistance, system maintenance, system performance improvement and skills enhancement.

Our professional services group offers a variety of tailored programs to meet all phases of a network life cycle including operations integration services, highly customizable solutions designed for specific customer needs that enhance the overall effectiveness of operations; and management systems integration services, which help network service providers improve their operations by extending the capability and performance of our network management systems.

We provide Tellabs product warranties for periods ranging from one to 10 years for the repair or replacement of modules and systems because of defective material or as may otherwise be required under a specific customer contract. We have a replacement service that is used to provide the customer with needed module replacements in response to a time-critical service outage.

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Our services group offers a variety of professional and consultative services, including program management, network planning and enhanced product support. These innovative service offerings are designed to augment our basic services and provide value-added benefits to our customers.

Services accounted for approximately 13%, 15% and 14% of revenue in 2004, 2003 and 2002, respectively.

COMPETITION

Our products and services are sold in global markets where competition is intense and is based on the following key factors: price, performance, product features, delivery, reliability, breadth of product line, relationships with customers and responsiveness to their needs, customer-oriented planning, and emerging technology from new entrants.

Tellabs’ competition comes primarily from telecommunications and data networking infrastructure vendors that include a small number of large and vertically integrated companies with substantially greater technical resources, sales and marketing capacities, and established relationships with incumbent carriers. Tellabs’ competition also includes several smaller and early-stage companies that compete directly or indirectly with our offerings or that are developing and deploying advanced technology that could offer advantages over our solutions.

SALES ORGANIZATION

Our global sales group includes direct sales personnel and sales support personnel located throughout the United States, Canada, Latin America, Europe, the Middle East, Africa, and Asia Pacific. Our North America sales organization (United States and Canada) is structured by customer segment (e.g., ILECs, wireless), while internationally, the sales organizations are structured to support activities on a regional basis: Latin America, EMEA (Europe, Middle East, Africa) and Asia Pacific.

We generate revenue through our direct sales organization and selected distributors. We have arrangements with a number of distributors of telecommunications equipment, both in North America and internationally, some of whom maintain inventories of our products to facilitate prompt delivery. These distributors provide information on our products through their catalogs and through trade show demonstrations. Our field sales force also provides technical support to our distributors. In 2004, revenue generated through our direct sales organizations and selected distributors was as follows:

	Direct Sales			Distributors
North America		88	%		12	%
International		77	%		23	%
Consolidated		84	%		16	%

CUSTOMERS

Revenue from customers within North America accounted for approximately 66%, 61%, and 70%, of consolidated revenue in 2004, 2003 and 2002, respectively. Revenue from international customers accounted for approximately 34%, 39%, and 30%, of consolidated revenue in 2004, 2003 and 2002, respectively. The largest single customer group is ILECs, which includes BellSouth, Qwest Communications, SBC and Verizon. Revenue from ILECs accounted for approximately 40%, 37% and 36% of consolidated revenue in 2004, 2003 and 2002, respectively.

In 2004, revenue from Verizon (including Verizon Wireless) accounted for 27% of consolidated revenue. In 2003, revenue from Verizon (including Verizon Wireless) accounted for 21% of consolidated revenue. In 2002, revenue from Verizon (including Verizon Wireless) and AT&T (including then existing entities of AT&T Wireless and AT&T Broadband) accounted for approximately 17% and 11% of consolidated revenue, respectively. No other customer in 2004, 2003 or 2002 accounted for more than 10% of consolidated revenue.

BACKLOG

At fiscal years ending December 31, 2004, and January 2, 2004, total product and service backlogs were approximately $301 million and $169 million, respectively. Part of this backlog is due to our acquisition of AFC in November of

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2004. All of the December 31, 2004 backlog is expected to be shipped in 2005. We consider backlog to be an indicator, but not the sole predictor, of future revenue.

RESEARCH AND DEVELOPMENT

Tellabs believes that the enhancement of existing products and the development of new products are vital to our long-term success. As of December 31, 2004, research and development employees totaled 1,718, representing approximately 42% of our total workforce. We conduct research and development at our facilities in Naperville, Illinois; Ashburn, Virginia; Vienna, Virginia; San Jose, California; Petaluma, California; Bedford and Richardson, Texas; Miramar, Florida; Ballerup, Denmark; and Espoo and Oulu, Finland. In addition to our internal efforts to develop new products, we undertake research and development-oriented acquisitions and product-oriented alliances in order to allow us access to technology that is important to the future of our customers. Research and development expenses were $250.3 million in 2004, $286.1 million in 2003, and $335.2 million in 2002.

MANUFACTURING

We have outsourced our printed circuit board assembly manufacturing operations to contract manufacturers. We outsourced our printed circuit board assembly manufacturing operations in North America, located in Bolingbrook, Illinois, in the fourth quarter of 2003. We then outsourced our international printed circuit board assembly manufacturing operations, located in Espoo, Finland, in January, 2004. We are active in the order, configuration, and system assembly operations for our products. We currently have four sites where this activity is performed. These are located in Bedford, Texas; Petaluma, California; Bolingbrook, Illinois; and Espoo, Finland. We currently perform repair and return on products in all facilities with the exception of our Bolingbrook, Illinois facility.

We handle and dispose of any hazardous waste material from our manufacturing activities in compliance with all Federal, State and local provisions. The cost of complying with environmental regulations has not had a material impact on capital expenditures, earnings or our competitive position.

Our products contain components that are generally available from multiple suppliers, as well as components of proprietary design that are currently sourced from a single supplier. In some cases, long lead times would be required to develop alternative sources for proprietary components. If supplies of components become limited, such as has occurred on occasion in the past, or if a supplier of a proprietary component was unable to meet Tellabs’ requirements, the resulting shortages could result in production delays that may adversely affect our business.

EMPLOYEES

At December 31, 2004, we had 4,125 employees. Approximately 1,389 individuals were employed in the sales, sales support, customer service and marketing areas; 1,718 in research and product development, and 1,018 in support activities. We consider our employee relations to be good. We are not a party to any collective bargaining agreement.

INTELLECTUAL PROPERTY

We have various trade and service marks, both registered and unregistered, in the United States and in numerous foreign countries (collectively, “Marks”). All of these Marks are important because they differentiate our products and services within the industry through brand name recognition. We are not aware of any factor that would affect our ability to utilize any of our major Marks.

We believe that our patents and other intellectual property rights are important to our business and we currently hold U.S. and foreign patents. We have also developed certain proprietary hardware designs, software programs and other works in which we own various intellectual property rights, including rights under copyright and trade secret laws.

Through various licensing arrangements we grant certain rights to our intellectual property and receive certain rights to intellectual property of others. We expect to maintain current licensing arrangements and to secure licensing arrangements in the future, as needed and to the extent available on reasonable terms and conditions, to support continued development and marketing of our products. Some of these licensing arrangements require or may require the payment of royalties, and the amount of these payments may depend upon various factors, including but not limited to: the structure of royalty payments, offsetting considerations, if any, and the degree of use of the licensed technology in any of our products or otherwise.

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BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION

We manage our business in one business segment. Information with respect to our revenue by product group, revenue by country and net long-lived assets by country for the fiscal years ended December 31, 2004, January 2, 2004, and December 27, 2002, is set forth in Note 13 to our consolidated financial statements in our 2004 Annual Report included herein as Exhibit 13, and is incorporated herein by reference.

HOW TO OBTAIN OUR SEC REPORTS

We file annual, quarterly and special reports, proxy statements and other information with the SEC. These filings are available to the public at the SEC’s website at www.sec.gov. No information from this web page is incorporated herein by reference.

Our website is located at www.tellabs.com. Copies of our most recent annual stockholder report and proxy statement are available directly on this website free of charge as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website includes direct links to the SEC’s website for our annual and quarterly filings.

Copies of our annual, quarterly and current reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto, are available on our website free of charge and will be provided either electronically or in paper form free of charge upon request.

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GLOSSARY OF TECHNICAL TERMS

2G Wireless — Digital wireless networks that carry voice and low-speed data.

2.5G Wireless — 2G wireless networks that can be upgraded to carry digital voice and high speed data traffic in the future.

3G Wireless — Wireless networks built for digital voice and high-speed data.

Access — Equipment that provides a connection between end-customer locations and service provider central offices.

ADM (Add/Drop Multiplexing) - The ability to extract and insert lower-rate signals from a high-rate multiplexed signal without demultiplexing the signal.

ATM (Asynchronous transfer mode) — High speed transmission technology. A high-bandwidth, low-delay, packet-like switching and multiplexing technique.

Backbone - The main high capacity paths within a communications network.

Back Haul - A traffic management technique used to reduce the cost of multiplexing and demultiplexing.

Bandwidth — The carrying capacity of a communications channel.

Broadband — A high-bandwidth fiber optic, coaxial or hybrid line with more capacity than a standard voice-grade phone line, capable of carrying numerous voice, data and video channels at once.

Circuit — A connection between two points on a communications network.

Connectivity — Network capability that enables different devices to communicate with each other.

Core - The central glass element of a fiber optic cable through which the light is transmitted.

Data — Typically, network traffic other than voice. Increasingly, voice is encoded and transported as data.

Digital — Digital systems transport information in the binary 1s and 0s format, like computer code, to improve clarity and quality.

Digital cross-connect system — A specialized high-speed data channel switch, which connects transmission paths based on network needs (rather than call by call). Digital cross-connects manage and route network traffic, and combine, consolidate and segregate signals to maximize efficiency.

Digial Loop Carrier - This is a system that derives multiple channels, typically voice grade, from a single four-wire distribution cable running from a central office to a remote site.

DSL (Digital Subscriber Line) -A high-speed Internet connection to a home or business delivered over copper.

DSLAM (Digital Subscriber Line Acess Multiplexer) - A DSLAM serves as a point of interface between a number of subscriber premises and the carrier network.

DWDM – A fiber amplifier that allows more wavelengths to be multiplexed onto a single fiber.

Echo canceler – A device or system that reduces or eliminates echoes in voice transmission systems.

ESCON (Enterprise Systems Connectivity) - A high speed fiber optic channel for linking IBM mainframe processors to disk drives and other mainframes

Ethernet — A data network standard to connect computers, printers, workstations, terminals and servers.

Ethernet-over-SDH/Ethernet-over-SONET — Industry standards that enable Ethernet data traffic to be easily carried over SDH or SONET networks.

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ETSI – Stands for “European Telecommunications Standard Institute” and whose purpose is to coordinate the development of telecommunications systems within Europe.

Fiber to the Premise, Curb or Neighborhood (FTTx) — Fiber optic cable deployed directly to homes and neighborhoods to deliver broadband communications services.

Fiber optic cable — High-capacity cable that transmits communications along a glass fiber using laser light.

Frame relay — Data-oriented switching interface standard that transmits bursts of data over Wide Area Networks (WANs).

Gigabit Ethernet — A high-speed, standardized data format used to implement wide-area data networks.

Grooming - Consolidating or segregating traffic for efficiency.

HDTV (High Definition Television) — A television standard that delivers better quality picture and sound.

Internet — The world’s largest decentralized network of computers and network servers.

Intranet — A private computer network based on Internet protocols.

IP (Internet protocol) — Common name given to a set of rules that enable cooperating computers to share information across a network.

IPTV (Internet Protocol Television) — Technology that enables video and other entertainment services over two-way broadband networks.

Layer 2 - This is a part of the communications process that is concerned with procedures and protocols for operating the communication lines including the detection and correction of message errors.

Multiplexing - To transmit two or more signals over a single channel.

Multi-Protocol Label Switching (MPLS) — A packet switching standard that assigns multiple traffic types within a data stream levels of priority to implement Quality of Service (QoS).

Multi-service — Transportation of a variety of communications services at once (e.g., ATM, Ethernet or IP).

Network — A system of equipment and connections for the transmission of signals that carry voice, data and/or video.

NG or Next Generation - This term is used to describe emerging technologies.

Node - A point of connection into a network.

Optical Network Terminal (ONT) — A device that closes an optical circuit at a residence, business or neighborhood.

Optical transmission — A technology that transmits signals as light over fiber optic cable.

Packet — Data organized into a certain format for transmission over a communications network.

PON (Passive Optical Network) - A fiber optic network without active electronics. PON technology allows a fiber optic network to be built without the costly, active electronics found in all other types of networks.

Provisioning - The act of supplying telecommunications service to a user including all associated transmission, wiring and equipment.

Quality of Service (QoS) — Measurement of the integrity of traffic moving across a network, especially important for real-time transmissions such as voice, financial transactions or video services.

SDH (Synchronous Digital Hierarchy) — Transport format for transmitting high-speed digital information over fiber optic facilities outside of North America, comparable to SONET.

11

Service Level Agreement (SLA) — An agreement between an end user and a service provider that establishes metrics for Quality of Service (QoS) and measures the service provided to ensure the agreement is met.

SONET (Synchronous Optical NETwork) — Transport format for sending high-speed digital signals through fiber optics in North America, comparable to SDH.

Switch — A device that establishes and routes communications paths.

T1 - A digital transmission link with a speed of 1,544,000 bits per second.

Transport — The process of moving voice, data or video across communications networks.

VPN (Virtual Private Network) — A connection that enables businesses to securely transmit their own voice, data and/or video traffic over a public network (e.g., owned by a phone company or Internet provider) at a lower cost than a dedicated private network.

VoD (Video on Demand) — A service that enables end users to watch any video program at any time.

VoIP (Voice over Internet Protocol) — The transmission of voice traffic over data or Internet links.

Voice-quality enhancement — A technique that isolates and filters out unwanted signals and sounds such as echo and background noise to improve sound quality.

Wireless — Mobile networks that use radio rather than cables.

Wireline — Networks that use cables rather than radio.

12

ITEM 2. PROPERTIES

We own an 850,000-square foot corporate headquarters and research and development facility on 55 acres of land in Naperville, Illinois, approximately 35 miles west of Chicago and a 154,000-square foot operations and research and development facility, located on approximately 12 acres in Espoo, Finland. Also on this land is a 90,000-square foot operations facility. We also own two office buildings in Espoo, totaling 89,000 square feet, which contain research and development and administrative functions.

During 2004, we sold 19.1 acres of land with three buildings totaling 220,000 square feet in Lisle, Illinois. We also sold a vacant, 124,000-square foot manufacturing facility on 76 acres of land in Round Rock, Texas, a vacant 545,000-square foot research and development and manufacturing facility on 50 acres of land in Bolingbrook, Illinois, and 5 acres of vacant land in Ashburn, Virginia. Additionally, we sold a 182,000-square foot operations building on 12 acres of land, in Bolingbrook, Illinois, and associated with the sale of that building, entered into a short-term lease for 94,000-square feet of that same building. In December 2004, we sold a 222,000-square foot research and development facility in Ballerup, Denmark. As of the end of 2004, we had one location classified as “held for sale”: a 42,000-square foot office facility in Espoo, Finland.

Significant facilities leased by us, all for research and development, include: a 73,000-square foot facility in Ashburn, Virginia; a 53,000-square foot facility in San Jose, California; and a 28,000-square foot facility in Oulu, Finland.

Through acquisitions in 2004, we added leased properties in the U.S. We added a 141,000-square foot administrative and research and development facility and a 186,000-square foot operations facility, both in Petaluma, California. Additionally, we added research and development facilities in Miramar, Florida, Richardson, Texas; and Vienna, Virginia; that total 76,000-square feet. We also added a 166,000-square foot operations and research and development facility in Bedford, Texas.

In addition to these facilities, we lease five sales offices in the United States, one sales office in Canada and one sales office in Mexico. Internationally, we lease various sales offices in twenty-three countries outside North America, including some acquired in our acquisition of AFC.

We own substantially all of the equipment used in our business, other than that related to outsourced activities. We believe that our facilities are adequate and that suitable additional space and equipment will be available to accommodate expansion as needed.

ITEM 3. 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. The appeal was fully briefed, oral argument was heard on January 21, 2005 and the parties are awaiting a decision.

13

On June 1, 2004, a complaint was filed on behalf of a putative class of AFC stockholders against AFC, certain of its current officers and directors (“Individual Defendants”), and Tellabs, in the Court of Chancery in the State of Delaware in and for New Castle County. The complaint alleges that the Individual Defendants breached their fiduciary duties to AFC’s public stockholders by acting to cause or facilitate the merger of Tellabs and AFC for inadequate consideration, and that Tellabs acted to aid and abet the alleged breaches of fiduciary duty. In particular, plaintiff alleges that the merger consideration originally offered by Tellabs to AFC’s public stockholders prior to the amendment and restatement of the merger agreement is unfair and inadequate because, according to the plaintiff, “(a) the intrinsic value of the stock of AFC is materially in excess of the $21.24 per share being proposed, giving due consideration to the possibilities of growth and profitability of AFC in light of its business, earnings and earnings power, present and future; (b) the $21.24 per share price is inadequate and offers an inadequate premium to the public shareholders of AFC; and (c) the $21.24 per share price is not the result of any structured auction process by which AFC sought to obtain the best deal possible for its shareholders.” The plaintiff sought either to enjoin the merger or to rescind the transaction, in the event the merger is completed, and also asserts claims for unspecified compensatory and/or rescissory damages, and an award of costs, including attorneys’ fees. Tellabs believes that the claims against it are without merit and intends to vigorously defend itself in this action.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

FORWARD-LOOKING STATEMENTS

Except for historical information, the matters discussed or incorporated by reference in Part I of this report may include forward-looking statements made pursuant to the safe harbor provisions of 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” 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; manufacturing efficiencies; research and new product development; protection and access to intellectual property, patents and technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment 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 the Company’s filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.1 to this Form 10-K. 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. The foregoing discussion should be read in conjunction with the financial statements and related notes and management’s discussion and analysis included in our 2004 Annual Report included herein as Exhibit 13 and incorporated in this report by reference in Part II, Items 7 and 8.

14

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Tellabs’ common stock is listed on the Nasdaq National Market under the symbol “TLAB”. As of March 4, 2005, there were approximately 8,000 stockholders of record and 447,668,511 outstanding shares.

The section entitled “Common Stock Market Data” in our 2004 Annual Report included herein as Exhibit 13 is incorporated herein by reference. We have never paid cash dividends and do not anticipate paying a cash dividend in the foreseeable future.

We did not purchase or reacquire shares of our common stock during our fourth quarter of 2004. However, we have purchased approximately 16,500,000 shares of our common stock through March 4, 2005. See further discussion in Note 17 to our Annual Report included herein as Exhibit 13, and is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The five years of selected financial data is included in the 11-Year Summary of Selected Financial Data in our 2004 Annual Report included herein as Exhibit 13 is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The Management’s Discussion and Analysis of Results of Operations and Financial Condition in our 2004 Annual Report included herein as Exhibit 13 are incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investments in Marketable Securities
During the normal course of business, we invest a portion of our cash and cash equivalents in marketable securities. For a more detailed discussion of our investments for the fiscal years ended December 31, 2004, and January 2, 2004, please refer to Note 6 in our 2004 Annual Report included herein as Exhibit 13 and incorporated herein by reference.

Financial Instruments and Market Risk
We conduct business on a global basis in several major currencies and are subject to risks associated with fluctuating foreign exchange rates. In response to this, we developed a foreign currency exposure management policy with the objective of mitigating financial exposure to changing foreign exchange rates resulting from nonfunctional currency receivables and payables that are expected to be settled in one year or less. We utilize derivatives, primarily foreign currency forward contracts, to manage our foreign currency exposure. We do not engage in hedging specific individual transactions, but rather use derivatives to manage overall exposure levels for a specific currency. Gains and losses related to these derivatives are recorded to the Consolidated Statement of Operations each period.

We enter into derivative foreign exchange contracts only to the extent necessary to meet our overall goal of minimizing nonfunctional foreign currency exposures. We do not enter into hedging transactions for speculative purposes.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, all forward exchange contracts are recorded on the balance sheet at fair value. Forward foreign exchange contracts receivable are included in other current assets, while forward foreign exchange contracts payable are included as part of accrued liabilities in the Consolidated Balance Sheet. Changes in the fair value of these instruments are included in earnings, as part of other income and expense, in the current period. We had net gains of $14.4 million, $17.0 million, and $5.5 million on forward exchange contracts in 2004, 2003 and 2002, respectively. Derivative financial instruments involve elements of market and credit risk not recognized in the financial statements. The market risk that results from these instruments relates to changes in the foreign currency exchange rates, which is generally offset by movements in the value of the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of our derivative contracts. We do not believe there is a significant credit risk associated with our hedging activities because the counterparties are all large international financial institutions with high credit ratings. In addition, we also limit the aggregate notional amount of agreements entered into with any one financial institution in order to mitigate credit risk.

15

Our net foreign currency exposure is diversified among a broad number of currencies. The notional amounts reflected in the table that follows represent the U.S. dollar values of the agreed-upon amounts that will be delivered to a third party on the agreed-upon date:

			Notional Value of
	Weighted Average		Forward Contracts
(In millions)	Contract Rate		Maturing in 2005
Forward contracts at 12/31/04:
Forward contracts to sell foreign currencies for Euro:
United States dollar		1.2596	$	105.9
Other currencies				7.2
			$	113.1
Forward contracts to buy foreign currencies for Euro:
British pound		1.4231	$	5.8
Other currencies				2.7
			$	8.5
Forward contracts to sell foreign currencies for Danish kroner:
United States dollar		5.4524	$	8.9
Forward contracts to sell foreign currencies for British pound:
Euro		1.4162	$	16.3
Forward contracts to sell foreign currencies for U.S. dollar:
Mexican peso		11.2360	$	18.4
Other currencies				1.3
			$	19.7
Forward contracts to buy foreign currencies for U.S. dollar:
Canadian dollar		1.2162	$	12.3
Other currencies				1.8
			$	14.1
Forward contracts to buy foreign currencies for Thai baht:
United States dollar		39.0900	$	1.4
Total contracts outstanding at December 31, 2004:			$	182.0

			Notional Value of
	Weighted Average		Forward Contracts
(Dollars in millions)	Contract Rate		Maturing in 2004
Forward contracts at 1/2/04:
Forward contracts to sell foreign currencies for Euro:
United States dollar		1.2472	$	89.2
Other currencies				7.5
			$	96.7
Forward contracts to buy foreign currencies for Euro:
Swedish krone		9.1149	$	1.3
Forward contracts to sell foreign currencies for Danish kroner:
United States dollar		5.9845	$	5.8

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			Notional Value of
	Weighted Average		Forward Contracts
(Dollars in millions)	Contract Rate		Maturing in 2004
Forward contracts to sell foreign currencies for British pound:
Euro		1.4247	$	17.6
Forward contracts to buy foreign currencies for British pound:
United States dollar		1.7693	$	0.4
Forward contracts to buy foreign currencies for U.S. dollar:
Others		2.6255	$	3.9
Forward contracts to sell foreign currencies for U.S. dollar:
Canadian dollar		1.3153	$	34.5
Mexican peso		11.396		24.1
Other currencies				0.4
			$	59.0
Forward contracts to buy foreign currencies for Brazilian reis:
Euro		3.566	$	0.4
Forward contracts to sell foreign currencies for Canadian dollar
United States dollar		1.31515	$	36.7
Forward contracts to buy foreign currencies for Thai baht:
United States dollar		39.745	$	3.1
Total contracts outstanding at January 2, 2004:			$	224.9

     Consistent with our policy, we entered into most of the above contracts immediately prior to the respective year ends. Accordingly, the carrying value of such contracts at December 31, 2004 and January 2, 2004 approximates fair value.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and Notes, Report of Independent Registered Public Accounting Firm and Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting in our 2004 Annual Report included herein as Exhibit 13 are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) carried out an evaluation under their supervision and with the participation of our management, of the effectiveness of our disclosure controls and procedures and internal control over financial reporting. Based on that evaluation as noted above, the CEO and CFO have concluded that our disclosure controls and procedures are effective and there were no changes in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Our management report on internal control over financial reporting is set forth in our 2004 Annual Report included herein as Exhibit 13 and is incorporated herein by reference. In addition, the attestation report of Ernst and Young LLP, our independent registered public accounting firm, on management’s assessment of the effectiveness of our internal control over financial reporting and the effectiveness of our internal control over financial reporting is set forth in our 2004 Annual Report and is incorporated herein by reference.

ITEM 9B. OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required is incorporated herein by reference to the sections entitled “Election of Directors,” “Committees of the Board-Audit and Ethics Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement dated March 17, 2005, and the sections entitled “Officers” and “Code of Ethics, Certificate of Incorporation and Bylaws” in our 2004 Annual Report included herein as Exhibit 13 and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required is incorporated herein by reference to the sections entitled ‘Executive Compensation,’ “Director Compensation,” “Executive Compensation — Employment Agreements,” “Executive Compensation — Compensation Committee Interlocks and Insider Participation,” “Executive Compensation — Compensation Committee Report on Executive Compensation” and “Performance Graph” in our Proxy Statement dated March 17, 2005.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required is incorporated herein by reference to the sections entitled “Security Ownership of Management and Security Ownership of Certain Beneficial Owners” and “Equity Compensation Plan Table” in our Proxy Statement dated March 17, 2005.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required is incorporated herein by reference to the section entitled “Transactions with Executive Officers, Directors and Others” in our Proxy Statement dated March 17, 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required is incorporated herein by reference to the section entitled “Independent Auditor’s Fees and Services” in our Proxy Statement dated March 17, 2005.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements:

The following Consolidated Financial Statements of Tellabs, Inc., and Subsidiaries, included in the registrant’s 2004 Annual Report included herein as Exhibit 13, were previously incorporated by reference in Item 8:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets: December 31, 2004 and January 2, 2004

Consolidated Statements of Operations: Years ended December 31, 2004, January 2, 2004, and December 27, 2002

Consolidated Statements of Stockholders’ Equity: Years ended December 31, 2004, January 2, 2004, and December 27, 2002

Consolidated Statements of Cash Flows: Years ended December 31, 2004, January 2, 2004, and December 27, 2002

Notes to Consolidated Financial Statements

2. Financial Statement Schedule:

The following Consolidated Financial Statement Schedule of Tellabs, Inc., and Subsidiaries and related Report of Independent Registered Public Accounting Firm is included herein pursuant to Item 15(d):

Schedule II. Valuation and Qualifying Accounts and Reserves

Other schedules not included have been omitted because they are not applicable or the required information is shown in the consolidated Financial Statements or Notes thereto.

(b) Exhibits:

Exhibit	Description
Number
2.1	Agreement and Plan of Merger Among Tellabs, Inc., Orbit Merger Sub, Inc. and Ocular Networks, Inc. 13/
2.2	Agreement and plan of merger and reorganization by Tellabs, Inc., Vivace Networks, Inc. and Venice Acquisition Corp. 15/
2.3	Amendment to agreement and plan of merger and reorganization between Tellabs, Inc. and Vivace Networks, Inc. 15/
2.4	Agreement and Plan of Merger among Tellabs, Inc., Chardonnay Merger Corp. and Advanced Fibre Communications, Inc., 21/
2.5	Agreement and Plan of Merger, as amended and restated as of September 7, 2004, among Tellabs, Inc., Chardonnay Merger Corp. and Advanced Fibre Communications, Inc., 22/
2.6	Stock Purchase Agreement dated as of December 30, 2004, among Tellabs, Inc. and the Stockholders and Option holders of Vinci Systems, Inc.
2.7	Asset and Sale Agreement dated January 5, 2004, as amended, by and among Marconi Communications, Inc., Marconi Intellectual Property (Ringfence) Inc., Marconi Corporation plc, Advanced Fibre Communications, Inc. and Advanced Fibre Communications North America, Inc.
3.1	Restated Certificate of Incorporation and Amendments 21/
3.2	Amended and Restated By-Laws, as amended and restated on December 1, 2004
10.1	Tellabs Operations, Inc. Deferred Compensation Plan, as amended and its related trust, as amended 3/
10.2	Tellabs, Inc. Deferred Income Plan, as amended 14/
10.3	1984 Incentive Stock Option Plan, as amended and restated 1/
10.4	Amendment to Tellabs, Inc. 1984 Incentive Stock Option Plan (As Amended and Restated June 26, 1992) 9/
10.5	Amendment to the Coherent Communications Systems Corporation Amended and Restated Stock Option Plan 9/
10.6	1986 Non-Qualified Stock Option Plan, as amended and restated 1/
10.7	Amendment to Tellabs, Inc. 1986 Non-Qualified Stock Option Plan (As Amended and Restated June 26,

19

Exhibit	Description
Number
	1992) 9/
10.8	1987 Stock Option Plan for Non-Employee Corporate Directors, as amended and restated 1/
10.9	Amendment to Tellabs, Inc. 1987 Stock Option Plan for Non-Employee Corporate Directors (As Amended and Restated June 26, 1992) 9/
10.10	1989 Stock Option Plan, as amended and restated 1/
10.11	Amendment to Tellabs, Inc. 1989 Stock Option Plan (As Amended and Restated June 26, 1992) 9/
10.12	Employee Quality Stock Award Program 2/
10.13	1991 Stock Option Plan, as amended and restated 1/
10.14	Amendment to Tellabs, Inc. 1991 Stock Option Plan (As Amended and Restated June 26, 1992) 9/
10.15	Amendment to the Coherent Communications Systems Corporation Amended and Restated 1993 Equity Compensation Plan 9/
10.16	1994 Stock Option Plan 3/
10.17	Amendment to the Tellabs, Inc. 1994 Stock Option Plan 9/
10.18	Amendment to the Tellabs, Inc. 1997 Stock Option Plan 9/
10.19	1998 Stock Option Plan 5/
10.20	Amendment to the Tellabs, Inc. 1998 Stock Option Plan 9/
10.21	NetCore Systems, Inc. 1997 Stock Option Plan 6/
10.22	1999 Tellabs, Inc., Stock Bonus Plan 8/
10.23	SALIX Technologies, Inc. 1998 Omnibus Stock Plan and Option Agreement Dated as of December 1, 1997 7/
10.24	Amendment to the SALIX Technologies, Inc. Omnibus Stock Plan 9/
10.25	Employment Agreement – President and Chief Executive Officer 20/
10.26	Employment Agreement – Chairman of the Board 20/
10.27	Future Networks, Inc. Stock Incentive Plan 10/
10.28	Amendment to the Coherent Communications Systems Corporation 1993 Equity Compensation Plan 11/
10.29	Tellabs, Inc. 2001 Stock Option Plan 11/
10.30	Form of Executive Agreement for Corporate Officers 17/
10.31	Form of Executive Agreement for Senior Executives 17/
10.32	Ocular Networks, Inc. Amended and Restated 2000 Stock Incentive Plan 12/
10.33	Tellabs Advantage Plan, as amended and restated 19/
10.34	First Amendment to the Tellabs Advantage Plan 19/
10.35	Second Amendment to the Tellabs Advantage Plan 19/
10.36	Vivace Networks, Inc. 1999 Equity Incentive Plan, as amended 17/
10.37	Tellabs, Inc. 2004 Incentive Compensation Plan 18/
10.38	2004 Amendment to the Tellabs Advantage Plan
10.39	Forms of Stock Award Statement and Stock Award Agreement pertaining to Tellabs, Inc. 2004 Incentive Compensation Plan
10.40	Advanced Fibre Communication, Inc.’s 1993 Stock Option/ Stock Issuance Plan, as amended
10.41	Form of Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1993 Plan
10.42	Form of Notice of Grant of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1993 Plan
10.43	Form of Stock Purchase Agreement pertaining to the Advanced Fibre Communication, Inc. 1993 Plan
10.44	Advanced Fibre Communication, Inc.’s 1996 Stock Incentive Plan
10.45	Form of Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
10.46	Form of Automatic Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
10.47	Form of Notice of Grant of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
10.48	Form of Notice of Grant of Non-Employee Director Automatic Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan.
10.49	Form of Stock Issuance Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
10.50	Form of Addendum to Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
11	Statement re: Computation of per Share Earnings
13	Annual Report to Stockholders
21	Subsidiaries of Tellabs, Inc.
23	Consent of Independent Registered Public Accounting Firm
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
99.1	Forward-Looking Statements and Risks and Future Factors Impacting Tellabs

Exhibits 10.1 through 10.50 are management contracts or compensatory plans or arrangements required to be filed as an Exhibit to this Form 10-K pursuant to Item 15(c) hereof.

20

(c) Schedules: See Item 15(a)2 above.

1/ Incorporated by reference from Tellabs, Inc. Post-effective Amendment No. 1 on Form S-8 to Form S-4 filed on
or about June 29, 1992 (File No. 33-45788). 2/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended April 1, 1988 (File No. 0-9692).
3/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 31, 1993 (File No. 0-9692).
4/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 29, 1995 and Form 10-Q Quarterly Report for the quarter ended September 26, 1997. The Deferred Income Plan Amendment is incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 1, 1999 (File No. 0-9692).
5/ Incorporated by reference from Tellabs, Inc. Definitive Proxy Statement filed on or about March 16, 1998 (File No. 0-9692).
6/ Incorporated by reference from Tellabs, Inc. Post-Effective Amendment No. 1 on Form S-8 to Form S-4, filed on September 17, 1999 (File No. 33-83509).
7/ Incorporated by reference from Tellabs, Inc. Post-Effective Amendment No. 1 on Form S-8 to Form S-4, filed on March 13, 2000 (File No. 33-95135).
8/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 31, 1999 (File No. 0-9692).
9/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 30, 2000 (File No. 0-9692).
10/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on March 5, 2001 (File No. 333-56546).
11/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 30, 2001 (File No. 0-9692).
12/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on January 25, 2002 (File No. 333-81360).
13/ Incorporated by reference from Tellabs, Inc. Pre-Effective Amendment No. 1 to Form S-4, filed on August 5, 1999 (File No. 33-83509).
14/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 29, 2002 (File No. 0-9692).
15/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 27, 2003 (File No. 0-9692).
16/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 27, 2002 (File No. 0-9692).
17/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended September 26, 2003 (File No. 0-9692).
18/ Incorporated by reference from Tellabs, Inc. Definitive Proxy Statement filed March 19, 2004 (File No. 0-9692).
19/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 2, 2004 (File No. 09692).
20/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended April 2, 2004 (File No. 0-9692).
21/ Incorporated by reference from Tellabs, Inc. Form S-4 filed June 23, 2004 (File No. 333-116794).
22/ Incorporated by reference from Tellabs, Inc. amended S-4 filed September 20, 2004 (File No. 333-116794).

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 



March 14, 2005 TELLABS, INC.

By /s Krish A. Prabhu
Krish A. Prabhu
President, Chief Executive Officer and Director
(Principal Executive Officer)
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s Krish A. Prabhu Krish A. Prabhu President, Chief Executive Officer and Director (Principal Executive Officer)	March 14, 2005
/s Timothy J. Wiggins Timothy J. Wiggins Executive Vice President and Chief Financial Officer (Principal Financial Officer)	March 14, 2005
/s James A. Dite James A. Dite Vice President and Controller (Principal Accounting Officer)	March 14, 2005
/s Michael J. Birck Michael J. Birck Chairman and Director	March 14, 2005

22

/s Bo Hedfors Bo Hedfors Director	March 14, 2005
/s Mellody L. Hobson Mellody L. Hobson Director	March 14, 2005
/s Frank Ianna Frank Ianna Director	March 14, 2005
/s Frederick A. Krehbiel Frederick A. Krehbiel Director	March 14, 2005
/s Michael E. Lavin Michael E. Lavin Director	March 14, 2005
/s Stephanie Pace Marshall Stephanie Pace Marshall Director	March 14, 2005
/s William F. Souders William F. Souders Director	March 14, 2005
/s Jan H. Suwinski Jan H. Suwinski Director	March 14, 2005

23

TELLABS, INC. AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Three Years Ended December 31, 2004, January 2, 2004, and December 27, 2002

	Balance at	Net Additions
	Beginning	Charged to Costs			Balance at
(In Millions)	of Year	and Expenses	Deductions (A)	Acquisitions (B)	End of Year
2004
Accounts receivable returns & allowances	$5.4	$4.9	$0.2	$6.5	$16.6
2003
Accounts receivable returns & allowances	$19.0 (C)	$(0.7) (D)	$12.9	$0.0	$5.4
2002
Accounts receivable returns & allowances	$57.3	$(23.9) (D)	$14.4	$0.0	$19.0 (C)

NOTE:
(A) — Uncollectable accounts charged off.
(B) — This amount represents the acquisition of AFC in 2004.
(C)- $12.2 million allowance for current receivables (netted against Accounts Receivable) and $6.8 million allowance for long-term receivables (netted against Other Assets).
(D) — These amounts represent net reserve reversals.

		Net
	Balance at	Additions Charged
	Beginning	to Costs and			Balance at
(In Millions)	of Year	Expenses	Deductions (A)	Acquisitions (B)	End of Year
2004
Reserve for excess and obsolete inventory	$55.3	$16.0	$(29.6)	$36.0	$77.7
2003
Reserve for excess and obsolete inventory	$60.0	$38.2	$(42.9)	$0.0	$55.3
2002
Reserve for excess and obsolete inventory	$114.0	$83.8	$(137.8)	$0.0	$60.0

NOTE:
(A) – Inventory scrapped.
(B) – This amount represents the acquisition of AFC in 2004.

24

Exhibit Index

2.6	Stock Purchase Agreement dated as of December 30, 2004, among Tellabs, Inc. and the Stockholders and Option holders of Vinci Systems, Inc.
2.7	Asset and Sale Agreement dated January 5, 2004, as amended, by and among Marconi Communications, Inc., Marconi Intellectual Property (Ringfence) Inc., Marconi Corporation plc, Advanced Fibre Communications, Inc. and Advanced Fibre Communications North America, Inc.
3.2	Amended and Restated By-Laws, as amended and restated on December 1, 2004
10.38	2004 Amendment to the Tellabs Advantage Plan
10.39	Forms of Stock Award Statement and Stock Award Agreement pertaining to Tellabs, Inc. 2004 Incentive Compensation Plan
10.40	Advanced Fibre Communication, Inc.’s 1993 Stock Option/ Stock Issuance Plan, as amended
10.41	Form of Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1993 Plan
10.42	Form of Notice of Grant of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1993 Plan
10.43	Form of Stock Purchase Agreement pertaining to the Advanced Fibre Communication, Inc. 1993 Plan
10.44	Advanced Fibre Communication, Inc.’s 1996 Stock Incentive Plan
10.45	Form of Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
10.46	Form of Automatic Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
10.47	Form of Notice of Grant of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
10.48	Form of Notice of Grant of Non-Employee Director Automatic Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan.
10.49	Form of Stock Issuance Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
10.50	Form of Addendum to Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan
11	Statement re: Computation of per Share Earnings
13	Annual Report to Stockholders
21	Subsidiaries of Tellabs, Inc.
23	Consent of Independent Registered Public Accounting Firm
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
99.1	Forward-Looking Statements and Risks and Future Factors Impacting Tellabs

25

EX-2.6

Exhibit 2.6

Execution Version

STOCK PURCHASE AGREEMENT

Dated as of December 30, 2004

among

TELLABS, INC.,

THE STOCKHOLDERS

AND

THE OPTIONHOLDERS

STOCK PURCHASE AGREEMENT

TABLE OF CONTENTS

	Page
ARTICLE I PURCHASE AND SALE OF SHARES AND CANCELLATION OF OPTIONS		2
Section 1.1 Purchase and Sale of Shares and Cancellation of Options		2
Section 1.2 Closing Date		2
Section 1.3 Purchase Price		2
Section 1.4 Payment of the Purchase Price		3
Section 1.5 No Fractional Securities		7
Section 1.6 Buyer’s Additional Deliveries		7
Section 1.7 Sellers’ Deliveries		7
Section 1.8 Indemnity and Stock Escrows		9
Section 1.9 Further Assurances		10
Section 1.10 Escrow and Power of Attorney		10
Section 1.11 Withholding		10
Section 1.12 Agreed Tax Treatment		10
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS		11
Section 2.1 Organization of the Company		11
Section 2.2 Subsidiaries and Investments		11
Section 2.3 Capital Stock of the Company		11
Section 2.4 Title to Stock		11
Section 2.5 Authority of Sellers		12
Section 2.6 Financial Statements		13
Section 2.7 No Dividends; Absence of Certain Changes or Events		13
Section 2.8 No Undisclosed Liabilities		15
Section 2.9 Governmental Permits		16
Section 2.10 Taxes		16
Section 2.11 Actions, Proceedings and Violations		18
Section 2.12 Certain Agreements		18
Section 2.13 Employee Benefits		19
Section 2.14 Worker Safety and Environmental Laws		20
Section 2.15 Labor Matters		20
Section 2.16 Intellectual Property		21
Section 2.17 Availability of Assets and Legality of Use		28
Section 2.18 Real Property		28
Section 2.19 Real Property Leases		28
Section 2.20 Personal Property Leases		28
Section 2.21 Title to Assets		28
Section 2.22 Contracts		28
Section 2.23 Status of Contracts		29
Section 2.24 Insurance		30
Section 2.25 Brokers		30

i

	Page
Section 2.26 [Intentionally Omitted.]		30
Section 2.27 [Intentionally Omitted.]		30
Section 2.28 Depositaries; Powers of Attorney		30
Section 2.29 Absence of Certain Payments		30
Section 2.30 Transactions with Affiliates		31
Section 2.31 Securities Law Matters		31
Section 2.32 Product Warranty		32
Section 2.33 Books and Records		32
Section 2.34 Accounts Receivable		33
Section 2.35 Inventory		33
Section 2.36 Representations Complete		33
Section 2.37 Defined Liabilities		33
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER		33
Section 3.1 Organization of Buyer		34
Section 3.2 Authority of Buyer		34
Section 3.3 Capital Structure		34
Section 3.4 SEC Documents and Other Reports		35
Section 3.5 No Finder		35
Section 3.6 Issuance of Buyer Shares		35
Section 3.7 No Other Representations		35
ARTICLE IV ADDITIONAL AGREEMENTS		36
Section 4.1 Covenant Not to Compete or Solicit Business		36
Section 4.2 Tax Matters		37
Section 4.3 Use of Name		40
Section 4.4 Waiver		40
Section 4.5 Employee Benefit Plans		40
Section 4.6 Operation of the Company		40
Section 4.7 Acceleration of Performance Conditions		40
ARTICLE V INDEMNIFICATION		41
Section 5.1 Indemnification by Sellers		41
Section 5.2 Indemnification by Buyer		42
Section 5.3 Notice and Determination of Claims and Forfeiture Events		43
Section 5.4 Resolution of Conflicts; Arbitration		44
Section 5.5 Seller Representative		45
Section 5.6 [Intentionally Omitted.]		45
Section 5.7 Third Party Claims		45
Section 5.8 Subsequent Dispositions		46
Section 5.9 No Contribution		46
Section 5.10 Certain Conflicts		46
Section 5.11 Treatments of Payments		46
Section 5.12 Exclusive Remedies		46
Section 5.13 No Double Recovery		46
ARTICLE VI FORFEITURE EVENTS		47
Section 6.1 Notice And Determination Of Forfeiture Events		47
ARTICLE VII GENERAL PROVISIONS		48
Section 7.1 Survival		48

ii

	Page
Section 7.2 Confidential Nature of Information		49
Section 7.3 Governing Law; Venue		49
Section 7.4 Notices		49
Section 7.5 Successors and Assigns		50
Section 7.6 Access to Records after Closing		50
Section 7.7 Entire Agreement; Amendments		51
Section 7.8 Interpretation		51
Section 7.9 Waivers		51
Section 7.10 Expenses; Attorneys’ Fees		51
Section 7.11 Partial Invalidity		51
Section 7.12 Execution in Counterparts		52
Section 7.13 Definitions		52
Section 7.14 No Public Announcement		59
Section 7.15 Jurisdiction and Venue; Service of Process		59

iii

Annexes
Annex A	Shares
Annex B	Options
Exhibits
Exhibit A	Buyer Shares
Exhibit B	Opinion of Counsel for the Company and Special Counsel to Asghar Mostafa
Exhibit C	Release and Waiver
Exhibit D	Escrow Agreement
Exhibit E	Share Escrow Agreement and Power of Attorney
Exhibit F	Option Escrow Agreement and Power of Attorney
Exhibit G	Guarantee of Asghar Mostafa
Exhibit H	Proprietary Information and Inventions Agreement
Exhibit I	Bank Payoff Letter
Exhibit J	Note Payoff Letter

iv

STOCK PURCHASE AGREEMENT

          STOCK PURCHASE AGREEMENT, dated as of December 30, 2004, among Tellabs, Inc., a Delaware corporation (“Buyer”), on the one hand, and the Sellers (as hereinafter defined), on the other hand.

W I T N E S S E T H :

          WHEREAS, each of the parties set forth on Annex A hereto (collectively, the “Stockholders” and each, a “Stockholder”) is the record and beneficial owner of (i) the number of issued and outstanding shares of Class A Common Stock, $0.01 par value (the “Class A Shares”), of Vinci Systems, Inc., a Delaware corporation (the “Company”), and (ii) the number of issued and outstanding shares of Class B Common Stock, $0.01 par value (the “Class B Shares”), of the Company, in each case set forth opposite such Stockholder’s name on Annex A hereto (the Class A Shares and the Class B Shares being referred to collectively herein as the “Shares” and each as a “Share”);

          WHEREAS, the Shares owned by the Stockholders constitute all of the issued and outstanding shares of capital stock of the Company, which is engaged in the business of developing, manufacturing and distributing software and hardware used in the telecommunications industry (the “Business”);

          WHEREAS, each of the parties set forth on Annex B hereto (collectively, the “Optionholders” and each, an “Optionholder”) is the record and beneficial owner of the options (collectively, the “Options” and each, an “Option”) to purchase the number of Class B Shares set forth opposite such Optionholder’s name on Annex B;

          WHEREAS, the Stockholders desire to sell to Buyer, and Buyer desires to purchase from the Stockholders, all of such issued and outstanding Shares, all on the terms and subject to the conditions set forth herein;

          WHEREAS, the Stockholders and the Optionholders (collectively, the “Sellers”) and Buyer desire to provide for the cancellation and termination of all of the Options;

          WHEREAS, Asghar Mostafa owns all the limited liability company interests in Mostafa Group LLC, the principal stockholder of the Company; and

          WHEREAS, in order to induce Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, Asghar Mostafa hereby is agreeing to be bound by Section 4.1 and Article VII, and has delivered a personal guaranty in connection herewith.

          NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, it is hereby agreed among the Company, each of the Sellers and Buyer as follows:

ARTICLE I
PURCHASE AND SALE OF SHARES AND CANCELLATION OF OPTIONS

          Section 1.1 Purchase and Sale of Shares and Cancellation of Options. Upon the terms and subject to the conditions of this Agreement, on the Closing Date, (i) the Sellers shall sell, transfer, assign, convey and deliver to Buyer, and Buyer shall purchase from the Sellers, free and clear of all Encumbrances, an aggregate of 6,200,000 Class A Shares and an aggregate of 1,945,000 Class B Shares, in each case owned beneficially and of record by the Sellers, which shares constitute, and will constitute as of the Closing Date, all of the issued and outstanding shares of capital stock of the Company; and (ii) all Options shall be automatically canceled and terminated without further action by any party, which Options constitute, and will constitute as of the Closing Date, all of the issued and outstanding options for shares of the Company’s capital stock.

          Section 1.2 Closing Date. The purchase and sale of the Shares and the cancellation and termination of Options (the “Closing”) shall take place simultaneously with the execution and delivery hereof at 10:00 A.M., local time, on December 30, 2004, at the offices of Sidley Austin Brown & Wood LLP, 1501 K Street, N.W., Washington, D.C., or at such other place or at such other time as shall be agreed upon by Buyer and the Seller Representative (such date and time being hereinafter called the “Closing Date”).

          Section 1.3 Purchase Price.

          (a) The total purchase price for the Shares and the cancellation and termination of the Options (the “Purchase Price”) shall be equal to the following and shall be payable as and only to the extent provided in this Agreement and subject to the terms hereof, including the terms of Sections 1.4 and 1.5:

     (i) Twenty Five Million Dollars ($25,000,000) minus all Defined Liabilities (the “First Cash Payment”); plus

     (ii) 1,443,418 shares of Buyer Common Stock (the “Buyer Shares”), reduced for any fractional shares pursuant to Section 1.5 (the “Stock Payment”); plus

     (iii) Three Million Dollars ($3,000,000) (the “Second Cash Payment”); plus

     (iv) Six Million Dollars ($6,000,000) (the “Third Cash Payment”); plus

     (v) Four Million Dollars ($4,000,000) (the “Fourth Cash Payment”); plus

     (vi) Two Million Dollars ($2,000,000) (the “Fifth Cash Payment” and together with the First Cash Payment, the Second Cash Payment, the Third Cash Payment and the Fourth Cash Payment, the “Cash Payments” and each a “Cash Payment”). The Cash Payments excluding the First Cash Payment are hereinafter referred to as the “Subsequent Cash Payments.”

     (b) The Purchase Price shall be allocated among the Sellers as follows:

2

     (i) For each Share, the Per Share Cash Price plus the Per Share Stock Price; and

     (ii) For each Share subject to purchase under each Option canceled, terminated and relinquished hereby, (x) the Per Share Cash Price minus the exercise price per Share under such Option set forth on Annex B hereto, plus (y) the Per Share Stock Price.

     (c) As used herein, the following terms have the following meanings:

          “Base Share Cash Price” means the amounts resulting from dividing the Cash Payments by 9,060,000, the aggregate of the issued and outstanding Shares after the exercise of all Options.

          “Defined Liabilities” means all debt for borrowed money of the Company, (including principal and interest and any notes issued by the Company to Asghar Mostafa or any of his Affiliates (including Mostafa Venture Fund I, LLC)) and all amounts owing in respect of deferred compensation. Payments to be made by the Company after Closing to UBS Securities LLC pursuant to that certain letter agreement dated September 3, 2003 between the Company and UBS Securities LLC shall not be deemed Defined Liabilities.

          “Exercise Factor” means the amount resulting from dividing the aggregate exercise price of all Options, as set forth in Annex B, respectively, by 9,060,000.

          “Per Share Cash Price” means the Base Share Cash Price plus the Exercise Factor.

          “Per Share Stock Price” means the number of Buyer Shares resulting from dividing the Stock Payment by 9,060,000, the aggregate of the issued and outstanding Shares after the exercise of all Options.

          Section 1.4 Payment of the Purchase Price.

     (a) At Closing Buyer shall pay the First Cash Payment as follows:

     (i) Buyer shall pay the Sellers an amount equal to the First Cash Payment minus the Cash Escrow Amount (as defined below) by wire transfer of immediately available funds to the account specified by written instructions from the Seller Representative at least 5 days before the Closing Date (the “Payment Account”); and

     (ii) Buyer shall deposit with the Escrow Agent an amount equal to ten percent (10%) of the First Cash Payment (the “Cash Escrow Amount”), as set forth in Section 1.8.

          (b) At Closing Buyer shall pay the Stock Payment, reduced for any fractional shares in accordance with Section 1.5 hereof, by delivering to the Escrow Agent the Stock Payment, as set forth in Section 1.8, to be held in escrow and released in accordance with the

3

Escrow Agreement; provided that,

     (i) if at any time prior to June 30, 2006, (i) any Seller (other than Asghar Mostafa) ceases to be employed by the Company as a result of (x) a Voluntary Departure from the Company or (y) a termination for Cause by the Company, the portion of the Share Escrow Fund (as defined in the Escrow Agreement) credited to the subaccount of such Seller under the Escrow Agreement (including all Escrow Shares (as defined in the Escrow Agreement) and any cash resulting from the sale of any any Escrow Shares and any dividends and distributions in respect of such Escrow Shares, whether in cash, additional Buyer Shares or other property, received by the Escrow Agent, in each case credited to such subaccount) shall be forfeited by such Seller and shall immediately be returned to Buyer by the Escrow Agent.

     (ii) if at any time prior to June 30, 2006, (i) Asghar Mostafa ceases to be employed by the Company as a result of (x) a Voluntary Departure from the Company or (y) a termination for Cause by the Company, the entire Share Escrow Fund (including all Escrow Shares and any cash resulting from the sale of any Escrow Shares and any dividends and distributions in respect of all Escrow Shares, whether in cash, additional Buyer Shares or other property, received by the Escrow Agent) shall be forfeited by all the Sellers and shall immediately be returned to Buyer by the Escrow Agent.

     (iii) if at any time prior to June 30, 2006, (i) any two of Joseph Kralowetz, Douglas Ortega or Michael Giovannoni cease to be employed by the Company as a result of (x) a Voluntary Departure from the Company or (y) a termination for Cause by the Company the entire Share Escrow Fund (including all Escrow Shares and any cash resulting from the sale of any Escrow Shares and any dividends and distributions in respect of all Escrow Shares, whether in cash, additional Buyer Shares or other property, received by the Escrow Agent) shall be forfeited by all the Sellers and shall immediately be returned to Buyer by the Escrow Agent.

     (iv) if at any time prior to June 30, 2006, (i) more than 50% of the employees of the Company immediately prior to the Closing Date cease to be employed by the Company as a result of (x) a Voluntary Departure from the Company or (y) a termination for Cause by the Company, the entire Share Escrow Fund (including any and all Escrow Shares and cash resulting from the sale of any Escrow Shares and dividends and distributions in respect of all Escrow Shares, whether in cash, additional Buyer Shares or other property, received by the Escrow Agent) shall be forfeited by all the Sellers and shall immediately be returned to Buyer by the Escrow Agent.

     (v) The occurrence of the events giving rise to a forfeiture pursuant to clause (i) immediately above is referred to in this Agreement as an “Individual Forfeiture Event” and the occurrence of any of the events giving rise to any forfeiture pursuant to clauses (ii), (iii) or (iv) immediately above is referred to in this Agreement as a “Total Forfeiture Event.”

     The Purchase Price shall be deemed reduced by the value of the Escrow Shares and the amount of cash resulting from the sale of any Escrow Shares, in each case to the

4

extent forfeited pursuant hereto. The obligation of Buyer to make any Stock Payment pursuant to this Agreement shall not be affected by the death of any Seller.

          (c) Buyer shall pay the Sellers the Second Cash Payment by wire transfer of immediately available funds to the Payment Account no later than 10 days after the following is satisfied:

     (i) No later than February 28, 2005, the Company achieves a bill of materials (which bill of materials shall include manufacturing costs and a power solution that Verizon accepts as designed per the Buyer Product Specification Documents (PSD) for the 611 ONT (as defined below), R10.1, and ONT Power Specification) (the “BOM Expenses”) of $281 with respect to the 611 ONT (assuming production of 500,000 units) and Buyer is able to independently verify such BOM Expenses through its own supply chain. This target of $281 assumes that the Company will (x) use a Luminent triplexer with a cost of $55 and (y) have a conversion cost of $30 using Breconridge as a contract manufacturer. In the event that Buyer directs the Company to use an alternate triplexer or a different contract manufacturer, the $281 target will be adjusted to reflect any increase in cost dollar-for-dollar to the Company provided that the Company substantiates that it would have received the above $55 and $30 costs, respectively but for Buyer’s direction to the Company to use an alternative triplexer or a different contract manufacturer.

          (d) Buyer shall pay the Sellers the Third Cash Payment by wire transfer of immediately available funds to the Payment Account no later than 10 days after all of the following conditions are satisfied:

     (i) In the case of the Company’s 611 ONT SFH, including both its hardware and software components (the “611 ONT”):

          (A) No later than February 28, 2005, the 611 ONT is released to Buyer with (i) no critical issues and (ii) no major issues without acceptable workarounds, for validation in accordance with the current plan set forth in Schedule 1.4(c)(i); provided, that if Buyer does not release to the Company Release 9.2 1G, with full functionality as it relates to ONT function and interoperability, prior to January 31, 2005, such February 28, 2005 date and all subsequent dates provided for below in this clause (i) shall be extended by a period equal to the period between February 1, 2005 and the date the Buyer delivered to the Company said deliverable;

          (B) No later than April 15, 2005, the 611 ONT is delivered to the Verizon laboratory with (i) no critical issues and (ii) no major issues without acceptable workarounds for testing; provided, that if Buyer does not release to the Company Buyer’s OLT Release 9.2 1G by January 31, 2005 with full functionality as it relates to ONT function and interoperability such April 15, 2005 date and all subsequent dates provided for below in this clause (i) shall be extended by a period equal to the period between aforementioned Buyer deliverable dates and the date the Buyer delivered to the Company such functional OLT Release 9.2 1G;

5

          (C) No later than May 31, 2005, the Company has made all deliveries and taken all actions to cause the Verizon laboratory to formally approve the 611 ONT for use by Verizon; provided that in the event Verizon has not accepted Buyer’s OLT Release 9.2 1G by April 15, 2005, such May 31, 2005 date and all subsequent dates provided for below in this clause (i) shall be extended by a period equal to the period between April 16, 2005 and the date the Buyer’s OLT Release 9.2 1G has been accepted into the laboratory by Verizon; and

          (D) No later than June 30, 2005, as such date may be extended as set forth in this Section 1.4 , the Company demonstrates remotely from its laboratory to a remote Nortel 5200 or equivalent platform each of the following: (i) the 611 ONT’s hardware is able to support SIP based services; (ii) the 611 ONT is able to initiate and receive calls and implement supplementary services (such as call waiting) on all lines simultaneously; and (iii) the 611 ONT supports multiple analog lines and invokes the supplementary services through the use of hook-flash and digit events.

          (e) Buyer shall pay the Sellers the Fourth Cash Payment by wire transfer of immediately available funds to the Payment Account no later than 10 days after the following is satisfied:

     (i) No later than February 15, 2006, (y) the 612 ONT SFH shall be released for production and (z) the Company achieves a bill of materials with respect to the 612 ONT SFH having BOM Expenses of $210 (assuming production of 500,000 units) and Buyer is able to independently verify such BOM Expenses through its own supply chain. The 612 ONT shall have substantially the same functionality as the 611 ONT with all critical and major issues fixed as agreed to by the Buyer and the Company shall have implemented MoCA functionality, as defined by Verizon, on the 612 ONT if the Buyer determines that MoCA functionality is needed for Verizon. If MoCA functionality is added to the 612 ONT pursuant to Buyer’s request and the components needed for MoCA functionality are not available to the Company by September 30, 2005, then the February 15, 2006 date set forth above shall be extended by a period equal to the period between October 1, 2005 and the date of availability of components to the Company; and BOM Expenses may increase beyond the $210 target by the amount equal to the cost of those modifications and components needed solely for MoCA functionality if requested by Buyer.

          (f) Buyer shall pay the Sellers the Fifth Cash Payment by wire transfer of immediately available funds to the Payment Account no later than February 15, 2006 if the Company’s expenses other than for general and administrative expenses determined in accordance with Buyer’s practice (including for product development as contemplated hereby and to comply with the Company Agreements), do not exceed the $8.0 million in 2005 as set forth in Schedule 1.4(f).

Notwithstanding the foregoing, if any performance by the Company is delayed due to the action or failure to act by Verizon (unless such action or failure to act by Verizon is related to the 611 ONT or the 612 ONT in which case this provision shall have no effect as to such delay) (the

6

“Verizon Delay”), then any and all subsequent dates provided for above in items (A), (B) or (C) of clause (d)(i) above shall be extended by a period equal to the period of the Verizon Delay.

If any of the foregoing conditions for making a Subsequent Cash Payment is not satisfied by the date specified herein for such condition to be satisfied, as such date maybe extended in accordance with such foregoing conditions, the Sellers will cease to be entitled to such Subsequent Cash Payment and the Purchase Price will be reduced by such amount. The conditions for making the Subsequent Cash Payments are referred to in this Agreement as the “Performance Conditions” and the period for such performance provided for in this Section 1.4 is referred to in this Agreement as the “Performance Period.”

          Section 1.5 No Fractional Securities. No certificates or scrip representing fractional shares of Buyer Shares shall be issued as part of the Stock Payment. The number of Buyer Shares to be deposited at Closing by Buyer with the Escrow Agent is the aggregate of the number of Buyer Shares set forth opposite each Seller’s name on Exhibit A, which numbers have been rounded down to eliminate any fractional shares a Seller would have received hereunder otherwise.

          Section 1.6 Buyer’s Additional Deliveries. At Closing, Buyer shall deliver to the Sellers all of the following:

          (a) Copies of Buyer’s Certificate of Incorporation certified as of a recent date by the Secretary of State of the State of Delaware;

          (b) Certificate of good standing of Buyer issued as of a recent date by the Secretary of State of the State of Delaware;

          (c) Certificate of the secretary or an assistant secretary of Buyer, dated the Closing Date, in form and substance reasonably satisfactory to the Sellers, as to (i) no amendments to the Certificate of Incorporation of Buyer since a specified date; (ii) the By-laws of Buyer; (iii) the resolutions of the Board of Directors of Buyer authorizing the execution and performance of this Agreement and the contemplated transactions; and (iv) incumbency and signatures of the officers of Buyer executing this Agreement and any Buyer Ancillary Agreement;

          (d) the Escrow Agreement duly executed by Buyer; and

          (e) Evidence, in form and substance satisfactory to the Seller Representative, that all Defined Liabilities have been paid in full;

          Section 1.7 Sellers’ Deliveries. At Closing the Sellers shall deliver to Buyer all the following:

          (a) Copies of the Certificate of Incorporation of the Company certified as of a recent date by the Secretary of State of the State of Delaware;

          (b) Certificate of good standing of the Company issued as of a recent date by the Secretary of State of the State of Delaware;

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          (c) Certificate of the secretary or an assistant secretary of the Company dated the Closing Date, in form and substance reasonably satisfactory to Buyer, as to (i) no amendments to the Certificate of Incorporation of the Company since a specified date; and (ii) the By-laws of the Company;

          (d) A certificate or certificates for the Shares held by each Stockholder, duly endorsed by such Stockholder in blank or accompanied by stock powers duly executed by such Stockholder in blank, in each case, in form satisfactory to Buyer;

          (e) The agreements evidencing the Options;

          (f) Opinion of counsel for the Company and special counsel to Asghar Mostafa (individually and in his capacity as the Seller Representative) and Mostafa Group LLC, substantially in the form contained in Exhibit B;

          (g) Signed resignations, effective as of the Closing, of each of the officers and directors of the Company and any consultants of the Company specified by Buyer prior to the Closing;

          (h) A release and waiver, substantially in the form of Exhibit C, of any claim the Sellers or Asghar Mostafa (in his personal capacity and in his capacity as the Seller Representative) may have against the Company in respect of periods prior to the Closing;

          (i) All consents, waivers or approvals obtained by the Company with respect to the consummation of the transactions contemplated by this Agreement;

          (j) The Escrow Agreement duly executed by the Sellers and the Seller Representative;

          (k) A statement in accordance with Treasury Regulation Sections 1.1445-2(c)(3) and 1.897-2(h) certifying that the Company is not, and has not been, a “United States real property holding corporation” for purposes of Sections 897 and 1445 of the Code, and Buyer shall have no actual knowledge that such statement is false or receive a notice that the statement is false pursuant to Treasury Regulation Section 1.1445-4. In addition, the Company shall have delivered to Buyer on the Closing Date the notification to the IRS (as hereinafter defined), in accordance with the requirements pursuant to Treasury Regulation Section 1.897-(h)(2), of delivery of the statement referred to in the preceding sentence, signed by a responsible corporate officer of the Company. The Company acknowledges that Buyer may cause the Company to file such notification with the IRS (as hereinafter defined) on or after the Closing Date;

          (l) [Intentionally Omitted];

          (m) A Proprietary Information and Inventions Agreement duly executed by each of the Sellers;

          (n) Complete and signed IRS Form W-8 or W-9, whichever is appropriate, from each of the Sellers;

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          (o) Guarantee duly executed by Asghar Mostafa;

          (p) Duly executed Bank Payoff Letter;

          (q) Duly executed Note Payoff Letter; and

          (r) Resignations of each of the directors and officers of the Company sepcified by Buyer.

          Section 1.8 Indemnity and Stock Escrows.

          (a) On or prior to the Closing Date, the Sellers, the Seller Representative, Buyer and Computershare Trust Company, Inc., a Colorado trust company, as escrow agent (the “Escrow Agent”), shall enter into an Escrow Agreement, substantially in the form of Exhibit D (the “Escrow Agreement”), providing for the establishment of an escrow account (the “Escrow Account”) with the Escrow Agent (i) in the case of the Cash Escrow Amount, to secure the obligations of the Sellers to Buyer (and any Buyer Group Members) pursuant to Article V (it being understood, for the avoidance of doubt, that claims arising under Section 4.2 (relating to Taxes) shall be deemed to arise under Article V) and (ii) in the case of the Stock Payment, to hold such payment subject to forfeiture by the Sellers as provided in Section 1.4(b) and Article VI.

          (b) At the Closing, Buyer shall deposit in the Escrow Account so established the Cash Escrow Amount together with the Stock Payment to be held and subsequently disbursed in accordance with the terms, conditions and provisions of the Escrow Agreement. All dividends and distributions in respect of the Stock Payment, whether in cash, additional Buyer Shares or other property and any proceeds from the sale of any Escrow Shares, received by the Escrow Agent shall be held by the Escrow Agent as part of the Escrow Account and not distributed to the Seller except in accordance with the Escrow Agreement. The right of any Seller to receive any funds from the Cash Escrow Fund (as defined in the Escrow Agreement) shall be conditioned upon such funds not being otherwise distributed in accordance with the Escrow Agreement to indemnify or reimburse any Buyer Group Member for Losses or Expenses in accordance with Article V or to pay or reimburse the Escrow Agent for any fees and expenses that are to be deducted from the escrowed funds in accordance with the Escrow Agreement. The right of any Seller to receive any shares or funds from the Share Escrow Fund (as defined in the Escrow Agreement) shall be conditioned upon such shares or funds not being otherwise forfeited as provided in Section 1.4(b) and Article VI or used to pay or reimburse the Escrow Agent for any fees and expenses that are to be deducted from the escrowed funds in accordance with the Escrow Agreement. The fees and expenses of the Escrow Agent are to be borne one-half by Buyer and one-half by the Sellers.

          (c) Upon termination of the Escrow Agreement, any funds or shares remaining in the Escrow Account (after making adequate provision for any distributions to any Buyer Group Member, the Escrow Agent or the Seller Representative, as contemplated above) shall be distributed to the Seller Representative as provided in the Escrow Agreement.

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          Section 1.9 Further Assurances. The Sellers shall, at any time and from time to time on and after the Closing Date, upon request by Buyer and without further consideration, take or cause to be taken such actions and shall execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such transfers, conveyances and assurances as may be required or desirable to more effectively (i) convey, transfer, assign, deliver, assure and confirm to Buyer the Shares to be sold and transferred to Buyer hereunder, and for reducing to the possession of Buyer such shares or to the possession of the Company any of the Company’s assets or properties not in its possession at the Closing Date; and (ii) cancel and terminate the Options.

          Section 1.10 Escrow and Power of Attorney.

          (a) Simultaneously with the execution and delivery hereof, each Stockholder executed and delivered the Share Escrow Agreement and Power of Attorney in the form of Exhibit E hereto dated as of the date hereof (herein called, with respect to any such Stockholder, its “Share Escrow Agreement and Power of Attorney”), in each case with all appropriate blanks on the Designated Stockholder’s signature page thereof being completed, as the Designated Stockholder referred to therein, and, in connection therewith, delivered to Asghar Mostafa, as the Seller Representative thereunder, (i) this Agreement as duly executed by such Stockholder; (ii) certificates representing the number and type of Shares to be sold by such Stockholder hereunder; and (iii) the other agreements, instruments or documents referred to therein being delivered by such Stockholder to such Seller Representative.

          (b) Simultaneously with the execution and delivery hereof, each Optionholder executed and delivered the Option Escrow Agreement and Power of Attorney in the form of Exhibit F hereto (herein called, with respect to any Optionholder, its “Option Escrow Agreement and Power of Attorney”) with all appropriate blanks on the Designated Optionholder’s signature page thereof being completed, as the Designated Optionholder referred to therein, and, in connection therewith, delivered to Asghar Mostafa, as the Seller Representative thereunder, (i) this Agreement as duly executed by such Optionholder; and (ii) the other agreements, instruments or documents referred to therein being delivered by such Optionholder to such Seller Representative.

          Section 1.11 Withholding. From the amount to be paid to each Seller under Section 1.3 or the Escrow Agreement, there shall be deducted, withheld, reported and paid over to the IRS (as hereinafter defined) or other applicable governmental authority any Taxes imposed under applicable provisions of law.

          Section 1.12 Agreed Tax Treatment. The parties hereto agree that (i) the Per Share Cash Price plus the Per Share Stock Price delivered in respect of each Share pursuant to this Article I (as adjusted to take into account any Individual Forfeiture Event or Total Forfeiture Event) shall be treated for all Tax purposes as consideration paid for such Share (except to the extent properly treated as imputed interest for such purposes) and (ii) the Per Share Cash Price (minus the applicable exercise price) plus the Per Share Stock Price delivered in cancellation of each Option pursuant to this Article I (as adjusted to take into account any Individual Forfeiture Event or Total Forfeiture Event) shall be treated for all Tax purposes as compensation income paid to the holder of the Option being cancelled, in all cases subject to Section 5.11.

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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS

          As an inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, the Sellers, jointly and severally, represent and warrant to Buyer as follows:

          Section 2.1 Organization of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. The Company has no Subsidiaries. The Company is duly qualified to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified or licensed and in good standing would not have a Material Adverse Effect on the Company. The Company has delivered to Buyer true and complete copies of the Company’s Certificates of Incorporation and By-laws, as in effect on the date hereof, minute books and stock transfer records. All the officers and directors of the Company since December 31, 2003 are Sellers.

          Section 2.2 Subsidiaries and Investments. The Company does not, directly or indirectly, (a) own, of record or beneficially, any outstanding voting securities or other equity interests in any corporation, partnership, joint venture or other entity, (b) otherwise control any such corporation, partnership, joint venture or other entity or (c) have any obligation to make any capital contribution to, or otherwise provide assets or cash to any such corporation, partnership, joint venture or other entity. Each outstanding share of capital stock (or other voting security or equity equivalent, as the case may be) of the Company is duly authorized, validly issued, fully paid and nonassessable, and each such share (or other voting security or equity equivalent, as the case may be) is owned by the Company, free and clear of all Encumbrances.

          Section 2.3 Capital Stock of the Company. The authorized capital stock of the Company consists of (i) 7,000,000 Class A Shares, of which 6,200,000 shares are duly and validly issued and outstanding, fully paid and nonassessable and owned, beneficially and of record by the Stockholders listed on Annex A hereto as owning the same in the respective amounts indicated thereon; and (ii) 3,000,000 Class B Shares, of which (x) 1,945,000 shares are duly and validly issued and outstanding, fully paid and nonassessable and owned, beneficially and of record by the Stockholders listed on Annex A hereto as owning the same in the respective amounts indicated thereon and, (y) 915,000 Class B Shares are unissued but reserved for issuance upon the exercise of the Options held of record by the Optionholders as listed on Annex B hereto. None of such issued and outstanding shares or Options has been issued in violation of, or is subject to, any preemptive or subscription rights.

          Section 2.4 Title to Stock.

          (a) Each of the Stockholders is the sole lawful and beneficial owner of the Shares to be sold and delivered by such Seller to Buyer pursuant to this Agreement, free and

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clear of all Encumbrances, and the delivery of such shares to Buyer pursuant to this Agreement will transfer and convey good and marketable title thereto to Buyer, free and clear of all Encumbrances. Except for this Agreement, there are no agreements, arrangements, warrants, options, puts, calls, rights or other commitments, plans or understandings of any character relating to the issuance, sale, purchase, redemption, conversion, exchange, registration, voting or transfer of any shares of capital stock or other securities of the Company (including without limitation the Options). All voting rights in the Company are vested exclusively in the Class A Shares. Each Stockholder is a resident of (or, in the case of each Stockholder which is not an individual, its principal office is located in) the state or country indicated below its name on Annex A hereto, and such Stockholder’s residence (or, in such case, business address) is set forth below the Stockholder’s name on Annex A hereto.

          (b) The aggregate number of Options outstanding, the number of Options held by each Optionholder and the exercise price and period thereof is as set forth on Annex B, all of which Options are duly and validly issued and outstanding, owned beneficially and of record solely by the Optionholders as set forth in Annex B, free and clear of all Encumbrances. Effective on the Closing Date, the Options shall be duly and validly canceled and terminated and the Optionholders will not have any further rights thereunder, whether to purchase shares of capital stock of the Company or otherwise. The Optionholders will not exercise any Option prior to the Closing Date. The Options were issued pursuant to the Company’s 2003 Nonqualified Stock Option Plan (the “Stock Option Plan”). A true and complete copy of the Options and the Stock Option Plan has been delivered to Buyer. Each Optionholder is a resident of (or, in the case of each Optionholder which is not an individual, its principal office is located in) the state or country indicated below its name on Annex B hereto, and such Optionholder’s residence (or, in such case, business address) is set forth below the Optionholder’s name on Annex B hereto.

          (c) Neither the Company nor any of the Sellers has assigned any right of first refusal with respect to, or right to repurchase any, shares of the capital stock of the Company or, the Options (or any shares issuable upon the exercise thereof).

          Section 2.5 Authority of Sellers.

          (a) In the case of each Seller which is not a natural person, as indicated on Annex A hereto, such Seller is a duly and validly organized and existing corporation, partnership, limited liability company or other entity, as the case may be. Each of the Sellers has the full legal right, power, capacity and authority to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by the such Seller to Buyer pursuant hereto (collectively, such agreements and instruments of the Sellers being the “Seller Ancillary Agreements”) to consummate the transactions contemplated hereby and thereby (including the sale, transfer and delivery of such Sellers’ Shares to Buyer as herein provided and cancellation and termination of the Options ) and to comply with the terms, conditions and provisions hereof and thereof.

          (b) The execution, delivery and performance of this Agreement and the Seller Ancillary Agreements by the Sellers have been duly authorized and approved by all necessary corporate, partnership or other action on the part of the Sellers, as the case may be, and do not require any further authorization or consent of the Company, the Sellers or any other person.

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This Agreement constitutes and each Seller Ancillary Agreement, when duly executed and delivered by the Sellers and the other parties thereto, will constitute the legal, valid and binding agreement of the Sellers party thereto (and, in the case of the Share Escrow Agreement and Power of Attorney and the Option Escrow Agreement and Power of Attorney, a legal, valid and binding agreement and power of attorney) enforceable in accordance with their respective terms. Upon the execution and delivery by the Seller Representative (as hereinafter defined) of the Escrow Agreement, the Escrow Agreement will constitute the valid and binding obligation of the Seller Representative, enforceable against the Seller Representative, in accordance with its terms. The Seller Representative has the requisite power and authority to enter into the Escrow Agreement and to fulfill the terms thereof contemplated thereby.

          (c) Except as set forth in Schedule 2.5(c), none of the execution and delivery of this Agreement or of any of the Seller Ancillary Agreements, the consummation by the Sellers of any of the transactions contemplated hereby or thereby, and compliance by the Sellers with or fulfillment by the Sellers of the terms, conditions and provisions hereof or thereof will:

     (i) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon any of the assets or properties of the Sellers or of the Company under, the Certificate of Incorporation or By-laws of the Company, any note, instrument, agreement, mortgage, lease, license, franchise, Company Permit or judgment, order, award or decree to which any of the Sellers or the Company is a party or any of the assets or properties of any of the Sellers or the Company is subject or by which any of the Sellers or the Company is bound, or any statute, other law or regulatory provision affecting the Sellers or the Company or any of their respective assets or properties; or

     (ii) require the approval, consent, authorization or act of, or the making by any of the Sellers or the Company of any declaration, filing or registration with, any third party or any Governmental Body.

          Section 2.6 Financial Statements. Schedule 2.6 contains (i) the unaudited balance sheet (the “Balance Sheet”) of the Company as of December 31, 2003 (the “Balance Sheet Date”) and the related statements of income, stockholders’ equity and cash flows for the year ended December 31, 2003 (the “Annual Financial Statements”), and (ii) the unaudited balance sheet of the Company as of November 30, 2004 and the related statements of income, stockholders’ equity and cash flows for the eleven months then ended (the “Interim Financial Statements” and together with the Annual Financial Statements, the “Financial Statements”). The Financial Statements have been prepared in conformity with GAAP consistently applied and fairly present in all material respects the financial position of the Company at the dates of such balance sheets and the results of its operations and cash flows for the respective periods indicated (subject to any customary year-end adjustments which will not in the aggregate be material).

          Section 2.7 No Dividends; Absence of Certain Changes or Events.

          (a) The Company has never declared or made, or agreed to declare or make, any payment of dividends or distributions to its stockholders (and no record date with respect to

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any of the foregoing has occurred) or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock or other equity.

          (b) Since the Balance Sheet Date there has been:

     (i) no Material Adverse Change with respect to the Company; or

     (ii) no damage, destruction, loss or claim made or filed against the Company (whether or not covered by insurance) or condemnation or other taking which adversely affects the results of operations, assets, properties, condition (financial or otherwise) or business of the Company.

          (c) Since the Balance Sheet Date, the Company has conducted its business in all material respects only in the ordinary course and in conformity with past practice. Without limiting the generality of the foregoing, since the Balance Sheet Date, except as set forth in Schedule 2.7(c), the Company has not:

     (i) issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any option, warrant or other right to purchase, any of its capital stock or other equity interest or any security convertible into its capital stock or other equity;

     (ii) issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any of its bonds, notes or other debt securities;

     (iii) paid any material obligation or liability (absolute or contingent) other than current liabilities reflected on the Balance Sheet and current liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice;

     (iv) except in the ordinary course of business consistent with past practice, made or permitted any material amendment or termination of any Company Agreement;

     (v) undertaken or committed to undertake capital expenditures exceeding $100,000 for any single project or related series of projects or $250,000 in the aggregate;

     (vi) made charitable donations in excess of $10,000 in the aggregate;

     (vii) sold, leased (as lessor), transferred or otherwise disposed of (including any transfers from the Company, or mortgaged or pledged, or imposed or suffered to be imposed any Encumbrance on, any of the assets reflected on the Balance Sheet or any assets acquired by the Company after the Balance Sheet Date, except for inventory and minor amounts of personal property sold or otherwise disposed of for fair value in the ordinary course of its business consistent with past practice and except for (A) liens for taxes and other governmental charges and assessments which are not yet due and payable, (B) liens of landlords and liens of carriers, warehousemen, mechanics and materialmen and other like liens arising in the ordinary course of business for sums not yet due and payable and (C) other liens or imperfections on property which are not material in amount, do not interfere with, and are not violated by the consummation of the transactions contemplated by, this Agreement, and do not materially detract from the

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value or marketability of, or materially impair the existing use of, the property affected by such lien or imperfection (each, a “Permitted Encumbrance”);

     (viii) canceled any debts owed to or claims held by the Company (including the settlement of any claims or litigation) other than in the ordinary course of its business consistent with past practice;

     (ix) created, incurred or assumed, or agreed to create, incur or assume, any indebtedness for borrowed money or entered into, as lessee, any capitalized lease obligations;

     (x) accelerated or delayed collection of notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of its business consistent with past practice;

     (xi) delayed or accelerated payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of its business consistent with past practice;

     (xii) instituted any increase in any compensation payable to any employee, director or consultant of the Company or in any profit-sharing, bonus, incentive, deferred compensation, insurance, pension, retirement, medical, hospital, disability, welfare or other benefits made available to employees of the Company except, in case of employees other than directors or officers, salary increases in connection with annual or periodic compensation reviews in the ordinary course of business consistent with the Company’s past practice;

     (xiii) made any Tax election or settled or compromised any material federal, state, local or foreign income Tax liability;

     (xiv) prepared or filed any Tax Return (as hereinafter defined) inconsistent with past practice or, on any such Tax Return, taken any position, made any election, or adopted any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods;

     (xv) made any change in the accounting principles and practices used by the Company from those applied in the preparation of the Financial Statements;

     (xvi) made any payment with respect to any Defined Liabilities other than the payment of $103,000 to Branch Banking & Trust of Virginia, in satisfaction of all amounts owing hereto; or

     (xvii) entered into or become committed to enter into any other material transaction except in the ordinary course of business consistent with past practice or agreed or committed to do or authorized any of the foregoing.

          Section 2.8 No Undisclosed Liabilities. Except as set forth in Schedule 2.8, the Company is not subject to any liability (including, without limitation, unasserted claims,

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whether known or unknown), whether absolute, contingent, accrued or otherwise, which is not shown or which is in excess of amounts shown or reserved for in the Balance Sheet, other than liabilities of the same nature as those set forth in the Balance Sheet and the notes thereto and reasonably incurred in the ordinary course of its business consistent with past practice after the Balance Sheet Date.

          Section 2.9 Governmental Permits. The Company owns, holds or possesses all licenses, franchises, permits, privileges, immunities, approvals and other authorizations from Governmental Entities which are necessary to entitle it to own or lease, operate and use its assets and to carry on and conduct its business substantially as currently conducted (herein collectively called “Company Permits”). Complete and correct copies of all of the Company Permits have been delivered by the Company to Buyer.

          The Company has fulfilled and performed its obligations under each of the material Company Permits, and each of the material Company Permits is valid, subsisting and in full force and effect and will continue in full force and effect after the Closing, in each case without (x) the occurrence of any breach, default or forfeiture of rights thereunder, or (y) the consent, approval, or act of, or the making of any filing with, any Governmental Entity.

          Section 2.10 Taxes.

          (a) Except as set forth in Schedule 2.10(a), (i) each of the Company and each Company Group (as hereinafter defined) has timely filed all Tax Returns required to have been filed; (ii) all such Tax Returns are complete and accurate and disclose all Taxes required to be paid by the Company and each Company Group for the periods covered thereby and all Taxes (as hereinafter defined) shown to be due on such Tax Returns have been timely paid; (iii) all Taxes (whether or not shown on any Tax Return) owed by the Company or any Company Group have been timely paid; (iv) none of the Company or any member of any Company Group has waived or been requested to waive any statute of limitations in respect of Taxes, which waiver or request is currently in effect; (v) there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened with respect to Taxes of the Company or any Company Group and no basis exists therefor; (vi) all deficiencies asserted or assessments made as a result of any examination of the Tax Returns referred to in clause (i) have been paid in full; (vii) all Tax Sharing Arrangements (as hereinafter defined) and Tax indemnity arrangements (in each case to which the Company is or becomes a party) will terminate prior to the Closing and the Company will have no liability thereunder on or after the Closing; (viii) there are no liens for Taxes upon the assets of the Company except liens relating to current Taxes not yet due; (ix) all Taxes which the Company or any Company Group is required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued, reserved against and entered on the books of the Company; (x) the charges, accruals and reserves in respect of Taxes on the Balance Sheet are adequate to provide for all unpaid Taxes of the Company as of the Balance Sheet Date; (xi) none of the Company or any member of any Company Group is currently the beneficiary of any extension of time within which to file any Tax Return; (xii) the Tax Returns referred to in clause (i) have been examined by the appropriate taxing authority or the period for assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired; (xiii) during the last three years, the Company has not been a party to any transaction treated by the parties thereto as one to which Section 355 of the Code (or any similar

16

provision of state, local or foreign law) applied; (xiv) no income or gain of the Company (or any predecessor) has been deferred pursuant to Treasury Regulation §§ 1.1502-13 or 1.1502–14, or any similar or predecessor Treasury Regulation, whether proposed, temporary or final; and (xv) no excess loss account (as described in Treasury Regulation §§ 1.1502-19 and 1.1502-32) exists with respect to the stock of any Subsidiary of the Company.

          (b) (i) To the extent the Company has participated in a transaction that is described as a “reportable transaction” within the meaning of Treasury Regulation § 1.6011-4(b)(1), such participation has been adequately disclosed to the IRS on IRS Form 8886 (Reportable Transaction Disclosure Statement) (or predecessor form) and (ii) none of the items of income, gain, loss, deduction, and credit of the Company (or any predecessor), has been or is expected to be generated by any transaction that is the same as or substantially similar to one of the types of transactions that the IRS has identified (by notice, regulation, other form of published guidance or otherwise) as a “listed transaction” pursuant to Treasury Regulation § 1.6011-4(b)(2).

          (c) No transaction contemplated by this Agreement is subject to withholding under Section 1445 of the Code and no stock transfer Taxes, sales Taxes, use Taxes, real estate transfer Taxes, or other similar Taxes will be imposed on the transactions contemplated by this Agreement, other than as set forth in Schedule 2.10(c) with respect to the cancellation of the Options held by James Burke.

          (d) As a direct or indirect result of the transactions contemplated by this Agreement, no payment or other benefit and no acceleration of the vesting or any options, payments or other benefits, will be (or under Section 280G of the Code and the Treasury Regulations thereunder will be presumed to be) a “parachute payment” to a “disqualified individual” as those terms are defined in Section 280G of the Code, without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future.

          (e) None of the Company or any predecessor of the Company (i) is (and none thereof has ever been), a member of any “affiliated group” (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) or any other group of corporations or entities which files or has filed Tax Returns on a combined, consolidated or unitary basis or (ii) has any liability for Taxes of another Person under Treasury Regulation § 1.1502-6 (or any similar provision of state, local or foreign law).

          For purposes of this Agreement: (i) “Company Group” means any “affiliated group” (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that, at any time on or before the Closing, includes or has included the Company or any Subsidiary of the Company, or any predecessor of the Company or any Subsidiary of the Company (or another such predecessor), or any other group of corporations that, at any time on or before the Closing, files or has filed Tax Returns on a combined, consolidated or unitary basis with the Company or any Subsidiary of the Company, or any predecessor of the Company or any Subsidiary of the Company (or another such predecessor), (ii) “Tax” or “Taxes” means any federal, state, local, foreign or provincial net income or gross income, gross receipts, windfall profit, severance, property, production, sales, use, license,

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excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, value-added, transfer, stamp or environmental (including Taxes under Section 59A of the Code), or other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty imposed by any Governmental Body and any liability of the Company or any Subsidiary of the Company for the payments of amounts with respect payments of a type described in this clause (ii) as a result of being a member of a Company Group, or as a result of any obligation of the Company or any Subsidiary under any Tax Sharing Arrangement or Tax indemnity arrangement, (iii) “Tax Return” means any return, report or similar statement (including the attached schedules) required to be filed with respect to any Tax, including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax, and (iv) “Tax Sharing Arrangement” means any written or unwritten agreement or arrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a combined, consolidated or unitary Tax Return which Tax Return includes the Company or any Subsidiary of the Company.

          Section 2.11 Actions, Proceedings and Violations.

          (a) Except as set forth in Schedule 2.11(a), there are no outstanding orders, judgments, injunctions, awards or decrees of any Governmental Entity against or involving the Company, or against or involving any of the present or former directors, officers, employees, or, to the Knowledge of the Company, consultants, agents or stockholders of the Company, as such, or any of its or their properties, assets or business or any Company Plan (as hereinafter defined). Except as set forth in Schedule 2.11(a), there are no actions, suits or claims or legal, administrative or arbitration proceedings or investigations pending or, to the Knowledge of the Company, threatened against or involving the Company or any of its or their present or former directors, officers, employees, or, to the Knowledge of the Company, consultants, agents or stockholders, as such, or any of its or their properties, assets or business or any Company Plan and the Company is not aware of any reasonable basis therefore, including without limitation, any actions, suits or claims or legal, administrative or arbitration proceedings or investigations relating to (i) prior employment of any of the Company’s employees, the use in connection with the Company’s business of any information or techniques allegedly proprietary to any of their former employers or their obligations under any agreements with prior employers or (ii) the transactions contemplated by this Agreement and the Seller Ancillary Agreements.

          (b) The Company (i) has not violated its charter, bylaws or other organizational documents, (ii) has complied in, all material respects, with all Requirements of Laws applicable to its properties (and their uses), operations or businesses, and (iii) has not violated any order, judgment, injunction, award or decree of any Governmental Entity. No notice of any such violation or non compliance has been received by the Company.

          (c) For purposes of this Agreement, (i) “Knowledge of the Company” or “Knowledge” means the actual knowledge of the individuals identified in Schedule 2.11(c), and (ii) “Requirements of Laws” means any foreign, federal, state and local laws, statutes, regulations, rules, codes or ordinances enacted, adopted, issued or promulgated by any Governmental Entity or common law.

          Section 2.12 Certain Agreements. Except as set forth in Schedule 2.12, the

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Company is not a party to any oral or written agreement or plan, including any employment agreement, severance agreement, stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or, other than the Options pursuant hereto, the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement.

          Section 2.13 Employee Benefits.

          (a) Each Company Plan is listed in Schedule 2.13(a). With respect to each Company Plan, the Company has delivered to Buyer a true and correct copy of (i) the only annual report (Form 5500) that the Company has filed with the Internal Revenue Service (“IRS”), (ii) each such Company Plan that has been reduced to writing and all amendments thereto, (iii) each trust agreement, insurance contract or administration agreement relating to each such Company Plan, (iv) a written summary of each unwritten Company Plan, (v) the most recent summary plan description or other written explanation of each Company Plan provided to participants, (vi) the most recent determination letter and request therefor, if any, issued by the IRS with respect to any Company Plan intended to be qualified under Section 401(a) of the Code, (vii) any request for a determination currently pending before the IRS and (viii) all correspondence with the IRS, the Department of Labor, the SEC or Pension Benefit Guaranty Corporation relating to any outstanding controversy or audit. Each Company Plan complies in all material respects with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Code and all other applicable statutes and governmental rules and regulations. Neither the Company nor any ERISA Affiliate currently maintains, contributes to or has any liability under or, at any time during the past six (6) years has maintained or contributed to, any pension plan which is subject to Section 412 of the Code or Section 302 of ERISA or Title IV of ERISA. Neither the Company nor any ERISA Affiliate currently maintains, contributes to or has any liability under or, at any time during the past six (6) years has maintained, contributed to, or had any liability under, any multiemployer plan (as defined in Section 4001(a)(3) of ERISA). Set forth in Schedule 2.13(a) is a schedule of any service credited to any participant under any Company Plan that exceeds such participant’s actual service with the Company.

          (b) Except as listed in Schedule 2.13(b), with respect to the Company Plans, no event or set of circumstances has occurred and there exists no condition or set of circumstances in connection with which the Company or ERISA Affiliates or any Company Plan fiduciary could be subject to any liability under the terms of such Company Plans, ERISA, the Code or any other applicable law. All Company Plans that are intended by their terms to be, or are otherwise treated by the Company as, qualified under Section 401(a) of the Code have been determined by the IRS to be so qualified, or a timely application for such determination is now pending and the Company is not aware of any reason why any such Company Plan is not so qualified in operation. Except as set forth in Schedule 2.13(b), neither the Company nor any ERISA Affiliate has any liability or obligation under any welfare plan or agreement to provide benefits after termination of employment to any employee or dependent other than as required by Section 4980B of the Code.

          (c) As used herein, (i) “Company Plan” means a “pension plan” (as defined in

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Section 3(2) of ERISA, a “welfare plan” (as defined in Section 3(1) of ERISA), or any other written or oral bonus, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, restricted stock, stock appreciation right, holiday pay, vacation, retention, severance, medical, dental, vision, disability, death benefit, sick leave, fringe benefit, personnel policy, insurance or other plan, arrangement or understanding, in each case established or maintained by the Company or any of its ERISA Affiliates or as to which the Company or any of its ERISA Affiliates has contributed or otherwise may have any liability, and (ii) “ERISA Affiliate” means any trade or business (whether or not incorporated) which would be considered a single employer with the Company pursuant to Section 414(b), (c), (m) or (o) of the Code and the regulations promulgated under those sections or pursuant to Section 4001(b) of ERISA and the regulations promulgated thereunder.

          (d) Schedule 2.13(d) contains a list of all (i) employment, compensation and other agreements with current and former employees, consultants and independent contractors providing services to the Company or any ERISA Affiliate, (ii) severance programs and policies of the Company and each ERISA Affiliate with or relating to its current and former employees, consultants and independent contractors, and (iii) plans, programs, agreements and other arrangements of the Company and each ERISA Affiliate with or relating to its current and former employees, consultants and independent contractors containing change of control or similar provisions (collectively, “Company Employment Agreements”). The Company has delivered to Buyer a true and correct copy of each Company Employment Agreement and any amendments thereto. No Company Employment Agreement or Company Plan provides for any payment to a current or former employee, consultant or independent contractor to gross-up or otherwise compensate such person for any tax obligation incurred by such person, including any excise tax obligation under Section 280G of the Code.

          Section 2.14 Worker Safety and Environmental Laws. The properties, assets and past and present operations of the Company have been and are in all material respects in compliance with all applicable federal, state, local and foreign laws, rules and regulations, orders, decrees, judgments, permits and licenses relating to public and worker health and safety and the protection and clean-up of the environment and activities or conditions related thereto, including, without limitation, those relating to the generation, handling, disposal, transportation or release of hazardous materials.

          Section 2.15 Labor Matters. Schedule 2.15 contains a true and complete listing of all employees of the Company, their annual salaries and their dates of hire. The Company has complied in all material respects with all applicable laws, rules and regulations which relate to prices, wages, hours, discrimination in employment and collective bargaining and to the operation of its business and is not liable for any arrears of wages or any withholding taxes or penalties for failure to comply with any of the foregoing. The Company is not a party to any collective bargaining agreement or labor contract. The Company is not engaged in any unfair labor practice with respect to any Persons employed by or otherwise performing services primarily for the Company (the “Company Business Personnel”), and there is no unfair labor practice complaint or grievance against the Company by the National Labor Relations Board or any comparable state agency pending or threatened in writing with respect to the Company Business Personnel. There is no labor strike, dispute, slowdown or stoppage pending or, to the

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Knowledge of the Company, threatened against or affecting the Company which may interfere with the respective business activities of the Company.

          Section 2.16 Intellectual Property.

          (a) For the purposes of this Agreement, the following terms shall have the meanings indicated:

     (i) “Company Intellectual Property” means Intellectual Property Rights, including Company Registered Intellectual Property Rights (as defined below), that: (1) are embodied in Products; or (2) were developed by or for the Company for use in the conduct of the Business; or (3) are used in or necessary to the conduct of the Business; or (4) are necessary to use Products; or (5) are owned or exclusively licensed by the Company.

     (ii) “Products” means any product or service (including products and services under development) of the Company, including any Technology comprising such products or services.

     (iii) “Intellectual Property Rights” means all of the following: (1) United States, foreign, and international patent applications, utility model applications and patents, as well as related applications and all reissues, divisions, re-examinations, renewals, extensions, provisionals, continuations, and continuations-in-part, and equivalent or similar rights anywhere in the world in inventions and discoveries including invention disclosures (“Patents”); (2) know-how and any other confidential or proprietary information that is protected as a trade secret (“Trade Secrets”); (3) copyrights, copyright registrations and applications, and all other corresponding rights throughout the world (“Copyrights”); (4) mask works, mask work applications, mask work registrations, and any equivalent or similar rights in semiconductor masks, layouts, architectures, or topology (“Maskworks”); (5) proprietary industrial designs and any related registrations and applications throughout the world; (6) rights in World Wide Web addresses and domain names and any related applications and registrations, all trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications and all associated goodwill throughout the world (“Trademarks”); and (7) any similar, corresponding or equivalent rights to any of the foregoing anywhere in the world.

     (iv) “Registered Intellectual Property Rights” means all United States, international, and foreign: (1) Patents, excluding invention disclosures for which there are no associated filed applications; (2) registered Trademarks and applications to register Trademarks, including intent-to-use applications; (3) Copyright registrations and applications to register Copyrights; (4) Maskwork registrations and applications to register Maskworks; and (5) any other Intellectual Property Rights that are the subject of an application, certificate, filing, registration, or other document issued by, filed with, or recorded by, any state, government, or other public legal authority for the purpose of creating, obtaining, perfecting or registering such Intellectual Property Rights.

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     (v) “Technology” means all of the following: (1) works of authorship, including computer programs, source code, executable code, documentation, designs, files, net lists, and mask works; (2) inventions (whether or not patentable), and improvements; (3) proprietary and confidential information, including technical data, customer and supplier lists, know-how and any other information, to the extent protected as a trade secret; (4) databases, data compilations, data collections, and technical data; (5) logos, trade names, trade dress, trademarks, service marks, World Wide Web addresses, domain names, tools, methods, and processes; and (6) all instantiations of the foregoing in any form and embodied in any media.

          (b) Schedule 2.16(b) lists all Registered Intellectual Property Rights owned by, filed in the name of, applied for by, or subject to a valid obligation of assignment to the Company as of the date of this Agreement (“Company Registered Intellectual Property Rights”) and lists any actual or threatened proceedings or actions before any court, tribunal (including the United States Patent and Trademark Office (“PTO”) or equivalent authority anywhere in the world) related to any of the Company Registered Intellectual Property Rights as of the date of this Agreement. For each item of Company Registered Intellectual Property Rights, Schedule 2.16(b) identifies any assignment of any interests in the item of Company Registered Intellectual Property Rights by the Company, or any co-ownership interests in the item of Company Registered Intellectual Property Rights.

          (c) Schedule 2.16(c) contains a list of all agreements, commitments, contracts, understandings, licenses, sublicenses, assignments and indemnities, which relate or pertain to any Intellectual Property or software and are material to the conduct of the Company’s business as currently conducted, to which the Company is a party, showing in each case the parties thereto. Correct and complete copies of all written items identified in Schedule 2.16(c) have been delivered by the Company to Buyer.

          (d) To the Knowledge of the Company, as of the date of this Agreement, each item of Company Registered Intellectual Property Rights, other than pending applications, is valid and subsisting. No item of Company Registered Intellectual Property Rights that consists of a pending Patent application fails to identify all pertinent inventors. Except as set forth in Schedule 2.16(d), no item of Company Registered Intellectual Property Rights has been abandoned, withdrawn, or permitted to lapse. All necessary registration, maintenance, and renewal fees due and payable to date in connection with Company Registered Intellectual Property Rights have been paid and all necessary documents and certificates in connection with Company Registered Intellectual Property Rights have been filed with the relevant patent, copyright, trademark, or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of obtaining or maintaining the Company Registered Intellectual Property Rights. Except as set forth on Schedule 2.16(d), and except for any actions prompted by acts of Governmental Bodies or by potentially infringing acts of third parties of which are outside the Knowledge of the Company, after due consultation with employees and/or third party agents of the Company responsible for the administration of such Company Registered Intellectual Property Rights, as of the date of this Agreement, there are no actions that must be taken by the Company within ninety (90) days of the Closing Date, including the payment of any registration, maintenance or renewal fees or the filing of any responses to PTO actions, documents, applications, or certificates for the purposes of obtaining, maintaining, perfecting, or

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preserving or renewing any Company Registered Intellectual Property Rights.

          (e) Except as set forth in Schedule 2.16(e), as of the date of this Agreement, the Company has no Knowledge of information, materials, facts, or circumstances that would constitute prior art or that would render any of the Company Registered Intellectual Property Rights invalid or unenforceable. The Company has not misrepresented, or failed to disclose, or knows of any misrepresentation or failure to disclose, any fact or circumstances in any application for any Company Registered Intellectual Property Right that would constitute fraud or a misrepresentation with respect to the application or that would otherwise, as a matter of law, cause any Company Registered Intellectual Property Right to be rendered unenforceable.

          (f) Except as set forth in Schedule 2.16(f), each item of Company Intellectual Property owned or exclusively licensed by the Company is free and clear of any license grants or other Encumbrances, except for Permitted Encumbrances and except for: (i) non-exclusive software licenses granted to end-user customers in written contracts for end-user customer use of the Products provided to the end-user customer by the Company in the Ordinary Course of Business; (ii) any additional non-exclusive licenses implied by law to end-user customers for use of Products; (iii) any non-exclusive licenses implied by law to visitors of the Company’s website with respect to the display on a visitor’s computer of information posted on the Company’s website; and (iv) any rights retained by the owner of any Company Intellectual Property that is exclusively licensed to the Company. Nothing with respect to the Company Intellectual Property and items identified in Schedule 2.16(f), nor any agreement, commitment, contract, understanding, license, sublicense, assignment or indemnity which relates to any other intellectual property of any third party, shall restrict the Company’s right, power and authority to execute and deliver this Agreement and the Company Ancillary Agreements, to consummate the transactions contemplated hereby and thereby and to comply with or fulfill the terms, conditions or provisions hereof or thereof. Except as set forth in Schedule 2.16(f) (which will distinguish between nonexclusive and exclusive licenses), the Company is the exclusive owners of all Company Intellectual Property. The Company has the sole and exclusive right to bring actions for management or unauthorized use of the Company Intellectual Property that is either owned by, or within the scope of an exclusive license to, the Company (including the right to seek past and future damages). Except as set forth in Schedule 2.16(f), no item of Company Intellectual Property that is either owned by, or within the scope of an exclusive license to, the Company is subject to any offer or commitment to offer, arising from participation in any technical standards consortium or other standards body, to license such Company Intellectual Property.

          (g) Except as set forth on Schedule 2.16(g), all Company Intellectual Property used in or necessary to the conduct of the Business as presently conducted and all Products were created solely by either (i) employees of the Company acting within the scope of their employment or (ii) by third parties who have validly and irrevocably assigned all of their rights in such Company Intellectual Property, including all Intellectual Property Rights, to the Company, and no third party owns or has any such rights to any of the Company Intellectual Property.

          (h) The Company has taken steps that are commercially reasonable to protect the Company Intellectual Property Rights in confidential information or proprietary information owned or exclusively licensed by the Company, and has taken commercially reasonable steps to

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prevent any disclosure by Company of any third party information provided to the Company under an obligation of confidentiality. Without limiting the foregoing, the Company has and enforces, a policy requiring each employee to execute, prior to commencing employment, a proprietary information, confidentiality, and assignment agreement, substantially in the form attached as Schedule 2.16(h) (the “Company Proprietary Information Agreement”), and all current and former employees of the Company executed the Company Proprietary Information Agreement prior to commencing employment. The Company Proprietary Information Agreement is sufficient to vest in the Company title to all Technology and related Intellectual Property Rights created by an employee within the scope of employment with the Company. The Company is not in material breach of the terms of any of the foregoing agreements and, to the Knowledge of the Company, no other party to any such agreement is in material breach of the Company Proprietary Information Agreement.

          (i) Except as set forth on Schedule 2.16(i), the Company has not transferred ownership of, or granted any exclusive license of or exclusive right to use, or authorized the retention of any exclusive rights to use or joint ownership of, any Technology or Intellectual Property Right that is Company Intellectual Property owned or exclusively licensed by the Company, or any Products or portion thereof, to any third party.

          (j) Except as set forth on Schedule 2.16(j), Company Intellectual Property constitutes all the Intellectual Property Rights used in or necessary to the conduct of the Business as it is currently conducted.

          (k) The contracts listed in Schedule 2.16(k) are all written contracts to which the Company is a party pursuant to which the Company acquires rights to any Company Intellectual Property which is material to the Business. Except as set forth in Schedule 2.16(k), the Company is not in material breach of any of the foregoing contracts and, to the Knowledge of the Company, no other party to any contract is in material breach of the foregoing contracts.

          (l) Except as set forth on Schedule 2.16(l), and except for mass-market licenses for software that is both not incorporated into the Products and not used in the manufacture of the Products, no third party who has licensed to the Company any Technology used in the Business or any Company Intellectual Property, has ownership rights, license rights, or any other claim to improvements made by the Company to such Technology or Company Intellectual Property.

          (m) Schedule 2.16(m) lists all written contracts between the Company and any third party under which the Company has, with respect to any infringement or misappropriation of the Intellectual Property Rights of any third party, either: (i) made a representation or warranty; (ii) agreed to, or assumed, any obligation or duty to defend, indemnify, reimburse, or hold harmless any third party; or (iii) assumed or incurred any other obligation or liability. The Company is not currently discharging, or has been called upon to discharge, any such obligation or liability.

          (n) Except as set forth on Schedule 2.16(n) and the next sentence, the Business as conducted in the past has not, and as currently conducted does not, and will not to the extent conducted in the same manner following the Closing, infringe or misappropriate any

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Intellectual Property Right of any third party, violate any right to privacy or publicity of any third party, violate any moral rights of any third party, or constitute unfair competition or trade practices. Except as set forth on Schedule 2.16(n), any commercial, off-the-shelf third party office products, such as telephones, fax machines, copiers and personal computers, used in the conduct of the Business as conducted in the past, or and as currently conducted: (i) was acquired in arms length transactions from reputable companies; and (ii) to the Knowledge of the Company does not infringe or misappropriate any Intellectual Property Right of any third party, violate any right to privacy or publicity of any third party, violate any moral rights of any third party, or violate any other rights of any third party. Except as set forth on Schedule 2.16(n), and except for any infringement that arises only as a result of a combination of the Products with equipment not provided by Company to the extent there exist substantial non-infringing uses for such Products apart from such combination, the use of any or all Products has not, does not, and will not, infringe or misappropriate any Intellectual Property Right of any third party.

          (o) Except as set forth on Schedule 2.16(o), the Company has not received notice of any claim, or any basis for any claims, that the operation of the Business or any Products infringes or misappropriates any Intellectual Property Right of any third party or constitutes unfair competition or trade practices under the laws of any jurisdiction.

          (p) There are no contracts between the Company any third party with respect to Company Intellectual Property under which there is any material dispute regarding the scope of the contract or regarding performance under the contract.

          (q) Except as set forth on Schedule 2.16(q), to the Knowledge of the Company, no third party is infringing or misappropriating any Company Intellectual Property owned or exclusively licensed by Company.

          (r) No Company Intellectual Property owned or, to the Knowledge of the Company, exclusively licensed by the Company or any Products is subject to any proceeding or outstanding decree, order, judgment or settlement agreement, or stipulation that restricts in any manner its use, transfer, or licensing by the Company or affects the validity, use, or enforceability of such Company Intellectual Property. To the Knowledge of the Company, no Company Intellectual Property or Products are subject to any outstanding decree, order, judgment or settlement agreement, or stipulation that restricts in any manner its use, enforcement, transfer, or licensing by the Company as authorized by the contracts identified in Schedule 2.16(k).

          (s) No (i) Products or publications, (ii) material published or distributed by the Company, or (iii) conduct or statement of the Company constitutes obscene material, a defamatory statement or material, false advertising, or otherwise violates in any material respect any applicable misappropriation, copyright, moral right, unfair competition, privacy, publicity or any other similar law or regulation.

          (t) All Company Intellectual Property that is either owned by, or within the scope of an exclusive license to, the Company is fully transferable, alienable, or licensable by the Company without restriction and without payment of any kind to any third party. Except as set forth in the contracts identified in Schedule 2.16(k), all Products are fully transferable, alienable,

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or licensable by the Company, without restriction and without payment of any kind to any third party.

          (u) Except as disclosed in Schedule 2.16(u), neither this Agreement nor the completion of the transactions contemplated by this Agreement, by operation of law or otherwise, of any contracts to which the Company is party, will result in (i) the Company granting to any third party any right to any Technology or Intellectual Property Right owned by, or licensed to, the Company, which right would not have been granted in the absence of this Agreement or the completion of the transactions contemplated hereby, (ii) the Company becoming bound by, or made subject to, any non-compete or other restriction on the operation or scope of their respective businesses to which the Company, as applicable, would not have been bound or subject to in the absence of this Agreement or the completion of the transactions contemplated hereby, or (iii) the Company being obligated to pay any royalties or other amounts to any third party in excess of those payable by the Company, respectively, prior to the Closing in the absence of this Agreement or the completion of the transactions contemplated hereby. The Company’s officers and employees have not entered into any agreement while employed by the Company and in the course of their employment relating to the prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than the Company.

          (v) Except as disclosed in Schedule 2.16(v), there are no material design defects in any Products. Except as disclosed in Schedule 2.16(v): (i) each individual version, model and line of the Products for which development is complete, or which otherwise to date has been provided to any reseller, original equipment manufacturer or any other customer of Company, will operate substantially in conformance with all material specifications for such version, model or line; and (ii) to the Knowledge of the Company, each such version, model or line is free from material systemic defects.

          (w) Except as set forth in Schedule 2.16(w), no government funding, facilities, or resources of a university, college, other educational institution or research center or funding from third parties were used in the development of Products, nor in the in the development of Company Intellectual Property that is either owned by or within the scope of an exclusive license to Company, nor in the development by Company of any Company Intellectual Property, and no Governmental Body, university, college, other educational institution, or research center has any claim or right in or to Company Intellectual Property owned or exclusively licensed by the Company, or to any Products. Except as set forth in Schedule 2.16(w), to the Knowledge of the Company, no current or former employee of the Company who contributed to the creation or development of any Company Intellectual Property has performed services for the government, a university, college or other educational institution, or a research center, during a period of time during which the employee was also performing services for the Company. Except as set forth in Schedule 2.16(w), neither Company Intellectual Property that is either owned by, or within the scope of an exclusive license to, the Company, nor any Product, has been licensed or otherwise provided to a Governmental Body, nor does the Company have any current obligation to license or assign any Product or other Company Intellectual Property to any Governmental Body.

          (x) Schedule 2.16(x) sets forth all software that is distributed as “open source software” or under a similar licensing or distribution model (including but not limited to the

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GNU General Public License (GPL), GNU Lesser General Public License (LGPL), Mozilla Public License (MPL), BSD licenses, the Artistic License, the Netscape Public License, the Sun Community Source License (SCSL), the Sun Industry Standards Source License (SISSL) and the Apache License) used by the Company in the conduct of the Business (“Open Source Materials”). Schedule 2.16(x) describes the manner in which these Open Source Materials were used, including whether and how the Open Source Materials were modified or distributed by the Company. Except as set forth in Schedule 2.16(x), the Company has not (i) incorporated Open Source Materials into, or combined Open Source Materials with, any Products, any Company Intellectual Property owned or exclusively licensed by the Company, or any Company Intellectual Property that otherwise comprises non-Open Source Materials portions of Company Intellectual Property; (ii) distributed Open Source Materials in conjunction with any Products, any Company Intellectual Property owned or exclusively licensed by the Company, or any Company Intellectual Property that otherwise comprises non-Open Source Materials portions of Company Intellectual Property; or (iii) used Open Source Materials in a manner that grants, or purports to grant, to any third party, any rights or immunities under any Products, any Company Intellectual Property owned or exclusively licensed by the Company, or any Company Intellectual Property that otherwise comprises non-Open Source Materials portions of Company Intellectual Property (including, but not limited to, requiring that any such Products or such Company Intellectual Property be (1) disclosed or distributed in source code form, (2) licensed for the purpose of making derivative works, or (3) redistributable at no charge).

          (y) Except as set forth in Schedule 2.16(y), the Products and Company Intellectual Property to the extent incorporated into the Products, do not contain any computer code that (i) is designed to disrupt, disable, harm, or otherwise impede in any harmful or improper manner, including aesthetical disruptions or distortions, the operation of the Products or such Company Intellectual Property (e.g., viruses or worms); (ii) is designed to disable the Products, such Company Intellectual Property or any computer system or impair in any way their operation based on the elapsing of a period of time, the exceeding of an authorized number of copies, or the advancement to a particular date or other numeral (e.g., time bombs, time locks, or drop dead devices); (iii) would permit the Company, or any third party to access the Products, such Company Intellectual Property or any computer system (e.g., traps, access codes, or trap door devices); or (iv) would permit the Company or any third party to track, monitor, or otherwise report the operation and use of the Products or such Company Intellectual Property.

          (z) Except as disclosed in Schedule 2.16(z), neither the Company nor any third party acting on its behalf has disclosed or delivered to any third party (other than employees and independent contractors operating for the Company’s benefit), or permitted the disclosure or delivery to any escrow agent or other third party (other than employees and independent contractors operating for the Company’s benefit, or as required under any patent application identified in Schedule 2.16(b) as Company Registered Intellectual Property Rights) of, any source code portion of the Company Intellectual Property owned or exclusively licensed by the Company or one of its Products. Except as disclosed in Schedule 2.16(z), no event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time, or both) gives rise to the obligation to make the disclosure or delivery to any third party of any source code portion of the Company Intellectual Property that is either owned by, or within the scope of an exclusive license to, the Company (other than employees and independent contractors

27

operating for the Company’s benefit, or as required under any patent application identified in Schedule 2.16(b) as Company Registered Intellectual Property Rights). Neither the Company nor any third party acting on their behalf has disclosed or delivered to any third party (other than employees and independent contractors operating for the Company’s benefit) any Trade Secrets without a legal obligation to maintain the confidentiality of such Trade Secrets, wherein such legal obligation is memorialized in a written contract identified in Schedule 2.22.

          Section 2.17 Availability of Assets and Legality of Use. Except as set forth in Schedule 2.17, the assets owned or leased by the Company constitute all the assets used in its business (including, but not limited to, all books, records, computers and computer programs and data processing systems) and are in good condition (subject to normal wear and tear and immaterial impairments of value and damage) and serviceable condition and are generally suitable for the uses for which intended. There are no material services provided by any of the stockholders of the Company or any of their Affiliates to the Company utilizing either (i) assets not owned by the Company as of the Closing or (ii) Persons not employed by the Company. For purposes of this Agreement, “Affiliate” means, with respect to any Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. For purposes of this Agreement, “Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust or unincorporated organization.

          Section 2.18 Real Property. The Company does not own any real property or hold any option to acquire any real property.

          Section 2.19 Real Property Leases. Schedule 2.19 sets forth a list of each lease or similar agreement under which the Company is lessee of, or holds or operates, any real property owned by any third Person. Except as set forth in Schedule 2.19, the Company has the right to quiet enjoyment of all the real property described in such Section of which it is the lessee for the full term of each such lease or similar agreement (and any related renewal option) relating thereto, and the leasehold or other interest of the Company in such real property is not subject or subordinate to any Encumbrance except for Permitted Encumbrances. Complete and correct copies of each such lease or similar agreement has been delivered by the Company to Buyer.

          Section 2.20 Personal Property Leases. Schedule 2.20 contains a list of each lease or other agreement or right, whether written or oral, under which the Company is lessee of, or holds or operates, any machinery, equipment, vehicle or other tangible personal property owned by a third party, except for any such lease, agreement or right that is terminable by the Company without penalty or payment on notice of 30 days or less, or which involves the payment by the Company of rentals of less than $10,000 per year.

          Section 2.21 Title to Assets. The Company has good title to all of its assets reflected on the Balance Sheet as being owned by it and all of the assets thereafter acquired by it (except to the extent that such assets have been disposed of after the Balance Sheet Date in the ordinary course of business consistent with past practice), free and clear of all Encumbrances, except for Permitted Encumbrances and except as set forth in Schedule 2.21.

          Section 2.22 Contracts. Except as set forth in Schedule 2.22, the Company is

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not a party to or bound by:

     (i) any contract for the purchase or sale of real property;

     (ii) any contract for the purchase of goods or raw materials requiring one or more payments by the Company in excess of $100,000 individually or in the aggregate;

     (iii) any contract for the sale of goods or services;

     (iv) any contracts relating to the marketing, distribution or manufacturing of products, services, processes or technology, or any OEM contract;

     (v) any contract for the purchase, licensing or development of software to be used by the Company other than contracts for the purchase or licensing of shrink-wrap, off-the-shelf software not involving the payment of more than $20,000 in the aggregate;

     (vi) any guarantee of the obligations or liabilities of customers, suppliers, officers, directors, employees, Affiliates of the Company, or any other Persons;

     (vii) any agreement which provides for, or relates to, the incurrence by the Company of debt for borrowed money or the extension of credit by the Company to any other Person;

     (viii) any agreement or understanding with a third party that restricts the Company from carrying on its business anywhere in the world;

     (ix) any contract which provides for, or relates to, any confidentiality arrangement or any non-competition arrangement with any Person, including any current or former officer or employee of the Company;

     (x) any contract or group of related contracts for capital expenditures in excess of $100,000 for any single project or related series of projects;

     (xi) any partnership, joint venture or other similar arrangement or agreement involving a sharing of profits or losses;

     (xii) any contract which involves payments or receipts by the Company of the Company of more than $100,000;

     (xiii) any contract for any purpose (whether or not made in the ordinary course of the business or otherwise not required to be listed or described in Schedule 2.22) which is material to the Company or its business; or

     (xiv) any contract not made in the ordinary course of business.

          Section 2.23 Status of Contracts. Except as set forth in Schedule 2.23, each of the leases, contracts and other agreements listed in Schedules 2.12, 2.16(b), 2.16(c), 2.16(h), 2.16(k), 2.16(l), 2.16(m), 2.19, 2.20 and 2.22 (collectively, the “Company Agreements”)

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constitutes a valid and binding obligation of the Company and, to the Knowledge of the Company, the other parties thereto, and is in full force and effect and will continue in full force and effect after the Closing, in each case without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder and without the consent, approval or act of, or the making of any filing with, any other party. The Company has fulfilled and performed in all material respects its obligations under each of the Company Agreements, and the Company is not in, or alleged to be in, breach or default under, nor, to the Knowledge of the Company, is there or, to the Knowledge of the Company, is there alleged to be any basis for termination of, any of the Company Agreements and, to the Knowledge of the Company, no other party to any of the Company Agreements has breached or defaulted thereunder, and no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a default or breach by the Company, to the Knowledge of the Company, by any such other party. Complete and correct copies of each of the Company Agreements have heretofore been delivered by the Company to Buyer.

          Section 2.24 Insurance. Schedule 2.24 sets forth a list of insurance maintained, owned or held by the Company, copies of which have been provided to Buyer. All such insurance policies are in full force and effect. To the Knowledge of the Company, such policies, with respect to their amounts and types of coverage, are adequate to insure against risks to which the Company is normally exposed in the operation of the Business, and are in amounts customarily insured against in operations similar to the Company. The Company has complied with each such insurance policies and has not failed to give any notice or to present any claim thereunder in a due and timely manner.

          Section 2.25 Brokers. No broker, investment banker or other Person, other than the fees and expenses owed to UBS Securities LLC pursuant to that certain letter agreement dated September 3, 2003 a true and complete copy of which has been delivered to Buyer, is entitled to any broker’s, finder’s or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or any Seller.

          Section 2.26 [Intentionally Omitted. ]

          Section 2.27 [Intentionally Omitted. ]

          Section 2.28 Depositaries; Powers of Attorney. Schedule 2.28 sets forth (a) the name and a brief description of all bank accounts, lock-boxes, safe deposit boxes, money market funds, certificates of deposit, stocks, bonds, notes and other securities in the name of or owned or controlled by the Company and the names of all persons authorized to draw thereon or to have access thereto and (b) the name of each person, corporation, firm or other entity holding a general or special power of attorney from the Company (together with a true and complete copy thereof).

          Section 2.29 Absence of Certain Payments. Except as set forth in Schedule 2.29; the Company is not involved in any transaction or other situation with any stockholder, employee, officer, director or Affiliate of the Company which may be generally characterized as a “conflict of interest,” including, but not limited to, direct or indirect interests in the business of

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any competitors, suppliers or customers thereof, and (b) since the formation of the Company, there have been no situations with respect to the Company which involved or involve (i) the use of any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity or to any of the Company’s customers or suppliers, (ii) the making of any direct or indirect unlawful payments to government officials or others from corporate funds or the establishment or maintenance of any unlawful or unrecorded funds, (iii) the receipt of any illegal discounts or rebates or any other violation of the anti-trust laws; or (iv) any investigation by any Governmental Body.

          Section 2.30 Transactions with Affiliates. Except as set forth in Schedule 2.30, there have been no material transactions in respect of the Company between the Company and any Seller, officer, director or other Affiliate of the Company (including spouses, children and other relatives of any of the foregoing).

          Section 2.31 Securities Law Matters.

          (a) Schedule 2.31(a) indicates, opposite the name of each Seller, whether such Seller is an “accredited” investor as such term is defined in Regulation D promulgated pursuant to the Securities Act. Each Seller, by reason of such Seller’s knowledge in business or financial matters is capable of evaluating the merits and risks of Seller’s investment in the Buyer Shares, and making an informed investment decision in connection therewith.

          (b) Each Seller is acquiring or will be acquiring the Buyer Shares for investment for Seller’s own account, not as a nominee or agent, for investment purposes only and not with the view to, or for resale in connection with, any distribution thereof. Each Seller understands that the issuance of the Buyer Shares pursuant hereto has not been, and will not be, registered under the Securities Act by reason of Buyer’s reliance on a specific exemption from the registration provisions of the Securities Act that depends upon, among other things, the bona fide nature of the investment intent of the Sellers and the accuracy of the Sellers’ representations as expressed herein. Seller, if other than a natural person, has not been formed for the specific purpose of acquiring the Buyer Shares.

          (c) Each Seller acknowledges that there are substantial restrictions on the transferability of the Buyer Shares; that the Buyer Shares are not, and the Sellers have no right to require that the Buyer Shares be registered under the Securities Act; and that accordingly, each Seller will have to hold the Buyer Shares until the time that such Seller is able to transfer the Buyer Shares in compliance with all securities laws and the terms of this Agreement and the Escrow Agreement.

          (d) Each Seller has had the opportunity to (i) ask questions of, and receive answers from, representatives of Buyer concerning Buyer and the terms and conditions of this transaction, as well as to obtain any information requested by Seller, (ii) to thoroughly review the Buyer SEC Documents, copies of which each Seller acknowledges receiving from Buyer prior the date hereof and (iii) to consult with Seller’s own advisors, including counsel and tax advisors. Seller’s decision to enter into the transactions contemplated hereby is based on Seller’s own evaluation of the risks and merits of the purchase and Buyer’s proposed business activities.

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          (e) No Seller is acquiring the Buyer Shares as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or presented at any seminar or meeting, or any solicitation by a person not previously known to such Seller in connection with investments in securities generally.

          (f) Each certificate evidencing any of the Shares shall bear a legend substantially as follows:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE SECURITIES HAVE BEEN REGISTERED UNDER SUCH ACT AND ANY AND ALL SUCH OTHER APPLICABLE LAWS OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND AN OPINION OF COUNSEL HAS BEEN RENDERED TO THE CORPORATION IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT REGISTRATION OF SUCH SECURITIES IS NOT REQUIRED UNDER APPLICABLE SECURITIES LAWS”

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO THE TERMS OF A STOCK PURCHASE AGREEMENT AND AN ESCROW AGREEMENT, EACH DATED AS OF DECEMBER 30, 2004 AMONG TELLABS, INC. AND THE PARTIES NAMED THEREIN, A COPY OF EACH OF WHICH IS ON FILE WITH THE SECRETARY OF THE CORPORATION AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SUCH AGREEMENT.”

          Section 2.32 Product Warranty. The technologies or products licensed, sold, leased, and delivered and all services provided by the Company have conformed in all material respects with all applicable contractual commitments and all express and implied warranties, and the Company have no liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due) for replacement or modification thereof or other damages in connection therewith. Buyer has been given a copy of the standard terms and conditions of sale, subscription, license or lease for each of the Company’s products and services and copies of the Company’s standard forms of merchant agreements and professional services agreements. The Company has not agreed to any product or service guaranty, warranty or other indemnity beyond the applicable standard terms and conditions of sale, license or lease or beyond that implied or imposed by applicable law.

          Section 2.33 Books and Records. The books of account, minute books and stock record books, all of which have been made available to Buyer, have been maintained in accordance with reasonable business practices. The Company’s minute books contain materially accurate and complete records of all meetings held of, and corporate action taken by, the

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stockholders, the Boards of Directors, and committees of the Boards of Directors of the Company, at which any corporate or shareholder action was taken or approved. There have been no changes, alterations or additions to such minute books and records of the corporate proceedings of the Company or prior to the Closing Date that have not been furnished to Buyer.

          Section 2.34 Accounts Receivable. All accounts receivable of the Company that are reflected on the Balance Sheet (collectively, the “Accounts Receivable”) represent valid obligations arising from sales actually made or services actually performed in the ordinary course of business. There is no contest, claim, or right of set-off, other than returns in the ordinary course of business, under any contract with any obligor of an Accounts Receivable relating to the amount or validity of such Accounts Receivable. Schedule 2.34 contains a complete and accurate list of all Accounts Receivable as of November 30, 2004, which list sets forth the aging of such Accounts Receivable.

          Section 2.35 Inventory. From the Balance Sheet Date, to the Knowledge of the Company, no event (including the passage of time) has occurred that could reasonably require the Company pursuant to GAAP to revalue any of its assets, including writing down the value of capitalized inventory.

          Section 2.36 Representations Complete. None of the representations or warranties of the Sellers contained herein, none of the information contained in the Schedules referred to in Article II, and none of the other information or documents furnished to Buyer or any of its representatives by the Sellers or its representatives pursuant to the terms of this Agreement, is false or misleading in any material respect or omits to state a fact herein or therein necessary to make the statements herein or therein not misleading in any material respect; provided, that representations and warranties which address matters only as of a certain date shall be true and correct in all material respects only as of such certain date. There is no fact which adversely affects or in the future is likely to adversely affect the Company in any material respect which has not been set forth or referred to in this Agreement or the Schedules hereto.

          Section 2.37 Defined Liabilities. The aggregate Defined Liabilities of the Company equal $5,152,000, consisting of (i) an aggregate principal amount of $4,500,000 and $219,000 in accrued and unpaid interest, owing under those certain Promissory notes dated as of July 14, 2003, June 8, 2004 and September 30, 2004, respectively, issued by the Company to Asghar Mostafa and (ii) $433,000 in earned but deferred compensation owing from the Company to Asghar Mostafa. No other amounts are owing from the Company to Asghar Mostafa or any of his Affiliates.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER

          As an inducement to the Company and the Sellers to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer hereby represents and warrants to the Sellers and agrees as follows:

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          Section 3.1 Organization of Buyer. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to own or lease and to operate and use its properties and assets and to carry on its business as now conducted.

          Section 3.2 Authority of Buyer.

          (a) Buyer has the corporate power and authority to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Buyer pursuant hereto (the “Buyer Ancillary Agreements”), to consummate the transactions contemplated hereby and thereby and to comply with the terms, conditions and provisions hereof and thereof.

          (b) The execution, delivery and performance of this Agreement and the Buyer Ancillary Agreements by Buyer have been duly authorized and approved by all necessary corporate action on behalf of Buyer’s Board of Directors and do not require any further authorization or consent of Buyer. This Agreement constitutes and each Buyer Ancillary Agreement, when executed and delivered by Buyer and the other parties thereto, will constitute the legal, valid and binding agreement of Buyer enforceable in accordance with its respective terms.

          (c) Assuming the accuracy of the Sellers representations contained in Section 2.31, neither the execution and delivery of this Agreement or any Buyer Ancillary Agreement by Buyer or the consummation by Buyer of any of the transactions contemplated hereby or thereby nor compliance by Buyer with or fulfillment by Buyer of the terms, conditions and provisions hereof or thereof will:

     (i) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, the Certificate of Incorporation or By-laws of Buyer or any material agreement or any judgment, order, award or decree to which Buyer is a party or any of its properties is subject or by which Buyer is bound; or

     (ii) require the approval, consent, authorization or act of, or the making by Buyer of any declaration, filing or registration with, any third party or any foreign, federal, state or local court, governmental or regulatory body.

          Section 3.3 Capital Structure. As of the date hereof, the authorized capital stock of Buyer consists of 1,000,000,000 shares of Buyer Common Stock and 5,000,000 shares of preferred stock, $0.01 par value (the “Buyer Preferred Stock”). At the close of business on December 20, 2004, (i) 462,202,989 shares of Buyer Common Stock were issued and outstanding, (ii) no shares of Buyer Common Stock were held in the treasury of Buyer or by Subsidiaries of Buyer, (iii) no shares of Buyer Preferred Stock were issued or outstanding, (iv) 66,947,568 shares of Buyer Common Stock were reserved for issuance pursuant to outstanding options, warrants or other rights to purchase or otherwise acquire shares of Buyer Common Stock under Buyer’s plans or other arrangements or pursuant to any plans or arrangements

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assumed by Buyer in connection with any acquisition, business combination or similar transaction (collectively, the “Buyer Stock Plans”), and (v) 153,483 stock appreciation rights granted pursuant to the Buyer Stock Plans were outstanding. As of the date of this Agreement, except as set forth above and, except for the issuance of shares of Buyer Common Stock pursuant to the Buyer Stock Plans, no shares of capital stock or other voting securities of Buyer were issued, reserved for issuance or outstanding. All of the Buyer Shares issuable pursuant to Section 1.3 of this Agreement, will be, when so issued and delivered in accordance with the terms of this Agreement, duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights.

          Section 3.4 SEC Documents and Other Reports. Buyer has filed all required documents with the Securities and Exchange Commission (the “SEC”) between January 1, 2004 and the date hereof (the “Buyer SEC Documents”). As of their respective dates or, if amended, as of the date of the last amendment, the Buyer SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and, at the respective times they were filed, none of the Buyer SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements (including, in each case, any notes thereto) of Buyer included in the Buyer SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles (“GAAP”) (except, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly presented in all material respects the consolidated financial position of Buyer and its consolidated Subsidiaries as at the respective dates thereof and the consolidated results of their operations and their consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments and to any other adjustments described therein).

          Section 3.5 No Finder. Neither Buyer nor any party acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

          Section 3.6 Issuance of Buyer Shares. Assuming the accuracy of the Sellers’ representations and warranties contained in Section 2.31, the offer, issuance and sale of the Buyer Shares at the Closing will be: (i) exempt from the registration and prospectus delivery requirements of the Securities Act, and (ii) have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Buyer is acquiring the Shares for its own account and not with a view to its distribution within the meaning of Section 2(11) of the Securities Act of 1933, as amended, and the rules and regulations issued pursuant thereto.

          Section 3.7 No Other Representations. The Buyer acknowledges that, except for the representations and warranties of the Sellers contained in Article II of this Agreement (including the Schedules hereto) and any Seller Ancillary Agreements, the Sellers have not made any representations or warranties, express or implied.

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ARTICLE IV
ADDITIONAL AGREEMENTS

          Section 4.1 Covenant Not to Compete or Solicit Business. In furtherance of the sale of the Shares and the Company to Buyer and the cancellation of the Options hereunder by virtue of the transactions contemplated hereby and more effectively to protect the value and goodwill of the Company and the Business, each of the persons on Schedule 4.1 (collectively the “Restricted Persons”) covenants and agrees that, for a period ending on the third anniversary of the Closing Date, neither such Restricted Person nor any of its Affiliates will:

     (i) directly or indirectly (whether as principal, agent, independent contractor, partner or otherwise) own, manage, operate, control, participate in, perform services for, or otherwise carry on, a business similar to or competitive with the Business anywhere in the world (it being understood by the parties hereto that the Business is not limited to any particular region of the world and that such business may be engaged in effectively from any location in any country); or

     (ii) induce or attempt to persuade any employee, agent or customer of the Company to terminate such employment, agency or business;

provided, however, that nothing set forth in this Section 4.1 shall prohibit the Restricted Persons or their Affiliates from owning not in excess of 2% in the aggregate of any class of capital stock of any corporation if such stock is publicly traded and listed on any national or regional stock exchange or reported on the National Association of Securities Dealers Automated Quotations (Nasdaq) System. In addition, each of the Restricted Persons covenants and agrees that neither it nor any of its Affiliates will divulge or make use of any trade secrets or other confidential information of the Company other than to disclose such secrets and information to Buyer or its Affiliates.

          In the event any of the Restricted Persons or any Affiliate of Restricted Persons violates any of its obligations under this Section 4.1, Buyer may proceed against it in law or in equity for such damages or other relief as a court may deem appropriate. Restricted Persons acknowledge that a violation of this Section 4.1 may cause Buyer irreparable harm which may not be adequately compensated for by money damages. Restricted Persons therefore agree that in the event of any actual or threatened violation of this Section 4.1, Buyer shall be entitled, in addition to other remedies that it may have, to a temporary restraining order and to preliminary and final injunctive relief against Restricted Persons or such Affiliate of Restricted Persons to prevent any violations of this Section 4.1, without the necessity of posting a bond. The prevailing party in any action commenced under this Section 4.1 shall also be entitled to receive reasonable attorneys’ fees and court costs. It is the intent and understanding of each party hereto that if, in any action before any court or agency legally empowered to enforce this Section 4.1, any term, restriction, covenant or promise in this Section 4.1 is found to be unreasonable and for that reason unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. Nothing contained in Section 5.4 shall be deemed in any way to limit or restrict Buyer’s rights under this paragraph.

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          Section 4.2 Tax Matters.

          (a) (i) Each of the Sellers, jointly and severally, shall be liable for, and pursuant to Article V agrees to indemnify and hold harmless each Buyer Group Member from and against any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from all Taxes imposed on the Company or for which the Company may otherwise be liable (A) as a result of having been a member of any Company Group (including, without limitation, Taxes for which the Company or any Subsidiary of the Company may be liable pursuant to Treasury Regulation § 1.1502-6 or similar provisions of state, local or foreign law as a result of having been a member of a Company Group or any obligations to contribute to the payment of a Tax determined on a combined, consolidated or unitary basis with respect to any Company Group and any Taxes resulting from the Company or any Subsidiary of the Company ceasing to be a member of any Company Group) or (B) for any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date; provided, however, that in the case of any taxable year or period that begins before the Closing Date and for which the Tax Return is required to be filed by Buyer pursuant to Section 4.2(b), no Seller shall have any liability under this Section 4.2(a) with respect thereto to the extent of the Taxes shown to be due on such Tax Return when initially filed (or, in the case of any Straddle Period, the portion of such Taxes so shown that are attributable under Section 4.2(a)(iii) to the period ending on and including the Closing Date), it being agreed that this proviso shall not apply to the extent such Taxes so shown are or were (1) income or franchise Taxes that individually or in the aggregate exceed $20,000, (2) not incurred in the ordinary course of the Company’s business, (3) computed by taking into account any deduction for compensation arising as a result of the transactions contemplated by this Agreement, (4) not properly withheld or remitted under applicable law or (5) attributable to the transactions contemplated by this Agreement (Taxes described in this proviso “Accrued Pre-Closing Taxes”). For the avoidance of doubt, the parties agree that for purposes of this Section 4.2(a)(i) Taxes of the Company shall be computed by taking into account the application of any net operating loss carryovers or net capital loss carryovers of the Company available as of the Closing Date (as adjusted from time to time as a result of any audit or other examination affecting the amount thereof), in all cases to the extent such application is permitted under applicable Tax law.

     (ii) Buyer shall be liable for, and pursuant to Article V agrees to indemnify and hold harmless each Seller Group Member from and against any and all Losses and Expenses incurred by such Seller Group Member in connection with or arising from (A) Taxes imposed on the Company for any taxable year or period that begins after the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period beginning after the Closing Date and (B) Accrued Pre-Closing Taxes; provided, however, that Buyer shall not be liable for or pay, and shall not indemnify the Sellers against, any Taxes for which the Sellers are liable under this Agreement (including, without limitation, Section 2.10 and Section 4.2(a)(i)).

     (iii) For purposes of paragraphs (a)(i) and (a)(ii) immediately above, whenever it is necessary to determine the liability for Taxes of the Company for a Straddle Period, the determination of the Taxes of the Company for the portion of the Straddle Period ending on and including, and the portion of the Straddle Period beginning after, the

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Closing Date shall be determined by assuming that the Straddle Period consisted of two taxable years or periods, one which ended at the close of the Closing Date and the other which began at the beginning of the day following the Closing Date, and items of income, gain, deduction, loss or credit of the Company for the Straddle Period shall be allocated between such two taxable years or periods on a “closing of the books basis” by assuming that the books of the Company were closed at the close of the Closing Date, provided, however, that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned between such two taxable years or periods on a daily basis.

     (iv) Each of the Sellers, jointly and severally, shall be liable for, and pursuant to Article V agrees to indemnify and hold harmless each Buyer Group Member from and against any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from any real property transfer or gains Tax, sales Tax, use Tax, stamp Tax, stock transfer Tax, or other similar Tax imposed on the transactions contemplated by this Agreement.

     (v) If any Seller becomes entitled to a refund or credit of Taxes for which it is liable under paragraph (a) to indemnify a Buyer Group Member, and such refund or credit is attributable to the carryback of losses, credits or similar items from a taxable year or period that begins after the Closing Date and is attributable to the Company or any Subsidiary of the Company, the Sellers shall promptly pay to Buyer the amount of such refund or credit together with any interest thereon. In the event that any refund or credit of Taxes for which a payment has been made to Buyer is subsequently reduced or disallowed, Buyer shall indemnify and hold harmless the Sellers for any Tax assessed against the Sellers by reason of the reduction or disallowance.

     (vi) On the Closing Date, each Seller shall deliver to Buyer a complete and signed IRS Form W-8 or W-9, whichever is appropriate for such Seller.

          (b) The Sellers shall timely file or cause to be timely filed when due (taking into account all extensions properly obtained) all Tax Returns that are required to be filed by or with respect to the Company prior to the Closing Date and the Sellers shall remit (or cause to be remitted) any Taxes due in respect of such Tax Returns, and Buyer shall timely file or cause to be timely filed when due (taking into account all extensions properly obtained) all Tax Returns that are required to be filed by or with respect to the Company on or after the Closing Date and Buyer shall remit (or cause to be remitted) any Taxes due in respect of such Tax Returns. The Sellers or Buyer shall reimburse the other party the Taxes for which the Sellers or Buyer is liable pursuant to paragraph (a) of this Section 4.2 but which are payable with any Tax Return to be filed by the other party pursuant to the previous sentence upon the written request of the party entitled to reimbursement setting forth in detail the computation of the amount owed by the Sellers or Buyer, as the case may be, but in no event earlier than 10 days prior to the due date for filing such Tax Return. All Tax Returns which the Sellers are required to file or cause to be filed in accordance with this paragraph (b) shall be prepared and filed in a manner consistent with past practice and, on such Tax Returns, no position shall be taken, elections made or method adopted that is inconsistent with positions taken, elections made or methods used in preparing and filing similar Tax Returns in prior periods (including, but not limited to, positions which would have

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the effect of deferring income to periods for which Buyer is liable or accelerating deductions to periods for which the Sellers are liable).

          (c) Buyer shall notify the Seller Representative upon receipt by Buyer, any of its Affiliates, or the Company of notice of any pending or threatened federal, state, local or foreign Tax audits or assessments which may materially affect the Tax liabilities of the Company for which the Sellers would be required to indemnify Buyer pursuant to paragraph (a) of this Section 4.2, provided that failure to comply with this provision shall not affect Buyer’s right to indemnification hereunder.

          The Company shall have the sole control in any Tax audit or administrative or court proceeding relating to taxable periods ending on or before the Closing Date; provided, however, that the Seller Representative shall be permitted, at his expense, to be present at, and participate in, any such audit or proceeding.

          (d) After the Closing Date, each of the Sellers and Buyer shall (and shall cause their respective Affiliates to):

     (i) timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns or other reports with respect to, Taxes described in paragraph (a)(iv) of this Section 4.2 (relating to sales, transfer and similar Taxes);

     (ii) assist the other party in preparing any Tax Returns which such other party is responsible for preparing and filing in accordance with paragraph (b) of this Section 4.2;

     (iii) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Company;

     (iv) make available to the other and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Company;

     (v) provide timely notice to the other in writing of any pending or threatened Tax audits or assessments of the Company for taxable periods for which the other may have a liability under this Section 4.2; and

     (vi) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period.

          (e) Notwithstanding anything to the contrary in this Agreement, each of the Sellers, jointly and severally, shall be liable for, and pursuant to Article V agrees to indemnify and hold harmless each Buyer Group Member from and against, any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from Taxes imposed on each Seller as a result of the transactions contemplated by this Agreement.

          (f) Buyer agrees not to make any election under Section 338 of the Code with

39

respect to the purchase of the Shares pursuant to this Agreement without the approval of the Seller Representative which shall not be unreasonably withheld, provided that it shall not be unreasonable if Seller Representative withholds consent if the Sellers would incur a Tax liability as a result of such election by Buyer.

          (g) Notwithstanding anything to the contrary in this Agreement, the obligations of the parties set forth in this Section 4.2 shall be unconditional and absolute and shall remain in effect without limitation as to time.

          Section 4.3 Use of Name. Each of the Sellers agrees and covenants that from and after the Closing it shall not use the name “Vinci Systems” or a name which includes such name or the name “Vinci” or any variations of such names in connection with any activity conducted by it or any of its Affiliates.

          Section 4.4 Waiver. By execution hereof, the Company and each of the Sellers hereby waives any right of first refusal with respect to, or right to repurchase any, shares of the capital stock of the Company or the Options (or any shares issuable upon the exercise thereof), in each case in connection with the sale of the Shares and the cancellation and termination of the Options contemplated hereby.

          Section 4.5 Employee Benefit Plans. As soon as practicable after the Closing, Buyer shall provide, or shall cause to be provided, employee benefit plans, programs and arrangements to employees of the Company that are substantially similar to those made available to similarly situated employees of Buyer. Upon the inclusion of the employees of the Company in any benefits plan maintained or sponsored by Buyer or its Subsidiaries, including, without limitation, any plan or arrangement providing vacation benefits, each Company employee shall receive credit for service prior to the Closing Date with the Company to the same extent such service was counted under any similar or corresponding Buyer plans for the purposes of determining eligibility to participate, vesting and the level of benefits provided. If any such Company employee or their dependents are included in any medical, dental or health plan other than the plan or plans they participated in prior to the Closing Date, the Buyer Plan shall waive all limitations as to pre-existing conditions and waiting periods.

          Section 4.6 Operation of the Company. During the Performance Period, (i) the provisions set forth in Schedule 4.6 shall apply to the operations of the Company and (ii) Sellers shall not take any action inconsistent with such provisions.

          Section 4.7 Acceleration of Performance Conditions. In the event that, during the Performance Period, Buyer, without the consent of the Seller Representative (i) sells, transfers or assigns or otherwise disposes of the material assets of the Company that are necessary for the achievement of the Performance Conditions, in each case in a manner that deprives the Company of the use thereof, (ii) sells more than 50% of the outstanding capital stock of the Company to a party that is not an Affiliate of the Buyer, or (iii) prevents the Sellers from satisfying the Performance Conditions by breaching the covenant contained in Section 4.6, then it shall be deemed that the Sellers have satisfied any remaining Performance Conditions the time for satisfying which has not expired under Section 1.4 as of the date of the occurrence of one of the events described in clauses (i), (ii) and (iii) above.

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ARTICLE V
INDEMNIFICATION

          Section 5.1 Indemnification by Sellers.

          (a) Each of the Sellers, jointly and severally, agrees to indemnify and hold harmless each Buyer Group Member from and against any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from:

     (i) any breach, or alleged breach, by any Seller of, or any other failure of any Seller or any Restricted Person to perform, any of its covenants, agreements or obligations in this Agreement or in any other agreement executed and delivered by or on behalf of such Seller pursuant to this Agreement; and

     (ii) any breach, or alleged breach, of any warranty or the inaccuracy, or alleged inaccuracy, of any representation of Seller contained or referred to in this Agreement or any certificate or other document delivered by or on behalf of any Seller pursuant to this Agreement;

provided, however, without in any way limiting the Sellers’ indemnification obligations under clause (i) of Section 5.1(a) or under clause (ii) of Section 5.1(a) with respect to the Seller Designated Representations (as hereinafter defined), (x) the Sellers shall indemnify the Buyer Group Members under clause (ii) of Section 5.1(a) (other than with respect to the Seller Designated Representations as to which no such limitation shall apply) only in the event that the aggregate amount (without duplication) of Loss and Expense borne by the Buyer Group Members with respect thereto exceeds $150,000 but if in excess of such amount, then for the amount of such excess. Sellers’ aggregate indemnification liability under clause (ii) of Section 5.1(a) (other than with respect to the Seller Designated Representations as to which no such limitation shall apply) shall be an amount equal to twenty five percent (25%) of the Purchase Price. Each Seller’s (other than Mostafa Group, LLC, as to which this limitation shall not apply) indemnification liability under clause (ii) of Section 5.1(a) (other than with respect to the Seller Designated Representations as to which no such limitation shall apply) shall be an amount equal to twenty five percent (25%) of such Seller’s pro rata portion of the Purchase Price.

          (b) The indemnification provided for in clause (ii) of Section 5.1(a) shall terminate on June 30, 2006 (and no claims shall be made by Buyer under clause (ii) of Section 5.1(a) thereafter), except that the indemnification by the Sellers shall continue in any event as to:

     (i) any breach, or alleged breach, of any warranty or the inaccuracy, or alleged inaccuracy, of any representation of the Sellers set forth in Sections 2.1, 2.3, 2.4, 2.5, 2.21, 2.25, or 2.31 (together with Section 2.10, the “Seller Designated Representations”), as to which no time limitation shall apply, and any breach, or alleged breach, of any warranty or the inaccuracy, or alleged inaccuracy, of any representation of the Sellers set forth in Section 2.10, which shall survive for sixty (60) days after the expiration date of the applicable statute of limitations (including any extensions thereof);

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and

     (ii) any Loss or Expense as to which Buyer has notified the Sellers in accordance with the provisions of Section 5.3 on or prior to the date such indemnification obligation would otherwise terminate in accordance with this Section 5.1, as to which the indemnification obligations of the Sellers shall continue until the liability of the Sellers shall have been determined pursuant to this Article V, and the Sellers shall have indemnified and reimbursed Buyer for the full amount of such Loss and Expense in accordance with this Article V.

          (c) If, at the time Buyer is obligated to make a Subsequent Cash Payment in accordance with Section 1.4 hereof, any Claim Notice given by a Buyer Group Member remains unresolved, Buyer shall be entitled to reduce the amount of such Subsequent Cash Payment by Buyer’s good faith reasonable estimate of the maximum aggregate amount of Loss and Expense exposure of the Buyer Group Member to matters reflected in all such unresolved Claim Notices, pending final determination of such matters. If it is finally determined that the Buyer Group Members were not entitled to the full amount of the indemnification reflected in such Claim Notices, Buyer shall promptly thereafter pay to the Seller Representative the appropriate portion of the applicable Subsequent Cash Payments that had been withheld together with Interest thereon. Otherwise Buyer shall retain such amount.

          Section 5.2 Indemnification by Buyer.

          (a) Buyer agrees to indemnify and hold harmless each Seller Group Member from and against any and all Losses and Expenses incurred by such Seller Group Member in connection with or arising from:

     (i) Any breach, or alleged breach, by Buyer of, or other failure of Buyer to perform, any of its covenants, agreements or obligations in this Agreement or in any other agreement executed and delivered by or on behalf of Buyer pursuant to this Agreement; or

     (ii) Any breach, or alleged breach, of any warranty or the inaccuracy, or alleged inaccuracy, of any representation of Buyer contained or referred to in this Agreement or in any certificate or other document delivered by or on behalf of Buyer pursuant hereto.

provided, however, without in any way limiting Buyer’ indemnification obligations under clause (i) of Section 5.2(a) or under clause (ii) of Section 5.2(a) with respect to the Buyer Designated Representations (as hereinafter defined), (i) the Buyer shall indemnify the Seller Group Members under clause (ii) of Section 5.2(a) (other than with respect to the Buyer Designated Representation as to which no such limitation shall apply) only in the event that the aggregate amount (without duplication) of Loss and Expense borne by the Seller Group Members with respect thereto exceeds $150,000 but if in excess of such amount, then for the amount of such excess, and (ii) Buyer’s aggregate indemnification liability under clause (ii) of Section 5.2 (other than with respect to the Buyer Designated Representation as to which no such limitation shall apply) shall be an amount equal to twenty five percent (25%) of the Purchase Price.

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          (b) The indemnification provided for in clause (ii) of Section 5.2 shall terminate on June 30, 2006 (and no claims shall be made by the Sellers under clause (ii) of Section 5.2 thereafter), except that the indemnification by Buyer shall continue in any event as to:

     (i) any breach, or alleged breach, of any warranty or the inaccuracy, or alleged inaccuracy, of any representation of Buyer set forth in Sections 3.1 and 3.3 (the “Buyer Designated Representations”), as to which no time limitation shall apply; and

     (ii) any Loss or Expense of which the Seller Representative has notified Buyer in accordance with the requirements of Section 5.3 on or prior to the date such indemnification would otherwise terminate in accordance with this Section 5.2, as to which the obligation of Buyer shall continue until the liability of Buyer shall have been determined pursuant to this Article V, and Buyer shall have reimbursed the Sellers for the full amount of such Loss and Expense in accordance with this Article V.

          Section 5.3 Notice and Determination of Claims and Forfeiture Events.

          (a) Any Buyer Group Member or Seller Group Member (the “Claiming Party”) seeking indemnification hereunder shall give to the party obligated to provide indemnification to such Claiming Party (the “Indemnifying Party”) and, in the case of any Buyer Group Member, the Escrow Agent, a notice (a “Claim Notice”) describing in reasonable detail the facts giving rise to any claim for indemnification hereunder and shall include in such Claim Notice (if then known) the amount or the method of computation of the amount of such claim, and a reference to the provision of this Agreement or any other agreement, document or instrument executed hereunder or in connection herewith upon which such claim is based; provided, that a Claim Notice in respect of any action at law or suit in equity by or against a third Person as to which indemnification will be sought shall be given promptly after the action or suit is commenced; provided further that failure to give such notice shall not relieve the Indemnifying Party of its obligations hereunder except to the extent it shall have been prejudiced by such failure. If the Claiming Party is a Buyer Group Member but is not Buyer, the Claim Notice must be accompanied by a certificate from Buyer confirming that the such Claiming Party is a Buyer Group Member.

          (b) In the event of Claim Notice by a Buyer Group Member, unless the Seller Representative shall have delivered an Objection in accordance with Section 5.3(c), the Escrow Agent shall, on the twentieth day (or such earlier day as the Seller Representative shall authorize in writing to the Escrow Agent) after receipt of a Claim Notice with respect to indemnification for a specified amount, deliver to Buyer, for its account or for the account of each Buyer Group Member named in the Claim Notice, such portion of the Cash Escrow Fund, valued in accordance with the Escrow Agreement, with a value equal to the specified amount.

          (c) Until the twentieth day following delivery of a Claim Notice, the Seller Representative may deliver to the Escrow Agent a written objection (an “Objection”) to the claim made in such Claim Notice. At the time of delivery of any Objection to the Escrow Agent, a duplicate copy of such Objection shall be delivered to the Claiming Party.

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          (d) Upon receipt of an Objection properly made to a Claim Notice, the Escrow Agent shall (i) deliver to Buyer, for its account or for the account of each Buyer Group Member named in the Claim Notice, such portion of the Cash Escrow Fund, valued in accordance with the Escrow Agreement, with a value equal to that portion of the amount subject to the Claim Notice, if any, which is not disputed by the Seller Representative and (ii) designate and segregate out of the assets of the Cash Escrow Fund a portion thereof, valued in accordance with the Escrow Agreement, with a value equal to the amount subject to the Claim Notice which is disputed by the Seller Representative. Thereafter, the Escrow Agent shall not dispose of such segregated portion of the Cash Escrow Fund until the Escrow Agent shall have received a certified copy of the final decision of the arbitrators as contemplated by Section 5.4, or the Escrow Agent shall have received a copy of the written agreement between the Claiming Party and the Seller Representative resolving such dispute and setting forth the amount, if any, which such Claiming Party is entitled to receive. The Escrow Agent will deliver to Buyer, for its account or for the account of each Buyer Group Member entitled to payment, such portion of the Cash Escrow Fund, valued in accordance with the Escrow Agreement, with a value equal to the amount that the Claiming Party is entitled to receive as set forth in the arbitration decision after the expiration of ten (10) business days from the receipt of such decision or, in the event that the amount to which the Claiming Party is entitled is established pursuant to an agreement between the Claiming Party and the Seller Representative, promptly after the Escrow Agent’s receipt of such agreement.

          Section 5.4 Resolution of Conflicts; Arbitration.

          (a) The Claiming Party shall deliver a written response to the Seller Representative in respect of any Objection properly delivered by the Seller Representative. If after twenty (20) days following delivery of such response there remains a dispute as to any claims, the Seller Representative and the Claiming Party, shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such claims or forfeiture. If the Seller Representative and the Claiming Party, should so agree, a memorandum setting forth such agreement shall be prepared and signed by both and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and shall distribute the assets from the Cash Escrow Fund in accordance with the terms thereof.

          (b) If no such agreement is reached within such sixty (60) days period, either the Claiming Party, or the Seller Representative may, by written notice to the other, demand arbitration of the matter unless the amount of the Loss or Expense is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three arbitrators. Within fifteen (15) days after such written notice is sent, Buyer and the Seller Representative shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of the arbitrators as to the validity and amount of any claim in the related Claim Notice shall be binding, and conclusive, and notwithstanding anything in this Section 5.4, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Cash Escrow Fund in accordance therewith.

          (c) Judgment upon any award rendered by the arbitrators may be entered in

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any court having jurisdiction. Any such arbitration shall be held in Chicago, Illinois under the CPR rules for non-administered arbitrations then in effect of the American Arbitration Association. The non-prevailing party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative fee of the CPR, and the expenses, including without limitation, attorneys’ fees and costs, reasonably incurred by the other party to the arbitration.

          (d) Nothing contained in this Section 5.4 shall limit Buyer’s rights under Section 4.1 or otherwise obtain equitable or injunctive relief for any breach of this Agreement.

          Section 5.5 Seller Representative. The “Seller Representative” under the Share Escrow Agreement and Power of Attorney and the Option Escrow Agreement and Power of Attorney shall be Asghar Mostafa.

          Section 5.6 [Intentionally Omitted.]

          Section 5.7 Third Party Claims.

          (a) Subject to paragraph (b) of this Section 5.7, the Claiming Party shall have the right to conduct and control, through counsel of its choosing, any third party claim, action or suit, and the Claiming Party may compromise or settle the same; provided, that the Claiming Party shall give the Indemnifying Party advance notice of any proposed compromise or settlement. The Claiming Party shall permit the Indemnifying Party to participate in the defense of any such action or suit through counsel chosen by it, provided that the fees and expenses of such counsel shall be borne by the Indemnifying Party. Subject to paragraph (b) of this Section 5.7, any compromise or settlement with respect to a claim for money damages effected after the Indemnifying Party by notice to the Claiming Party shall have disapproved such compromise or settlement shall discharge the Indemnifying Party from liability with respect to the subject matter thereof, and no amount in respect thereof shall be claimed as Losses or Expenses under this Article V; provided, however, that approval of such compromise or settlement shall not be unreasonably withheld.

          (b) If the remedy sought in any action or suit referred to in paragraph (a) of this Section 5.7 is solely money damages and will have no continuing effect on the business of the Claiming Party, the Indemnifying Party shall have 30 business days after receipt of the notice referred to in Section 5.3(a) to notify the Claiming Party that it elects to conduct and control such action or suit. If the Indemnifying Party does not give the foregoing notice, the Claiming Party shall have the right to defend, contest, settle or compromise such action or suit in the exercise of its reasonable discretion, and the Indemnifying Party shall, upon request from the Claiming Party, promptly pay to such Claiming Party in accordance with the other terms of this Article V the amount of any Loss and Expense for which indemnification is provided hereunder. If the Indemnifying Party gives the foregoing notice, the Indemnifying Party shall have the right to undertake, conduct and control, through counsel of its own choosing and at the sole expense of the Indemnifying Party, the conduct and settlement of such action or suit, and the Claiming Party shall cooperate with the Indemnifying Party in connection therewith; provided that (i) the Indemnifying Party shall not thereby permit to exist any Encumbrance upon any asset of the Claiming Party; (ii) the Indemnifying Party shall not consent to any settlement that does not include as an unconditional term thereof the giving of a complete release from liability with

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respect to such action or suit to the Claiming Party; (iii) the Indemnifying Party shall permit the Claiming Party to participate in such conduct or settlement through counsel chosen by the Indemnified Party, but the fees and expenses of such counsel shall be borne by the Claiming Party except as provided in clause (iv) below; and (iv) the Indemnifying Party shall agree promptly to reimburse the Claiming Party for the full amount of any Loss resulting from such action or suit and all related Expenses incurred by the Claiming Party, including fees and expenses of counsel for the Claiming Party incurred after giving the foregoing notice to the Indemnifying Party and prior to the assumption of the conduct and control of such action or suit by the Indemnifying Party but excluding fees and expenses of counsel for the Claiming Party incurred after the assumption of the conduct and control of such action or suit by the Indemnifying Party. So long as the Indemnifying Party is contesting any such action or suit in good faith, the Claiming Party shall not pay or settle any such action or suit. Notwithstanding the foregoing, the Claiming Party shall have the right to pay or settle any such action or suit; provided, that in such event the Claiming Party shall waive any right to indemnity therefore by the Indemnifying Party, and no amount in respect thereof shall be claimed as Losses or Expenses under this Article V.

          Section 5.8 Subsequent Dispositions. Buyer’s right to indemnification hereunder shall not be affected by any subsequent disposition of any of the assets of the Company or any of the Shares.

          Section 5.9 No Contribution. Each of the Sellers hereby agrees that such Seller shall have no right, and hereby waives any such rights, to contribution or any other right of recovery from the Company, its successors or assigns in respect of any payments made by such Seller pursuant to the provisions of this Article V or otherwise hereunder. From and after the Closing, the obligations of Seller hereunder are absolute.

          Section 5.10 Certain Conflicts. If there shall be any conflicts between the provisions of this Article V and Section 4.2(c) (relating to Tax contests), the provisions of Section 4.2(c) shall control with respect to Tax contests.

          Section 5.11 Treatments of Payments. Any payment by Buyer or Seller under this Article V shall be treated as an adjustment to the Purchase Price to the extent permitted under applicable provisions of law, and will be computed on an After-Tax Basis.

          Section 5.12 Exclusive Remedies. The remedies provided for in this Agreement and the Escrow Agreement shall be the sole and exclusive remedies of the parties hereto and their assigns for any breach of or inaccuracy in any representation, warranty or covenant contained in this Agreement or any certificate delivered at Closing; provided, however, that nothing herein is intended to waive any claims for fraud or willful misconduct or waive any equitable remedies to which a party may be entitled.

          Section 5.13 No Double Recovery. Notwithstanding anything herein to the contrary, no Buyer Group Member or Seller Group Member shall be entitled to indemnification or reimbursement under any provision of this Agreement for any Loss or Expense to the extent such Buyer Group Member or other Seller Group Member, as the case may be, has been fully indemnified or reimbursed for such Loss or Expense under any other provision of this

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Agreement or the Escrow Agreement.

ARTICLE VI
FORFEITURE EVENTS

          Section 6.1 Notice And Determination Of Forfeiture Events.

          (a) If Buyer wishes to assert that an Individual Forfeiture Event has occurred, it shall give the Escrow Agent and the Sellers Representative a notice (an “Individual Forfeiture Notice”), describing in reasonable detail the facts giving rise to the Individual Forfeiture Event and identifying the Subaccount under which the Escrow Shares are subject to forfeiture. If Buyer wishes to assert that a Total Forfeiture Event (together with any Individual Forfeiture Event, a “Forfeiture Event”) has occurred, it shall give the Escrow Agent and the Sellers Representative a notice (a “Total Forfeiture Notice” and together with any Individual Forfeiture Event, “Forfeiture Notice”), describing in reasonable detail the facts giving rise to the Total Forfeiture Event.

          (b) In the case of a Forfeiture Notice, unless the Seller Representative shall have delivered a Forfeiture Objection in accordance with Section 6.1(c), the Escrow Agent shall, on the twentieth day (or such earlier day as the Seller Representative shall authorize in writing to the Escrow Agent) after receipt of a Forfeiture Notice, deliver to Buyer (i) the certificate or certificates representing the Escrow Shares subject to forfeiture, (ii) any dividends and distributions in respect of the Escrow Shares subject to forfeiture, whether in cash, additional Buyer Shares or other property, received by the Escrow Agent and (iii) all cash proceeds resulting from the sale of any Escrow Shares that would have been otherwise subject to forfeiture, in each case as set forth in the Forfeiture Notice. The certificates representing the Escrow Shares to be delivered in accordance with the Forfeiture Notice shall be duly endorsed by the Escrow Agent in blank or accompanied by stock powers duly executed by the Escrow Agent in blank, in each case, in form satisfactory to Buyer.

          (c) Until the twentieth day following delivery of a Forfeiture Notice, the Seller Representative may deliver to the Escrow Agent a written objection (an “Forfeiture Objection”) to the claim made in such Forfeiture Notice. At the time of delivery of any Forfeiture Objection to the Escrow Agent, a duplicate copy of such Forfeiture Objection shall be delivered to the Buyer.

          (d) Upon receipt of a Forfeiture Objection properly made to a Forfeiture Notice, the Escrow Agent shall (i) deliver to Buyer, for its account, such portion of the Share Escrow Fund, if any, which is not disputed by the Seller Representative and (ii) designate and segregate out of the Share Escrow Fund a portion thereof which is disputed by the Seller Representative. Thereafter, the Escrow Agent shall not dispose of such segregated portion of the Share Escrow fund until the Escrow Agent shall have received a certified copy of the final decision of the arbitrators as contemplated by Section 6.1(e), or the Escrow Agent shall have received a copy of the written agreement between the Buyer and the Seller Representative resolving such dispute and setting forth the amount, if any, which Buyer is entitled to receive. The Escrow Agent will deliver to Buyer, for its account, such portion of the Share Escrow Fund that the Buyer is entitled to receive as set forth in the arbitration decision after the expiration of

47

ten (10) business days from the receipt of such decision or, in the event that the amount to which the Buyer is entitled is established pursuant to an agreement between the Buyer and the Seller Representative, promptly after the Escrow Agent’s receipt of such agreement.

          (e) In the event the Buyer and the Seller Representative are unable to agree as contemplated by Section 6.1(d),

     (i) the Buyer shall deliver a written response to the Seller Representative in respect of any Forfeiture Objection properly delivered by the Seller Representative. If after twenty (20) days following delivery of such response there remains a dispute as to any claims, the Seller Representative and the Buyer shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to such forfeiture. If the Seller Representative and the Buyer should so agree, a memorandum setting forth such agreement shall be prepared and signed by both and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and shall distribute the portion of the Share Escrow Fund in accordance with terms thereof;

     (ii) if no such agreement is reached within such sixty (60) days period, either the Buyer or the Seller Representative may, by written notice to the other, demand arbitration of the matter; and in such event the matter shall be settled by arbitration conducted by three arbitrators. Within fifteen (15) days after such written notice is sent, Buyer and the Seller Representative shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of the arbitrators as to the validity and amount of any claim in the related Forfeiture Notice shall be binding, and conclusive, and notwithstanding anything in this Section 6.1, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Share Escrow Fund in accordance therewith; and

     (iii) judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Chicago, Illinois under the CPR rules for non-administered arbitrations then in effect of the American Arbitration Association. The non-prevailing party to any arbitration shall pay its own expenses, the fees of each arbitrator, the administrative fee of the CPR, and the expenses, including without limitation, attorneys’ fees and costs, reasonably incurred by the other party to the arbitration.

          (f) Nothing contained in this Section 6.1 shall limit Buyer’s rights under Section 4.1 or to otherwise obtain equitable or injunctive relief for any breach of this Agreement.

ARTICLE VII
GENERAL PROVISIONS

          Section 7.1 Survival. All representations, warranties, covenants, agreements and obligations contained in this Agreement shall survive the consummation of the transactions contemplated by this Agreement; provided, however, that, except as otherwise provided in Article V, the representations and warranties contained in Article II and III shall terminate on June 30, 2006. Except as otherwise provided herein, no claim shall be made for the breach of

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any representation or warranty contained in Article II or III under this Agreement after the date on which such representations and warranties terminate as set forth in this Section 7.1. Except as otherwise provided in Article V, nothing contained in this Agreement shall be construed to terminate or otherwise limit any Claiming Party’s right to indemnification under Article V.

          Section 7.2 Confidential Nature of Information. Each party agrees that it will treat in confidence all documents, materials and other information which it shall have obtained regarding the other party during the course of the negotiations leading to the consummation of the transactions contemplated hereby (whether obtained before or after the date of this Agreement), the investigation provided for herein and the preparation of this Agreement and other related documents, and, in the event the transactions contemplated hereby shall not be consummated, each party will return to the other party all copies of nonpublic documents and materials which have been furnished in connection therewith. The obligation of each party to treat such documents, materials and other information in confidence shall not apply to any information which (a) such party can demonstrate was already lawfully in its possession prior to the disclosure thereof by the other party, (b) is known to the public and did not become so known through any violation of a legal obligation, (c) became known to the public through no fault of such party, (d) is later lawfully acquired by such party from other sources or (e) such party is required to disclose pursuant to judicial order or, in the opinion of counsel, pursuant to applicable law or the rules of any national securities association. Without limiting the right of either party to pursue all other legal and equitable rights available to it for violation of this Section 7.2 by the other party, it is agreed that other remedies cannot fully compensate the aggrieved party for such a violation of this Section 7.2 and that the aggrieved party shall be entitled to injunctive relief to prevent a violation or continuing violation hereof.

          Section 7.3 Governing Law; Venue. THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAW PROVISIONS) OF THE STATE OF DELAWARE.

          Section 7.4 Notices. All notices, consents, deliveries, demands, requests or other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered when delivered personally or by messenger or 72 hours after having been sent by registered or certified mail or by private courier or by facsimile transmission addressed as follows:

          If to Buyer to:

Tellabs, Inc.
One Tellabs Center
1415 West Diehl Road
Naperville, Illinois 60563
Attention: General Counsel
Facsimile No.: (630) 798-3231

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          with a copy to:

Sidley Austin Brown & Wood LLP
Bank One Plaza
10 South Dearborn Street
Chicago, Illinois 60603
Attention: Imad I. Qasim
Facsimile No.: (312) 853-7036

          If to the Sellers or the Seller Representative, to

Vinci Systems, Inc.
8330 Boone Blvd., Suite 500
Vienna, VA 22182
Attention: Asghar Mostafa
Facsimile No.: (703) 448-3799

          with a copy to:

Holland & Knight LLP
1600 Tysons Boulevard, Suite 700
McLean, VA 22102
Attention: Michael M. Mannix
Facsimile No.: (703) 720-8610

or to such other address (i) as Buyer may indicate to the Seller Representative, or (ii) as the Seller Representative may indicate to Buyer (in the case of the Sellers’ or the Seller Representative’s address), in each case by notice delivered in accordance herewith.

          Section 7.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their legal heirs, legal representatives, successors and permitted assigns. The Sellers may not assign any of their rights or obligations under this Agreement. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any person other than the parties and their legal heirs, legal representatives, successors and assigns permitted by this Section 7.5 any right, remedy or claim under or by reason of this Agreement.

          Section 7.6 Access to Records after Closing.

          (a) For a period of five years after the Closing Date, the Seller Representative shall have reasonable access to all of the books and records of the Company relating to periods prior to the Closing Date to the extent that such access may reasonably be required by the Sellers in connection with their obligations hereunder or the preparation of their federal or state income tax returns, amended returns, any claim for refund or any audit or contest of such returns or claims. Such access shall be afforded by the Company upon receipt of reasonable advance notice and during normal business hours. The Sellers shall be solely responsible for any costs or

50

expenses incurred by them pursuant to this Section 7.6(a). If the Company shall desire to dispose of any of such books and records prior to the expiration of such five-year period, the Company shall, prior to such disposition, give the Seller Representative thirty days, at their expense, to segregate and remove such books and records as they may select.

          (b) For a period of five years after the Closing Date, Buyer and its representatives shall have reasonable access to all of the books and records of the Sellers relating in any respect to the Company to the extent such access may reasonably be required by Buyer in connection with its ownership or operation of the Company, including any tax matters relating thereto. Such access shall be afforded by the Sellers upon receipt of reasonable advance notice and during normal business hours. Buyer shall be solely responsible for any costs and expenses incurred by it pursuant to this Section 7.6(b). If the Sellers shall desire to dispose of any of such books and records prior to the expiration of such five-year period, the Sellers shall, prior to such disposition, give Buyer thirty days, at Buyer’s expense, to segregate and remove such books and records as Buyer may select.

          Section 7.7 Entire Agreement; Amendments. This Agreement, the Annexes and the Exhibits and Schedules referred to herein and the documents delivered pursuant hereto contain the entire understanding of the parties hereto with regard to the subject matter contained herein or therein, and supersede all prior agreements, understandings or intents between or among any of the parties hereto. The parties hereto, by mutual agreement in writing, may amend, modify and supplement this Agreement.

          Section 7.8 Interpretation. Article titles and headings to sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. The Schedules and Exhibits referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein.

          Section 7.9 Waivers. Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the exclusive benefit thereof. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.

          Section 7.10 Expenses; Attorneys’ Fees. Each party hereto will pay all of his or its own costs and expenses incident to his or its negotiation and preparation of this Agreement and to his or its performance and compliance with all agreements and conditions contained herein on his or its part to be performed or complied with, including the fees, expenses and disbursements of his or its counsel and accountants. Without limitation of any party’s rights and obligations under Article V, in the event of any dispute, claim, arbitration or litigation with regard to this Agreement, each party hereto will pay all of his or its own costs, fees and expenses of counsel incurred in connection with such dispute, claim, arbitration or litigation.

          Section 7.11 Partial Invalidity. Wherever possible, each provision hereof shall

51

be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable.

          Section 7.12 Execution in Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by each of the parties and delivered to each of the Company, the Sellers and Buyer.

          Section 7.13 Definitions. As used in this Agreement, the following terms have the meanings specified or referred to in this Section 7.13:

          “611 ONT” has the meaning specified in Section 1.4(d)(i).

          “Accounts Receivable” has the meaning specified in Section 2.34.

          “Accrued Pre-Closing Taxes” has the meaning specified in Section 4.2(a)(i).

          “Affiliate” has the meaning specified in Section 2.17.

          “After-Tax Basis” shall mean, with respect to any amount which is to be paid hereunder on an “After-Tax Basis,” an amount which, after subtraction of the amount of all federal, state and foreign Taxes payable by the recipient thereof as a result of the receipt or accrual of such payment, and after taking into account (i) the increase in federal, state and foreign Taxes (including estimated Taxes) payable by such recipient for all affected taxable years as a result of the event or occurrence giving rise to such payment (the “Indemnified Event”), and (ii) the reduction in federal, state and foreign Taxes (including estimated Taxes) payable by the recipient for all taxable years ending on or before the end of the taxable year in which such payment is made, shall be sufficient as of the date of payment to compensate the recipient for such Indemnified Event.

          “Agreement” means this Stock Purchase Agreement dated as of December 30, 2004 among Buyer and the Sellers.

          “Annual Financial Statements” has the meaning specified in Section 2.6.

          “Balance Sheet” has the meaning specified in Section 2.6.

          “Balance Sheet Date” has the meaning specified in Section 2.6.

          “Bank Payoff Letter” means the payoff letter from Branch Banking and Trust Company of VA to the Company in the form attached hereto as Exhibit I.

52

          “Base Share Cash Price” has the meaning specified in Section 1.3(c).

          “BOM Expenses” has the meaning specified in Section 1.4(c)(i).

          “Business” has the meaning specified in the second recital to this Agreement.

          “Buyer” has the meaning specified in the first paragraph of this Agreement.

          “Buyer Ancillary Agreements” has the meaning specified in Section 3.2(a).

          “Buyer Common Stock” means the common stock of Buyer, par value $0.01.

          “Buyer Designated Representations” has the meaning specified in Section 5.2(b)(i).

          “Buyer Group Members” means Buyer and its Affiliates (including, after the Closing, the Company), directors, officers, employees, agents and their respective successors and assigns.

          “Buyer Preferred Stock” has the meaning specified in Section 3.3.

          “Buyer SEC Documents” has the meaning specified in Section 3.4.

          “Buyer Shares” has the meaning specified in Section 1.3(a)(ii).

          “Buyer Preferred Stock” has the meaning specified in Section 3.3.

          “Buyer Stock Plans” has the meaning specified in Section 3.3.

          “Cash Escrow Amount” has the meaning specified in Section 1.4(a)(ii).

          “Cash Escrow Fund” shall have the meaning set forth in Section 1.8(b).

          “Cash Payments” has the meaning specified in Section 1.3(a)(vi).

          “Cause” means an employee’s (i) commission of an act of fraud, embezzlement, misappropriation, theft, dishonesty or a criminal act constituting a felony under federal or state law, (ii) breach of its obligations under Sections 4.1 or 7.2 of this Agreement, (iii) breach of or willful failure to perform any material covenants under the Proprietary Information and Inventions Agreement with Buyer, (iv) repeated refusal to perform the duties assigned by Buyer or the Company, provided such duties are reasonably consistent with the employee’s employment position, (v) gross negligence or willful misconduct resulting in a loss to Buyer or the Company, or damage to the reputation of Buyer or the Company, (vi) material violation of the employment policies of Buyer or any of its Affiliates or (vii) violation of any statutory or common law duty of loyalty to Buyer or the Company.

53

          “Claim Notice” has the meaning specified in Section 5.3(a).

          “Claiming Party” has the meaning specified in Section 5.3(a).

          “Class A Shares” has the meaning specified in the first recital of this Agreement.

          “Class B Shares” has the meaning specified in the first recital of this Agreement.

          “Closing” has the meaning specified in Section 1.2.

          “Closing Date” has the meaning specified in Section 1.2.

          “Code” means the Internal Revenue Code of 1986, as amended.

          “Company” has the meaning specified in the first recital to this Agreement.

          “Company Agreements” has the meaning specified in Section 2.23.

          “Company Business Personnel” has the meaning specified in Section 2.15.

          “Company Employment Agreements” has the meaning specified in Section 2.13(d).

          “Company Group” has the meaning specified in Section 2.10.

          “Company Intellectual Property” has the meaning specified in Section 2.16(a)(i).

          “Company Permits” has the meaning specified in Section 2.9.

          “Company Plan” has the meaning specified in Section 2.13(c).

          “Company Proprietary Information Agreement” has the meaning specified in Section 2.16(h).

          “Company Registered Intellectual Property Rights” has the meaning specified in Section 2.16(b).

          “Copyrights” has the meaning specified in Section 2.16(a)(iii)(3).

          “Defined Liabilities” has the meaning specified in Section 1.3(c).

          “Encumbrance” means any lien, claim, charge, security interest, mortgage, pledge, easement, conditional sale or other title retention agreement, defect in title, community

54

property right, covenant, option, rights of first refusal, limitations on voting rights or other encumbrances of any nature whatsoever.

          “ERISA” has the meaning specified in Section 2.13(a).

          “ERISA Affiliate” has the meaning specified in Section 2.13(c).

          “Escrow Account” has the meaning specified in Section 1.8.

          “Escrow Agent” has the meaning specified in Section 1.8.

          “Escrow Agreement” has the meaning specified in Section 1.8.

          “Escrow Shares” has the meaning specified in the Escrow Agreement.

          “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          “Exercise Factor” has the meaning specified in Section 1.3(c).

          “Expense” means any and all expenses incurred in connection with investigating, preparing, defending, bringing or prosecuting any claim, action, suit or proceeding (including, without limitation, court filing fees, court costs, arbitration fees or costs, witness fees, and reasonable fees and disbursements of legal counsel, investigators, expert witnesses, accountants and other professionals).

          “Fifth Cash Payment” has the meaning specified in Section 1.3(a)(vi).

          “First Cash Payment” has the meaning specified in Section 1.3(a)(i).

          “Financial Statements” has the meaning specified in Section 2.6.

          “Forfeiture Event” has the meaning specified in Section 6.1(a).

          “Forfeiture Notice” has the meaning specified in Section 6.1(a).

          “Fourth Cash Payment” has the meaning specified in Section 1.3(a)(v).

          “GAAP” has the meaning specified in Section 3.4.

          “Governmental Body” means any court, government (federal, state, local or foreign), department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority.

          “Governmental Entity” means any domestic (federal and state), foreign or supranational court, commission, governmental body, regulatory agency, authority or tribunal.

55

          “Guarantee” means the guarantee of Asghar Mostafa in the form attached hereto as Exhibit G.

          “Indemnifying Party” has the meaning specified in Section 5.3(a).

          “Individual Forfeiture Event” has the meaning specified in Section 1.4(b).

          “Individual Forfeiture Notice” has the meaning specified in Section 6.1(a).

          “Intellectual Property Rights” has the meaning specified in Section 2.16(a)(iii).

          “Interest” means simple interest at the rate of 3.75% per annum.

          “Interim Balance Sheet” means the unaudited balance sheet of the Company as of November 30, 2004 included in Schedule 2.6.

          “Interim Financial Statements” has the meaning specified in Section 2.6.

          “IRS” has the meaning specified in Section 2.13(a).

          “Knowledge of the Company” has the meaning specified in Section 2.11(c).

          “Losses” means any and all losses, costs, obligations, liabilities, settlement payments, awards, judgments, fines, penalties, damages, expenses, Taxes, deficiencies or other charges, but shall not include Expenses.

          “Maskworks” has the meaning specified in Section 2.16(a)(iii)(4).

          “Material Adverse Change” or “Material Adverse Effect” means, when used with respect to Buyer or the Company, as the case may be, any event, change or effect that individually or when taken together with all other such events, changes or effects is or could reasonably be expected to be materially adverse to the business, prospects, assets, liabilities, financial condition or results of operations of Buyer and its Subsidiaries, taken as a single entity, or the Company, as the case may be.

          “Note Payoff Letter” means the payoff letter from Mostafa Venture Fund I, LLC to the Company, in the form attached hereto as Exhibit J.

          “Objection” has the meaning specified in Section 5.3(c).

          “Open Source Materials” has the meaning specified in Section 2.16(x).

          “Options” has the meaning specified in the third recital of this Agreement.

          “Option Escrow Agreement and Power of Attorney” has the meaning specified in Section 1.10(b).

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          “Optionholders” has the meaning specified in the third recital to this Agreement.

          “Patents” has the meaning specified in Section 2.16(a)(iii)(1).

          “Payment Account” has the meaning specified in Section 1.4(a)(i).

          “Permitted Encumbrance” has the meaning specified in Section 2.7(c)(vii).

          “Person” has the meaning specified in Section 2.17.

          “Performance Conditions” has the meaning specified in Section 1.4.

          “Performance Period” has the meaning specified in Section 1.4.

          “Per Share Cash Price” has the meaning specified in Section 1.3(c).

          “Per Share Stock Price” has the meaning specified in Section 1.3(c).

          “Products” has the meaning specified in Section 2.16(a)(ii).

          “Proprietary Information and Inventions Agreement” means the Proprietary Information and Inventions Agreement in the form attached hereto as Exhibit H.

          “PTO” has the meaning specified in Section 2.16(b).

          “Purchase Price” has the meaning specified in Section 1.3(a).

          “Registered Intellectual Property Rights” has the meaning specified in Section 2.16(a)(iv).

          “Release” means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any facility of any contaminant, including the movement of Contaminants through or in the air, soil, surface water, groundwater or Facility.

          “Requirements of Law” has the meaning specified in Section 2.11(c).

          “Restricted Persons” has the meaning specified in Section 4.1.

          “Schedule” or “Schedules” means the numbered schedules referred to in this Agreement.

          “SEC” has the meaning specified in Section 3.4.

          “Second Cash Payment” has the meaning specified in Section 1.3(a)(iii).

57

          “Securities Act” means the Securities Act of 1933, as amended.

          “Seller Ancillary Agreements” has the meaning specified in Section 2.5.

          “Seller Designated Representations” has the meaning specified in Section 5.1(b)(i).

          “Seller Group Member” means the Sellers, their Affiliates, employees, agents, attorneys, accountants and consultants and their respective successors and assigns.

          “Seller Representative” has the meaning specified in Section 5.5.

          “Sellers” has the meaning specified in the fifth recital to this Agreement.

          “Share Escrow Agreement and Power of Attorney” has the meaning specified in Section 1.10(a).

          “Share Escrow Fund” has the meaning specified in the Escrow Agreement.

          “Shares” has the meaning specified in the first recital to this Agreement.

          “Stock Option Plan” has the meaning specified in Section 2.4(b).

          “Stock Payment” has the meaning specified in Section 1.3(a)(ii).

          “Stockholders” has the meaning specified in the first recital to this Agreement.

          “Straddle Period” shall mean any taxable year or period beginning before and ending after the Closing Date.

          “Subsequent Cash Payment” has the meaning specified in Section 1.3(a)(vi).

          “Subsidiary” means any corporation, partnership, limited liability company, joint venture, trust, association or other entity of which Buyer or the Company, as the case may be (either alone or through or together with any other Subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation, partnership, limited liability company, joint venture or other entity.

          “Tax” or “Taxes” has the meaning specified in Section 2.10.

          “Tax Return” has the meaning specified in Section 2.10.

          “Tax Sharing Arrangement” has the meaning specified in Section 2.10.

58

          “Third Cash Payment” has the meaning specified in Section 1.3(a)(iv).

          “Technology” has the meaning specified in Section 2.16(a)(v).

          “Total Forfeiture Event” has the meaning specified in Section 1.4(b).

          “Total Forfeiture Notice” has the meaning specified in Section 6.1(a).

          “Trademarks” has the meaning specified in Section 2.16(a)(iii)(6).

          “Trade Secrets” has the meaning specified in Section 2.16(a)(iii)(2).

          “Verizon Delay” has the meaning specified in Section 1.4.

          “Voluntary Departure” means an employee’s voluntary termination of his or her employment with Buyer for any reason other than (i) a material adverse change by Buyer in such employee’s job responsibilities or (ii) a relocation by Buyer of such employee’s principal office by more than 25 miles (other than a relocation to Buyer’s facilities in Ashburn, Virginia), which in either case is without the employee’s consent, is described in a written termination notice which the employee provides to Buyer within 30 days after the occurrence of such event and is not corrected by Buyer within 30 days after Buyer’s receipt of such termination notice.

          Section 7.14 No Public Announcement. No party hereto shall, without the approval of the other parties hereto, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such party shall be so obligated by law or the rules of any stock exchange, in which case the other party shall be advised and the parties shall use their best efforts to cause a mutually agreeable release or announcement to be issued; provided that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with the accounting and Securities and Exchange Commission disclosure obligations.

          Section 7.15 Jurisdiction and Venue; Service of Process.

          (a) Buyer and each of the Sellers hereby irrevocably submits in any suit, action or proceeding arising out of or related to this Agreement, or any of the other agreements or instruments contemplated by this Agreement, or any of the transactions contemplated by this Agreement, to the jurisdiction of the courts of the United States of America located in the State of Illinois and the jurisdiction of the courts of the State of Illinois, said court to be determined by the Person bringing such suit, action or proceedings, and waive any and all objections to jurisdiction that it or he or she may have under the laws of the State of Illinois or the United States. Buyer and each of the Sellers hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding, in the State of Illinois and further irrevocably waives any claim that the State of Illinois is not a convenient forum for any such suit, action or proceeding.

          (b) Each Seller hereby irrevocably designates, appoints and empowers Seller Representative as its agent to receive, for and on behalf of such Seller, service of process in any

59

suit, action or proceeding arising out of or related to this Agreement, or any of the other agreements or instruments contemplated by this Agreement, or any of the transactions contemplated by this Agreement (which service shall be deemed completed ten (10) days after delivery thereof to such party served). In addition, service of process on any Seller in any such suit, action or proceeding shall be effective if mailed by certified first class mail, postage prepaid, to the Seller Representative at the address referred to in Section 7.4 with respect to it.

          (c) Each Seller undertakes to enter an unconditional appearance within thirty (30) days after the completion of service as provided for herein or under applicable law if not so provided. Nothing herein shall affect the right to serve process in any other manner permitted by law.

* * * * * * * *

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

TELLABS, INC.,

a Delaware corporation

By:

Name:

Title:

STOCKHOLDERS
Mostafa Group, LLC
By:
Name:	Asghar Mostafa
Title:	President and Chief Executive Officer

Joseph Kralowetz

Jyoti Athavale

Douglas Ortega

Michael Giovannoni

John Ridgway

Douglas Atkinston

Dyanna Gerber

Tara Greenwood

Signature Page 1

John Burch

OPTIONHOLDERS

Charles Rothrauff

Brendan Mannix

Gananathan Suresh

Hwa-Wei (David) Liu

Keth Bennington

Governor W. Grant

Adam Swanbery

Scott Burk

Emerson Deitz

Peter Randall

Joseph Roesch

James Burke

John Milroth

Signature Page 2

Wen-Bing Shiu

Jeff Rosenwald

Michael Ange

David P. Fredrickson

Jeffrey Noel

John Burch

Guy Merritt

Charles Ryland

Kevin Gemp

Asghar Mostafa hereby agrees to be bound by Section 4.1, and agrees to be bound by Article VII as if he was a Seller.

                                        
Asghar Mostafa

Signature Page 3

Form of notarization for limited liability companies:

State of	)
	)	SS.:
County of	)

     On this            day of December 2004, before me, the undersigned, a

Notary Public of said State, duly commissioned and sworn, personally appeared                     , known to me, who, being by me duly sworn, did dispose and say that he is the                      of                      , the limited liability company described in and that executed the within instrument, and that he signed his name thereto by order of the managers and/or the members of said limited liability company.

Notary Public

My Commission Expires:                                         

Form of notarization for individuals:
State of	)
	)	SS.:
County of	)

     On this            day of December 2004, before me, the undersigned,                    

     a Notary Public of said State, duly commissioned and sworn, personally appeared                                             

     , known to me to be the person described in and who executed the within instrument, and acknowledged to me that he executed the same and swore to the same.

Notary Public

My Commission Expires                                        

ANNEX A

See Attached.

Annex A-1

ANNEX B

See Attached.

Annex B-1

Exhibit A

BUYER SHARES

See Attached.

Exhibit A-1

Exhibit B

OPINION OF COUNSEL FOR THE COMPANY
AND
SPECIAL COUNSEL TO ASGHAR MOSTAFA

See Attached.

Exhibit B-1

Exhibit C

RELEASE AND WAIVER

See Attached.

Exhibit C-1

Exhibit D

ESCROW AGREEMENT

See Attached.

Exhibit D-1

Exhibit E

SHARE ESCROW AGREEMENT
AND
POWER OF ATTORNEY

See Attached.

Exhibit E-1

Exhibit F

OPTION ESCROW AGREEMENT
AND
POWER OF ATTORNEY

See Attached.

Exhibit F-1

Exhibit G

GUARANTEE

See Attached.

Exhibit G-1

Exhibit H

PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

See Attached.

Exhibit H-1

Exhibit I

BANK PAYOFF LETTER

See Attached.

Exhibit I-1

Exhibit J

NOTE PAYOFF LETTER

See Attached.

Exhibit J-1

EX-2.7

Exhibit 2.7

Asset Purchase and Sale Agreement

By and Among

Marconi Communications, Inc.,

Marconi Intellectual Property (Ringfence) Inc.,

Marconi Corporation PLC,

Advanced Fibre Communications, Inc.

and

Advanced Fibre Communications North
America, Inc.

Dated as of January 5, 2004

Sale of North American Access Systems Business

Table of Contents

ARTICLE I Definitions	1
1.1 Definitions	1
1.2 Interpretation	19
ARTICLE II Sale and Purchase of Assets; Assumption of Assumed Obligations	20
2.1 Purchase and Sale of Assets	20
2.2 Assignment of Permits and Contracts	22
2.3 Certain Provisions Regarding Assignments	24
2.4 Excluded Assets	25
2.5 Assumed Obligations	27
2.6 Retained Obligations	28
2.7 Prorations	30
ARTICLE III Purchase Price; Adjustment; Allocation	31
3.1 Payment of Purchase Price	31
3.2 Purchase Price Adjustment	31
3.3 Allocation of Consideration for Assets	33
ARTICLE IV Representations and Warranties of the Parent, the Seller and Marconi IP	34
4.1 Due Incorporation	34
4.2 Due Authorization	35
4.3 Consents and Approvals; Authority Relative to this Agreement	35
4.4 Management Accounts	36
4.5 No Other Assumed Liabilities	36
4.6 No Adverse Effects or Changes	37
4.7 Title to Assets; Affiliate Ownership of Assets	37
4.8 Access Business Assets	37
4.9 Real Property	37
4.10 Personal Property; Leased Personal Property	38
4.11 Customers and Distributors; Suppliers	39
4.12 Proceedings	39
4.13 Intellectual Property	40

-i-

Table of Contents
(continued)

4.14 Contracts	42
4.15 Permits	45
4.16 Insurance	45
4.17 Employee Benefit Plans and Employment Agreements	45
4.18 Employment and Labor Matters	46
4.19 Taxes	48
4.20 Compliance with Laws	48
4.21 Environmental Matters	48
4.22 Accounts Receivable	49
4.23 Inventory	49
4.24 Product Warranties and Liabilities	49
4.25 Effect of Transactions	50
4.26 Solvency	50
ARTICLE V Representations and Warranties of the Purchaser and AFCNA	50
5.1 Due Incorporation	50
5.2 Due Authorization	51
5.3 Consents and Approvals; Authority Relative to this Agreement	51
5.4 Proceedings	52
5.5 Financing	52
5.6 Independent Investigation	52
ARTICLE VI Covenants	52
6.1 Access to Information	52
6.2 Preservation of Business	53
6.3 Consents and Approvals	57
6.4 Marconi Name	59
6.5 Brokers	60
6.6 Assignments	60
6.7 Orderly Transition; Preservation of Books and Records; Access and Assistance	60
6.8 Insurance	62
6.9 Confidentiality	62
6.10 Taxes	67
6.11 Agreement Not to Compete	68

-ii-

Table of Contents
(continued)

6.12 Collection of Receivables	70
6.13 Release of Liens	70
6.14 Nonsolicitation	70
6.15 Bedford Facility	71
6.16 Grande	72
6.17 Audit	72
ARTICLE VII Conditions Precedent to Obligations of the Purchaser and AFCNA	75
7.1 Warranties True	75
7.2 Compliance with Agreements and Covenants	75
7.3 Certificate of Compliance	76
7.4 Hart-Scott-Rodino	76
7.5 No Injunctions or Other Legal Restraints	76
7.6 Absence of Proceedings	76
7.7 Certificates	76
7.8 FIRPTA Certificate	76
7.9 Consents	77
7.10 Material Adverse Effect	77
7.11 Other Documents	77
7.12 Release of Liens	77
7.13 Opinion of Counsel	77
7.14 Solvency Opinion	77
ARTICLE VIII Conditions Precedent to Obligations of the Seller, Marconi IP and the Parent	77
8.1 Warranties True	77
8.2 Compliance with Agreements and Covenants	78
8.3 Certificate of Compliance	78
8.4 Hart-Scott-Rodino	78
8.5 No Injunctions or Other Legal Restraints	78
8.6 Absence of Proceedings	78
8.7 Other Documents	78
8.8 Purchase Price	78
8.9 Certificates	78

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Table of Contents
(continued)

8.10 Opinion of Counsel	78
ARTICLE IX Closing	79
9.1 Closing	79
9.2 Deliveries by the Seller	79
9.3 Deliveries by the Purchaser	79
ARTICLE X Termination	80
10.1 Termination	80
10.2 Effect of Termination	81
ARTICLE XI Employees and Employee Benefits	81
11.1 Offers of Employment	81
11.2 Employee Benefits — Generally	82
11.3 Service Credit	82
11.4 Welfare Benefits	83
11.5 Paid Time Off	83
11.6 Disability	83
11.7 Bonus	84
11.8 Retirement Plans	84
11.9 Workers and Unemployment Compensation	84
11.10 Wages	84
11.11 Severance	85
11.12 Cooperation	85
11.13 Employment Claims	85
ARTICLE XII Indemnification	85
12.1 Survival	85
12.2 Indemnification by the Parent, the Seller and Marconi IP	86
12.3 Indemnification by the Purchaser and AFCNA	87
12.4 Limitations on Liability	88
12.5 Mitigation	89
12.6 Claims	90
12.7 Notice of Third Party Claims; Assumption of Defense	90
12.8 Time Limits	92
12.9 Net Losses and Subrogation	92
12.10 Purchase Price Adjustments	93

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Table of Contents
(continued)

12.11 Reimbursement of Expenses	93
ARTICLE XIII Miscellaneous	93
13.1 Expenses	93
13.2 Amendment	93
13.3 Notices	93
13.4 Payments in Dollars	95
13.5 Waivers	95
13.6 Assignment	95
13.7 No Third Party Beneficiaries	95
13.8 Publicity	96
13.9 Further Assurances	96
13.10 Severability	96
13.11 Entire Understanding	96
13.12 Language	96
13.13 Applicable Law	96
13.14 Remittances	96
13.15 Bulk Sales	97
13.16 Jurisdiction of Disputes; Waiver of Jury Trial	97
13.17 Schedules	97
13.18 Disclaimer of Warranties	98
13.19 Counterparts	99
13.20 Specific Performance	99

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EXHIBITS
Exhibit A	Assignment and Assumption Agreement
Exhibit B	Bill of Sale
Exhibit C	Copyright Assignment
Exhibit D	Cross License Agreement
Exhibit E	Grande Reseller Agreement
Exhibit F	Patent Assignment
Exhibit G	Release Agreement
Exhibit H-1	Sublicense
Exhibit H-2	Sublicense
Exhibit I	OPPS Supply Agreement
Exhibit J	Trademark Assignment
Exhibit K	Transition Services Agreement
Exhibit L	Bedford Lease
Exhibit M	FIRPTA Certificate
Exhibit N	Opinion of Mayer, Brown, Rowe & Maw LLP (US Law Matters)
Exhibit O	Opinion of Mayer, Brown, Rowe & Maw LLP (UK Law Matters)
Exhibit P	Opinion of Allen & Overy (Indenture Matters)
Exhibit Q	Opinion of Valuation Research Corporation
Exhibit R	Opinion of Pillsbury Winthrop LLP
SCHEDULES
Schedule 1.1A	Core Technology
Schedule 1.1B	Current Access Employees
Schedule 1.1C	Former Access Employees
Schedule 1.1D	Global Patent Licenses
Schedule 1.1E	Group A and Group B Patents
Schedule 1.1F	OPPS Patents
Schedule 1.1G	Purchaser’s Knowledge
Schedule 1.1H	Seller’s Knowledge
Schedule 1.1I	Shared Contracts
Schedule 2.1(a)	Personal Property
Schedule 2.1(e)	Registered Trade Names
Schedule 2.2(c)	Certain Customer Contracts
Schedule 2.2(f)	Other Contracts
Schedule 2.4(x)	Excluded Laboratory and Other Equipment
Schedule 2.5(g)	Assumed Proceedings
Schedule 3.2(g)	Calculation Principles
Schedule 4.3(a)	Seller Governmental Consents
Schedule 4.3(b)	Seller Other Consents
Schedule 4.4(a)	Management Accounts
Schedule 4.4(b)	Deviations from UK GAAP
Schedule 4.4(c)	Assets and Liabilities
Schedule 4.5	No Other Assumed Liabilities
Schedule 4.6	No Adverse Effects or Changes
Schedule 4.7(a)	Title to Assets

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Schedule 4.7(b)	Affiliate Ownership of Assets
Schedule 4.8	Access Business Assets
Schedule 4.9(a)	Real Property
Schedule 4.10(a)	Material Owned Personal Property
Schedule 4.10(b)	Material Personal Property Leases
Schedule 4.11(a)	Material Customers
Schedule 4.11(b)	Material Suppliers
Schedule 4.11(c)	Material Distributors/Sales Representatives
Schedule 4.12	Proceedings
Schedule 4.13(a)	Transferred Patents, Transferred Trademarks and Transferred Technology
Schedule 4.13(b)(i)	Transferred Intellectual Property — Administrative Actions
Schedule 4.13(b)(ii)	Transferred Intellectual Property — Effectiveness
Schedule 4.13(c)	Ownership of Transferred Patents, Transferred Trademarks and Transferred Technology
Schedule 4.13(d)	Inbound Licenses
Schedule 4.13(e)(i)	Transferred Intellectual Property — Infringement and Claims
Schedule 4.13(e)(ii)	Transferred Intellectual Property — Pending Challenges or Adversarial Proceedings
Schedule 4.13(e)(iii)	Transferred Intellectual Property — Infringement
Schedule 4.14(a)	Contracts
Schedule 4.14(b)	Material Contracts — Defaults
Schedule 4.14(c)	Material Contracts — Consents
Schedule 4.15	Permits
Schedule 4.16	Insurance
Schedule 4.17	Employee Benefit Plans and Employment Agreements
Schedule 4.18(a)	Work Stoppages; Collective Bargaining Agreements
Schedule 4.18(b)	Compliance with Labor Laws
Schedule 4.18(c)	Employment Losses Under WARN
Schedule 4.18(d)	Agreements Restricting Employees
Schedule 4.18(e)	Reporting of Wages
Schedule 4.20	Compliance with Laws
Schedule 4.21	Environmental Matters
Schedule 4.23	Inventory
Schedule 4.24(a)	Product Warranties and Liabilities
Schedule 4.24(c)	Recalls
Schedule 4.25	Effect of Transactions
Schedule 6.2	Preservation of Business
Schedule 6.3(c)	Obtaining Consents
Schedule 6.16	Grande
Schedule 7.9	Closing Condition Consents

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Asset Purchase and Sale Agreement

     THIS ASSET PURCHASE AND SALE AGREEMENT is made as of the 5th day of January, 2004, by and among Advanced Fibre Communications, Inc., a Delaware corporation (the “Purchaser”), Advanced Fibre Communications North America, Inc., a Delaware corporation and a wholly-owned subsidiary of the Purchaser (“AFCNA”), Marconi Communications, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of the Parent (the “Seller”), Marconi Intellectual Property (Ringfence) Inc., a Delaware corporation and a wholly-owned subsidiary of the Seller (“Marconi IP”), and Marconi Corporation plc, a public limited liability company incorporated in England and Wales (registered no. 0067307) (the “Parent”). Certain capitalized terms used herein are defined in Article I.

W I T N E S S E T H:

     WHEREAS, the Purchaser and AFCNA (with respect to the Inventory (as defined below) only) wish to purchase from the Seller and Marconi IP, and the Seller and Marconi IP wish to sell to the Purchaser and AFCNA (with respect to the Inventory only), the Assets (as defined below), and the Purchaser desires to assume from the Seller, and the Seller desires to assign to the Purchaser, certain obligations and liabilities relating to the Access Business (as defined below), all upon the terms and subject to the conditions contained herein; and

     WHEREAS, the Parent, as a parent entity of the Seller and Marconi IP, has approved the sale of the Assets to the Purchaser and AFCNA as provided herein, and the Board of Directors of the Parent has resolved that the consideration for the Assets is sufficient to effect such sale under the Indentures (as defined below).

     NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements herein contained, the Purchaser, AFCNA, the Seller, Marconi IP and the Parent agree as follows:

ARTICLE I

Definitions

     1.1   Definitions. The following terms shall have the following meanings for the purposes of this Agreement:

     “Access Business” shall mean the business, as conducted by the Seller prior to the date hereof, of designing, developing, manufacturing, marketing and selling to telecommunications service providers voice, data and video transport systems for copper and fiber access networks, including digital loop carriers, digital subscriber lines and systems delivering fiber to the curb, fiber to the premises and fiber to the home, and the provision of related technical services, field support services, repair and replacement services and ongoing maintenance services for such systems. “Access Business” does not include (a) the Accesshub Business or (b) the Other Businesses.

     “Access Employees” shall mean, collectively, Current Access Employees and Former Access Employees.

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     “Accesshub Business” shall mean the business, as conducted by the Parent and its Affiliates (other than the Seller and its Subsidiaries) prior to the date hereof, of designing, developing, manufacturing, marketing and selling to telecommunications service providers voice, data and video transport systems for copper and fiber access networks, including digital loop carriers, digital subscriber lines and systems delivering fiber to the curb, fiber to the premises and fiber to the home, and the provision of related technical services, field support services, repair and replacement services and ongoing maintenance services for such systems. “Accesshub Business” does not include (a) the Access Business or (b) the Other Businesses.

     “Access Plans” shall mean the plans, programs, arrangements and agreements which cover only Current Access Employees or Former Access Employees and are identified on Schedule 4.17 as an Access Plan.

     “Access Portion” shall have the meaning set forth in Section 2.3(c).

     “Accounting Firm” shall have the meaning set forth in Section 3.2(c).

     “Accounts Payable” shall have the meaning set forth in Section 2.5(e).

     “Accounts Receivable” shall have the meaning set forth in Section 2.1(c).

     “Accrued Compensation and Benefits” shall mean (i) payroll and bonuses earned (it being understood that payroll and bonuses will be deemed “earned” in accordance with the applicable plan or policy), (ii) vacation pay accrued and (iii) the Included AIP Amount, in each case with respect to the Transferred Employees.

     “Acquired Entity” shall have the meaning set forth in Section 6.11(b).

     “Acquisition” shall mean the purchase and sale of the Assets and the assumption of the Assumed Obligations pursuant to the terms and conditions of this Agreement.

     “Adjusted Purchase Price” shall have the meaning set forth in Section 3.2(f).

     “AFAC” shall mean Advanced Fibre Access Corporation, a Delaware corporation.

     “AFCNA” shall have the meaning set forth in the Preamble.

     “Affiliate” shall mean, with respect to any specified Person, any other Person which directly or indirectly, controls, is under common control with, or is controlled by, such specified Person. The term “control” as used in the preceding sentence means, with respect to a corporation, the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares of such corporation, or with respect to any Person other than a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person.

     “Affiliate Contracts” shall have the meaning set forth in Section 4.14(a)(vi).

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     “Affiliated Group” shall have the meaning set forth in this section under the definition of Tax or Taxes.

     “Agreement” shall mean this Asset Purchase and Sale Agreement, including all Exhibits and Schedules hereto, as it may be amended, modified or supplemented from time to time in accordance with its terms.

     “Antitrust Division” shall mean the Antitrust Division of the United States Department of Justice.

     “Applicable Accounting Principles” shall have the meaning set forth in Section 4.4.

     “Assets” shall have the meaning set forth in Section 2.2.

     “Assignment and Assumption Agreement” shall mean the assignment and assumption agreement in the form set forth in Exhibit A.

     “Assumed Obligations” shall have the meaning set forth in Section 2.5.

     “Assumed Proceedings” shall have the meaning set forth in Section 2.5(g).

     “Audit” shall have the meaning set forth in Section 6.17(a).

     “Balance Sheet” shall have the meaning set forth in Section 4.4.

     “BBRS Business” shall mean the business of designing, developing, manufacturing, marketing and selling broadband routing and switching equipment and systems and associated administrative and management software, and the provision of related technical services, field support services, repair and replacement services and ongoing maintenance services for such equipment, systems and software, provided, that, for purposes of the foregoing, “broadband routing and switching equipment and systems”: (a) includes ATM switching, IP switching, IP routing, frame relay switching, Ethernet switching, MPLS switching and similar products and technologies; and (b) excludes the Access Business, and specifically excludes Digital Subscriber Line Access Multiplexers (DSLAMS), the MX shelf deployed in a mode to aggregate FITLA and DISC*s DSL traffic and the aggregation of remote DSL ports of the FITLA and MX products of the Access Business that are internal to those products.

     “Bedford Facility” shall mean the facility located at 2100 Reliance Parkway, Bedford, Texas 76021.

     “Bedford Lease” shall have the meaning set forth in Section 4.9(a).

     “Bedford Sale Agreement” shall mean the Agreement for the Sale and Purchase of Real Estate entered into on November 24, 2003, by and between Jabil Circuit of Texas, L.P. and CAMI Industrial, LLC.

     “BellSouth Entity” shall mean (i) BellSouth Corporation, (ii) any Subsidiary of BellSouth Corporation, (iii) any Person that acquires directly or indirectly (whether by purchase,

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assignment, conveyance, spin-off, contribution or otherwise, alone or together with one or more Affiliates in a single transaction or series of related transactions) at least 100,000 telephone lines or other access lines within the Nine-State Region from BellSouth Corporation or any of its Subsidiaries (the “Subject Lines”) (it being understood that, subsequent to any such transaction, only the portion of such Person’s business consisting of the Subject Lines shall be deemed to be included in the definition of “BellSouth Entity”) and (iv) any successors (by way of merger, consolidation or otherwise) to any Persons referred to in the foregoing clauses (i), (ii) or (iii) (it being understood that in the case of a successor of the type contemplated by this clause (iv), only that portion of such successor’s business that constituted the business of a “BellSouth Entity” in the Nine-State Region prior to the applicable transaction shall be deemed included in the definition of “BellSouth Entity” subsequent to such transaction); provided, however that if any Person referred to in the foregoing clauses (i), (ii), (iii) or (iv) acquires any equity interest in, or all or a portion of the business or assets of, any Person (other than a Person referred to in the foregoing clauses (i), (ii), (iii) or (iv)) (regardless of the form of such transaction), then the definition of “BellSouth Entity” shall not include (A) such acquired Person or any of its Subsidiaries (in the case of an acquisition of equity interests) or (B) the business or assets so acquired (in the case of any acquisition of assets).

     “Benchmark Amount” shall mean $5,604,000.

     “Benefit Plans” shall mean, collectively, the Access Plans and the Seller Benefit Plans.

     “Bill of Sale” shall mean the bill of sale in the form set forth in Exhibit B.

     “Business Day” shall mean any day of the year other than (i) any Saturday or Sunday or (ii) any other day on which banks located in London, England or New York, New York generally are closed for business.

     “Business Material Adverse Effect” shall mean any event, change or occurrence which, individually or together with any other event, change or occurrence, (A) has had or would reasonably be expected to have a material adverse effect on the operations, assets, results of operations or financial condition of the Access Business as a whole or (B) has otherwise had or would reasonably be expected to have a material adverse effect on the Purchaser’s ability following the Closing to conduct the Access Business as currently conducted (for purposes of this clause (B), disregarding impairments to the extent caused by the identity of the Purchaser, by any unique characteristic of the Purchaser or by any facts relating specifically to the Purchaser that would distinguish it from another similarly situated purchaser of the Assets), other than any event, change or occurrence resulting from (i) matters generally affecting the economy of the United States of America or Canada, (ii) conditions affecting the industry in general in which the Access Business operates and not having a materially disproportionate effect (relative to most industry participants) on the Access Business, (iii) military action or any act of terrorism, (iv) the loss of any vendors, customers or employees of the Access Business due to the fact that the Purchaser (as opposed to any other Person) is acquiring the Access Business, (v) changes in Law (for this purpose, “Law” shall not include Judgments to which any of the Seller, the Parent or Marconi IP is a party or by which the Access Business or the Assets are bound) or (vi) with respect to clause (A) above only, matters to the extent relating to an Excluded Asset and/or a Retained Obligation so long as such matters do not have and would not reasonably be expected

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to have an adverse impact on the value of the Access Business to the Purchaser, the value of the Assets or the reputation of the Access Business.

     “Calculation Principles” shall have the meaning set forth in Section 3.2(g).

     “CAMI Transaction” shall have the meaning set forth in Section 4.9(a).

     “Claims” shall have the meaning set forth in Section 2.2(h).

     “Claims Proceeds” shall have the meaning set forth in Section 6.2(c)(iv).

     “Closing” shall mean the consummation of the Acquisition and the other transactions contemplated herein in accordance with Article IX.

     “Closing Date” shall mean the date on which the Closing occurs or is to occur.

     “Closing Working Capital” shall have the meaning set forth in Section 3.2(a).

     “COBRA” shall mean all continuation group health coverage in accordance with the provisions of Section 4980B or Part 6 of Subtitle B of Title 1 of ERISA.

     “Code” shall mean the United States Internal Revenue Code of 1986, as amended.

     “Commercial Agreements” shall mean the Transition Services Agreement, the OPPS Supply Agreement, the Grande Reseller Agreement, if any, and the Seller Bedford Lease, if any.

     “Commercial Laws” shall have the meaning set forth in Section 2.5(c).

     “Consent” shall mean a consent, authorization or approval of a Person, or a filing or registration with a Person.

     “Contract” shall mean any contract, license, lease, sales order, purchase order, indenture, mortgage, note, bond, warrant, legally binding commitment, agreement and all other legally binding arrangements, whether oral or written.

     “Conveyance Agreement” shall mean any Related Agreement other than the Commercial Agreements.

     “Copyright Assignment” shall mean the Copyright Assignment in the form attached hereto as Exhibit C.

     “Core Technology” shall mean the Transferred Technology described on Schedule 1.1A.

     “Cross License Agreement” shall mean the cross license agreement in the form attached hereto as Exhibit D.

     “CSC” shall mean Computer Sciences Corp., a Nevada corporation.

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     “CSC International” shall mean CSC International Systems Management Inc., a Nevada corporation.

     “CSC Outsourcing Arrangement” shall mean the series of agreements pursuant to which the Seller and its Affiliates have agreed to (i) outsource the provision of certain information technology services to CSC International, including information technology services for the Access Business, and (ii) transfer certain of their equipment, contracts and other assets to CSC International and British Telecommunications PLC for the purpose of facilitating such outsourcing arrangement, including certain information technology assets formerly used in support of the Access Business.

     “Current Access Employee” shall mean any person who is employed by the Seller or any of its Affiliates immediately prior to the Closing Date primarily in connection with the Access Business, including any such person on leave of absence, maternity or paternity leave, vacation, sick leave, short term or long term disability, military leave, jury duty or bereavement leave. All such persons are listed in Schedule 1.1B.

     “Current Access Products” shall mean products, materials and services that are presently offered by the Access Business, or are presently, demonstrably in development to be offered by the Access Business, in each case as such products, materials and services exist before incorporation of products, materials and services provided or performed by the OPPS Business.

     “December CA” shall have the meaning set forth in Section 6.9(a).

     “Deloitte” shall have the meaning set forth in Section 6.17(a).

     “Dollars” or numbers preceded by the symbol “$” shall mean amounts in United States Dollars.

     “Employee IP Agreement” shall mean: (i) for copyrights that qualify as works made for hire or for trade secrets, an agreement with the Seller or Marconi IP or any predecessor in interest, that vests in the Seller or Marconi IP or the predecessor in interest original ownership in such copyrights or trade secrets included in the Transferred Technology conceived or developed by Personnel and (ii) for copyrights that cannot qualify as works made for hire or for Patents, appropriate assignments, or agreements to assign, such copyrights or Patents included in Transferred Patents or Transferred Technology to the Seller or Marconi IP or any predecessor in interest.

     “Enforceability Limitations” shall mean limitations on enforcement and other remedies imposed by or arising under or in connection with applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar Laws affecting creditors’ rights generally from time to time in effect or general principles of equity.

     “Environmental Law” shall mean any Law, each as in effect on the date hereof or the Closing Date, that imposes liability or standards of conduct concerning discharges, emissions, Releases or threatened Releases of any pollutant or contaminant into ambient air, water (including ground water) or land, or otherwise relating to the generation, treatment, storage, disposal, cleanup, transport or handling of any pollutant or contaminant.

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     “Environmental Permit” shall mean any Permit required by or pursuant to any applicable Environmental Law.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

     “Evolutions” shall have the meaning set forth in the Cross License Agreement.

     “Exchange Act” shall have the meaning set forth in Section 6.17(f).

     “Excluded Assets” shall have the meaning set forth in Section 2.4.

     “Excluded Leases” shall have the meaning set forth in Section 2.4(g).

     “50% Losses” shall mean any Losses arising out of or resulting from (a) a breach of a representation or warranty contained in (i) Section 4.7(b), Section 4.8 or Section 4.13 of this Agreement, (ii) Section 5 of the Cross License Agreement or (iii) Section 3 of either Sublicense or (b) Section 12.2(f) or Section 12.2(g) of this Agreement.

     “FIRPTA Certificate” shall have the meaning set forth in Section 7.8.

     “Former Access Employee” shall mean any person who is not employed by the Seller or any of its Affiliates immediately prior to the Closing Date and who, immediately prior to such individual’s termination of employment with the Seller or its Affiliate, was coded on the data systems of the Seller or its Affiliates as employed in Department 160, the department number which designated the person as employed primarily in connection with the Access Business. All such persons are listed in Schedule 1.1C.

     “Freeport Sublease” shall mean the lease, dated March 27, 1998, by and between the Seller and Freeport #1 L.P. with respect to the Seller’s former facility located at 8616 Freeport Parkway, Irving, Texas 75063 and the related sublease, dated September 27, 2002, by and between the Seller and CSC.

     “FTC” shall mean the Federal Trade Commission.

     “Global Patent Licenses” shall mean the patent licenses set forth on Schedule 1.1D.

     “Governmental Authority” shall mean any Federal, state, local or foreign government or subdivision thereof, or any entity, body or authority exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any Federal, state, local or foreign government.

     “Governmental Required Consent” shall mean, with respect to a Person, compliance by such Person with, and filings by such Person under, the HSR Act.

     “Grande” shall mean Grande Communications, Inc., a Delaware corporation.

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     “Grande Agreements” shall mean the Grande Credit Facility and any notes receivable thereunder, the Grande Warrant Agreement and the System Purchase Agreement.

     “Grande Credit Facility” shall mean the Loan and Security Agreement, dated as of October 29, 2001, and as subsequently amended, among Grande, Grande Communications Networks, Inc., Grande Communications Holdings, Inc. (and certain Affiliates thereof), the Lenders thereto, General Electric Capital Corporation (as Administrative Agent) and GECC Capital Markets Group, Inc. (as Lead Arranger).

     “Grande Reseller Agreement” shall mean the Grande Reseller Agreement attached hereto as Exhibit E.

     “Grande Warrant Agreement” shall mean the Warrant Agreement, dated as of October 29, 2001, by and among Grande Communications Holdings, Inc., NTFC Capital Corporation and Marconi Finance, Inc.

     “Group Contract” shall mean any Contract under which the Access Business and at least one other business unit of the Seller or an Affiliate of the Seller purchase or sell goods or services on a joint basis or otherwise have rights or obligations.

     “Group A Patents” shall mean the Patents so designated on Schedule 1.1E, including any and all related foreign counterpart patents and patent applications.

     “Group B Patents” shall mean the Patents so designated on Schedule 1.1E, including any and all related foreign counterpart patents and patent applications.

     “Guarantees” shall have the meaning set forth in Section 4.14(a)(iii).

     “Hazardous Substance” shall mean any pollutant, contaminant, waste, material or substance that is defined as hazardous, regulated, or controlled under any applicable Environmental Law.

     “HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

     “Inbound Licenses” shall have the meaning set forth in Section 4.13(d).

     “Included AIP Amount” shall mean the total bonuses earned as of March 31, 2004 under the Marconi AIP, multiplied by a fraction, the numerator of which is the number of days in the applicable bonus payment period which occur prior to the Closing Date and the denominator of which is the total number of days in the applicable bonus payment period ending on March 31, 2004, less amounts paid by Marconi under the Marconi AIP prior to the Closing Date. However, and notwithstanding the foregoing, if the bonus is based on the satisfaction of more than one target and each of the targets has a different period of time associated with the target, the proration above described shall be computed with respect to each target separately.

     “Indemnified Person” shall mean the Person or Persons entitled to, or claiming a right to, indemnification under Article XII.

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     “Indemnifying Person” shall mean the Person or Persons claimed by the Indemnified Person to be obligated to provide indemnification under Article XII.

     “Indentures” shall mean, collectively, (i) the Indenture, dated as of May 19, 2003, between Marconi Corporation plc, the Initial Guarantors named therein and Law Debenture Trust Company of New York with respect to certain Guaranteed Senior Secured Notes due 2008; (ii) the Indenture, dated as of May 19, 2003, between Marconi Corporation plc, the Initial Guarantors named therein and Law Debenture Trust Company of New York with respect to certain Guaranteed Junior Secured Notes due 2008; and (iii) the Security Trust and Intercreditor Deed, dated as of May 19, 2003, between Marconi Corporation plc, The Law Debenture Trust Company of New York, JPMorgan Chase Bank, HSBC Bank plc, the New Bonding Facility Banks named therein, The Bank of New York, the Intra-Group Creditors named therein and the Intra Group Borrowers named therein.

     “Information and Records” shall have the meaning set forth in Section 2.1(d).

     “Intellectual Property” shall mean intellectual property rights, whether protected, created or arising under the laws of the United States or any other jurisdiction anywhere in the world, including:

     (a) patent registrations and applications;

     (b) copyright registrations and applications;

     (c) registrations of and applications for trade names, trademarks, service names and service marks;

     (d) trade secrets (including trade secrets consisting of know-how, inventions, discoveries, concepts, ideas, methods, processes, designs, formulae, technical data, drawings, specifications, data bases, customer lists, pricing information and other proprietary and confidential information);

     (e) domain names; and

     (f) all other proprietary rights.

     “Interim Audit” shall have the meaning set forth in Section 6.17(f)

     “Interim Financial Statements” shall have the meaning set forth in Section 6.17(f)

     “Inventory” shall have the meaning set forth in Section 2.1(b).

     “Jabil” shall mean Jabil Circuit, Inc., a Delaware corporation.

     “Jabil Agreements” shall mean, collectively, the Jabil Manufacturing Agreement, the Jabil Repair Agreement, the Jabil Rationalization Agreement and the Jabil Transition Agreement.

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     “Jabil Manufacturing Agreement” shall mean the Manufacturing Agreement, dated June 13, 2001, among the Seller, certain Affiliates of the Seller and Jabil, as amended.

     “Jabil Rationalization Agreement” shall mean the U.S. Rationalization Agreement, dated August 28, 2002, as amended pursuant to (i) the First Amendment to the U.S. Bedford Rationalization Agreement, dated October 7, 2003, among the Seller, certain Affiliates of the Seller and Jabil and (ii) the Second Amendment to the U.S. Bedford Rationalization Agreement, dated December 19, 2003, among the Seller, certain Affiliates of the Seller and Jabil.

     “Jabil Repair Agreement” shall mean the Repair Services Agreement, dated June 13, 2001, among the Seller, certain Affiliates of the Seller and Jabil.

     “Jabil Transition Agreement” shall mean the Access Transition Agreement, dated May 2, 2003, by and between the Seller and Jabil.

     “Judgment” shall have the meaning set forth in Section 4.3(b).

     “Law” shall mean any law, statute, regulation, ordinance, rule, order, decree or governmental requirement enacted, promulgated or imposed by any Governmental Authority.

     “Liability” shall mean with respect to any Person, any liability or obligation of such Person of any kind, character or description, whether known or unknown, absolute or contingent, accrued or unaccrued, disputed or undisputed, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise and whether or not the same is required to be accrued on the financial statements of such Person.

     “LIBOR Rate” shall have the meaning set forth in Section 3.2(f).

     “Lien” shall mean any claim, encumbrance, lien, mortgage, pledge or security interest.

     “Loss” or “Losses” shall mean any and all losses, liabilities, claims, diminution in value, damages and expenses (including reasonable legal and other discretionary third-party fees and expenses in connection with defending or settling any claim, demand, action, Proceeding or threat thereof or investigating any facts related thereto).

     “Management Accounts” shall have the meaning set forth in Section 4.4.

     “Marconi AIP” shall mean the Marconi Access Systems Annual Incentive Plan 2003/2004 Financial Year, as amended, as in effect on the date hereof.

     “Marconi Entity” shall have the meaning set forth in the Cross License Agreement.

     “Marconi Finance” shall mean Marconi Finance, Inc., a Delaware corporation.

     “Marconi 401(k) Plan” shall have the meaning set forth in Section 11.8.

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     “Marconi Guarantee” shall mean any guarantee, indemnity, performance bond, letter of credit, deposit or other security or contingent obligation in the nature of a financial obligation, including letters of comfort or support entered into or granted by any of the Seller’s Affiliates in relation to or arising out of any obligations or liabilities of the Seller in connection with the Access Business (i) that are set forth on the Schedules or (ii) that were incurred in the ordinary course of business.

     “Marconi IP” shall have the meaning set forth in the Preamble.

     “Marconi Name” shall mean the business name, brand name, trade name, trademark, service mark, and domain name “Marconi,” any business name, brand name, trade name, trademark, service mark and domain name that includes the word “Marconi”, any portion thereof, any and all other derivatives thereof and the Marconi logo (i.e., the script “M”).

     “Marconi plc” shall mean Marconi plc, a public limited liability company incorporated in England and Wales (registered no. 3846429) whose registered office is at New Century Park, PO Box 53, Coventry, CV3 1HJ, United Kingdom.

     “Marconi Retirement Plan” shall have the meaning set forth in Section 11.3.

     “Material Contracts” shall have the meaning set forth in Section 4.14(b).

     “Material Personal Property Leases” shall have the meaning set forth in Section 4.10.

     “Maximum Rent” shall have the meaning set forth in Section 6.15(b).

     “Net Accounts Payable” shall mean the aggregate amount of the Accounts Payable, less the amount of any Accounts Payable erroneously billed, overbilled or otherwise subject to a good faith reduction or dispute by the Access Business.

     “Net Accounts Receivable” shall mean the aggregate amount of the Accounts Receivable, less reserves established in accordance with the Calculation Principles.

     “Net Inventory” shall mean the aggregate amount of the Inventory (other than supplies), less reserves established in accordance with the Calculation Principles.

     “Nine-State Region” shall mean the States of Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.

     “Non-Access Portion” shall have the meaning set forth in Section 2.3(c).

     “Notice of Acceptance” shall have the meaning set forth in Section 3.2(b)(i).

     “Notice of Disagreement” shall have the meaning set forth in Section 3.2(b)(ii).

     “October CA” shall have the meaning set forth in Section 6.9(c).

     “100% Losses” shall mean Losses arising out of or resulting from (i) a breach of a Title and Authorization Warranty (other than the representation and warranty set forth in Section

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4.7(b)), (ii) a breach of a covenant contained herein (other than breaches of covenants contained in (A) the first sentence of Section 6.2, (B) Section 6.2(a)(ii), (iii), (vi), (xvi) or (xx) or (C) Section 6.2(b), (c), or (d)) or in a Conveyance Agreement, (iii) Section 12.2(c), (d), or (e) hereof, (iv) Section 12.3(c) or (d) hereof or (v) fraud.

     “OPPS Business” shall mean the business of (a) providing configuration, design, implementation and support services for network systems, and the provision of technical services, field support services, repair and replacement services and ongoing maintenance services, in each case relating to such configuration, design, implementation and support services, (b) designing, developing, manufacturing, marketing and selling enclosures for housing both active and passive electronic systems and active and passive communications systems, and the provision of related technical services, field support services, repair and replacement services and ongoing maintenance services for such enclosures, and (c) designing, developing, manufacturing, marketing and selling connection, protection and power systems, solutions and products for or to network systems, and the provision of technical services, field support services, repair and replacement services and ongoing maintenance services, in each case relating to connection, protection and power systems, solutions and products for or to network systems.

     “OPPS Patents” shall mean the Patents listed on Schedule 1.1F.

     “OPPS Supply Agreement” shall have the meaning set forth in the definition of “Supply Agreements.”

     “Other Businesses” shall mean the OPPS Business, the BBRS Business and the Test Systems Business.

     “Other Business Product” shall mean any product of the Other Businesses (as conducted in accordance with the definitions of “OPPS Business,” “BBRS Business” and “Test Systems Business” herein) that (i) does not incorporate or use, and was not developed using, any of the Core Technology, (ii) is not covered by any of the Group A Patents (excluding, only for purposes of this clause (ii), products of existing licensees under the Global Patent Licenses), and (iii) does not include any Current Access Products.

     “Other Business Service” shall mean any service of the Other Businesses (as conducted in accordance with the definitions of “OPPS Business,” “BBRS Business” and “Test Systems Business” herein) that (i) is performed without the use of any of the Core Technology, (ii) is not performed on products covered by any of the Group A Patents (excluding, only for purposes of this clause (ii), products of existing licensees under the Global Patent Licenses) and (iii) is not performed on any Current Access Products.

     “Other Confidentiality Agreements” shall have the meaning set forth in Section 6.9(a).

     “Other Current Liabilities” shall mean the aggregate of (i) the accrual for the discount owing to Communications Test Design, Inc., a distributor to BellSouth Telecommunications, Inc., which accrual the Seller and the Purchaser agree shall equal 2.25% of outstanding accounts receivables owing to the Access Business from Communications Test Design, Inc. and (ii) the accruals for personal property taxes, sales and use taxes and franchise taxes.

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     “Parent” shall have the meaning set forth in the Preamble.

     “Patent” shall mean any United States patents, pending United States patent applications, and all extensions, continuations, continuations in part, divisions, reissues and reexaminations of such patents and patent applications.

     “Patent Assignment” shall mean the patent assignment by Marconi IP in favor of the Purchaser in the form of Exhibit F.

     “Permit” shall mean any permit, license, approval or other authorization required or granted by any Governmental Authority.

     “Permitted Liens” shall mean: (i) Liens for Taxes that are not yet delinquent or that are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with the past practices of the Access Business; (ii) workers’, mechanics’, materialmen’s, repairmen’s, suppliers’, carriers’ or similar Liens arising in the ordinary course of business with respect to the accounts payable being assumed by the Purchaser pursuant to Section 2.5(e) that are not yet delinquent or that are being contested in good faith by appropriate proceedings; (iii) covenants, zoning restrictions, easements, licenses, or other restrictions on the use of real property or other irregularities in title (including leasehold title) thereto that do not materially impair the use of such real property, leases or leasehold estates; and (iv) those Liens set forth in Schedule 4.7(a) (other than Item 1 on Schedule 4.7(a)).

     “Person” shall mean any individual, corporation, proprietorship, firm, partnership, limited partnership, limited liability company, trust, association or other entity.

     “Personal Property” shall have the meaning set forth in Section 2.1(a).

     “Personnel” shall mean all former and current employees, agents, consultants and independent contractors that have contributed to or participated in the conception or development of Transferred Technology or Transferred Patents.

     “Post-Closing Specific Performance Covenants” shall mean the covenants set forth in Section 2.3, the last two sentences of Section 2.7, Section 3.2, Section 3.3, Section 6.4, Section 6.6, Section 6.7, Section 6.9, the last two sentences of Section 6.10(b), Section 6.10(c), Section 6.11, Section 6.12, Section 6.13, Section 6.15(b), Section 6.15(c), Section 6.17, Section 13.6 and Section 13.9 of this Agreement.

     “Pre-Closing Environmental Liability” shall mean any Loss, Proceeding, responsibility or other Liability arising out of Environmental Laws and (1) any condition of the Assets or Excluded Assets to the extent existing on or prior to the Closing Date, (2) the ownership or operation of the Access Business (including by any former owner or operator thereof) or the Assets or any Excluded Asset (or any assets previously owned or operated in connection with the Access Business by any former owner or operator thereof) on or prior to the Closing Date, (3) (A) personal injury, property damage or exposure to Hazardous Substances or (B) investigation, remediation, natural resources damages or other response actions, including claims related to any Releases, in each case arising out of the ownership or operation of the Access Business or the Assets or any Excluded Asset (or any assets previously owned or

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operated in connection with the Access Business or by any former owner or operator of the Access Business) on or prior to the Closing Date or (4) the Release of Hazardous Substances or the arrangement for such activities, from, at or to any off-site location arising out of the ownership or operation of the Access Business, the Other Businesses, the Assets or any Excluded Asset (or any assets previously owned or operated in connection with the Access Business or the Other Businesses or by any former owner or operator of the Access Business or the Other Businesses) on or prior to the Closing Date (it being understood that, for purposes of this clause (4), the Seller and its Affiliates shall not be liable for any actions or inactions by the Purchaser or any of its Affiliates with respect to any such arrangement subsequent to the Closing).

     “Pre-Closing Insurance Claims” shall have the meaning set forth in Section 6.2(c)(ii).

     “Pre-Closing Specific Performance Covenants” shall mean the covenants set forth in Section 2.1, Section 2.2, Section 2.3, Section 2.5, Section 3.1, Section 6.1, Section 6.2, Section 6.3, Section 6.4, Section 6.6, Section 6.7, Section 6.9, the last two sentences of Section 6.10(b), Section 6.13, Section 6.14, Section 6.15, Section 6.16, Section 6.17, Section 13.6 and Section 13.8 of this Agreement.

     “Prepaids” shall mean all prepaid expenses of the Access Business as determined and accounted for in accordance with accounting policies of the Access Business, including prepaid travel expenses, license fees, maintenance fees and support fees, deferred charges, advanced payments, security deposits and other prepaid items.

     “Proceeding” shall have the meaning set forth in Section 2.6(e).

     “Proposed Adjustments” shall have the meaning set forth in Section 3.2(b)(ii).

     “PTO” shall have the meaning set forth in Section 11.5.

     “PTO Policy” shall have the meaning set forth in Section 11.5.

     “Purchase Price” shall have the meaning set forth in Section 3.1(a).

     “Purchased Contracts” shall mean the Contracts and other rights described in Section 2.2 (including the Access Portion of the Shared Contacts).

     “Purchaser” shall have the meaning set forth in the Preamble.

     “Purchaser 401(k) Plan” shall have the meaning set forth in Section 11.8.

     “Purchaser Benefit Plans” shall have the meaning set forth in Section 11.2.

     “Purchaser Indemnified Party” shall have the meaning set forth in Section 12.2.

     “Purchaser Material Adverse Effect” shall mean any event, change or occurrence that has had or would reasonably be expected to have a material adverse effect (i) on the ability of the Purchaser or AFCNA to perform their obligations under this Agreement and their Related

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Agreements or (ii) on the ability of the Purchaser or AFCNA to consummate the transactions required to be effected by them as contemplated hereby and thereby.

     “Purchaser’s knowledge,” or any similar expression with regard to the knowledge or awareness of or receipt of notice by the Purchaser, shall mean the actual, direct and personal knowledge of any of the Persons listed in Schedule 1.1G.

     “Purchaser’s Welfare Plans” shall have the meaning set forth in Section 11.4.

     “Related Agreement” shall mean any Contract that is to be entered into by a party hereto at the Closing or otherwise pursuant to this Agreement on or prior to the Closing Date, including the Assignment and Assumption Agreement, the Bill of Sale, the Patent Assignment, the Cross License Agreement, the Sublicenses, the Grande Reseller Agreement, if any, the OPPS Supply Agreement, the Transition Services Agreement, the Copyright Assignment and the Trademark Assignment. The Related Agreements executed by a specified Person shall be referred to as “such Person’s Related Agreements,” “its Related Agreements” or other similar expression.

     “Release” shall mean any releasing, disposing, discharging, injecting, spilling, leaking, leaching, pumping, dumping, emitting, escaping, emptying, seeping, dispersal, migration, transporting, placing and the like, including the moving of any materials through, into or upon, any land, soil, surface water, groundwater or air, or otherwise entering into the environment.

     “Release Agreement” shall mean the Release Agreement between The Law Debenture Trust Corporation p.l.c., Marconi Corporation plc, Marconi Communications, Inc. and Marconi Intellectual Property (Ringfence) Inc., substantially in the form attached hereto as Exhibit G.

     “Request” shall have the meaning set forth in Section 6.17(b).

     “Representatives” of a Person shall mean any officer, director, employee, accountant, counsel, investment banker, financial advisor or other representative of such Person or any of its Affiliates.

     “Restricted Asset” shall have the meaning set forth in Section 2.3(a).

     “Restricted Product” shall mean any voice, data or video transport system for copper or fiber access networks (or any component thereof), including digital loop carriers, digital subscriber lines and systems delivering fiber to the curb, fiber to the premises or fiber to the home.

     “Restrictive Covenants” shall have the meaning set forth in Section 6.11(c).

     “Retained Obligations” shall have the meaning set forth in Section 2.6.

     “Retained Patents” shall mean Patents (other than the Transferred Patents), including any and all related foreign counterpart patents and patent applications, that are owned by, or licensed to, any of the Marconi Entities and are licensable to the Purchaser and its Affiliates by a Marconi Entity (but excluding the OPPS Patents and the rights licensed to the Parent, the Seller or any of their Affiliates under the Global Patent Licenses), and

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     (a)   are listed in Schedule 1.24 of the Cross License Agreement; or

     (b)   cover any Current Access Product; or

     (c)   cover a patented machine, manufacture, combination or composition, or a material or apparatus for which a Current Access Product is a material part of the invention, where such Current Access Product is not a staple article or commodity of commerce suitable for substantial noninfringing use.

     “Retained Technology” shall mean Technology that: (a) is owned by, or licensed to, any Marconi Entity and is licensable to the Purchaser and its Affiliates by any Marconi Entity; (b) is used in the Access Business as presently conducted by the Seller; and (c) is not Transferred Technology; provided, however, that Retained Technology does not include the Technology in Schedule 1.25 of the Cross License Agreement.

     “SEC’s Staff” shall have the meaning set forth in Section 6.17(b).

     “Seller” shall have the meaning set forth in the Preamble.

     “Seller Bedford Lease” shall have the meaning set forth in Section 6.15(c).

     “Seller Benefit Plans” shall mean the plans, programs, arrangements and agreements set forth on Schedule 4.17 that are identified on such Schedule as a Seller Benefit Plan.

     “Seller Indemnified Party” shall have the meaning set forth in Section 12.3.

     “Seller Material Adverse Effect” shall mean any event, change or occurrence that has had or would reasonably be expected to have a material adverse effect (i) on the ability of the Parent, the Seller and Marconi IP to perform their obligations under this Agreement and their Related Agreements or (ii) on the ability of the Parent, the Seller and Marconi IP to consummate the transactions required to be effected by them as contemplated hereby and thereby.

     “Seller’s knowledge,” or any similar expression with regard to the knowledge or awareness of or receipt of notice by the Seller, shall mean the actual, direct and personal knowledge of (i) any of the Persons listed in Schedule 1.1H or (ii) if, between the date hereof and the Closing, any Person set forth on Schedule 1.1H ceases to hold the position with the Seller or an Affiliate of the Seller that such Person holds as of the date hereof, any Person who assumes such position or a comparable position prior to the Closing.

     “Seller’s Pension Plans” shall have the meaning set forth in Section 11.8.

     “Seller’s Welfare Plans” shall have the meaning set forth in Section 11.4.

     “Shared Contracts” shall mean those Group Contracts set forth in Schedule 1.1I.

     “Special Warranty Matters” shall mean the obligation of the Seller to provide replacement products or repair services as a result of the matters set forth in items 1, 2, 3 and 4 in the “Customer Disputes” Section of Schedule 4.11(a).

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     “Special Warranty Reserve” shall mean $4,638,000 (which amount represents the amount of the reserve agreed between the Seller and the Purchaser with respect to the Special Warranty Matters as of September 30, 2003) less the aggregate cost of replacement products and repair services incurred in connection with the Special Warranty Matters between September 30, 2003 and the Closing.

     “Statement of Working Capital” shall have the meaning set forth in Section 3.2(a).

     “Sublicenses” shall mean the sublicense agreements in the forms of Exhibits H-1 and H-2 hereto.

     “Subsidiaries” of a Person shall mean any Person subject to control by such Person. The term “control” as used in the preceding sentence means, with respect to a corporation, the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares of such corporation, or with respect to any Person other than a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person.

     “Supply Agreements” shall mean, collectively, (i) the Supply Agreement between the Seller (acting through OPPS) and the Purchaser in the form set forth in Exhibit I (the “OPPS Supply Agreement”) and (ii) the Grande Reseller Agreement, if any.

     “System Purchase Agreement” shall have the meaning set forth in Section 6.16.

     “Tax” or “Taxes” means all: (i) Federal, state, local, foreign and other taxes, assessments, duties or similar charges of any kind whatsoever, including all corporate franchise, income, sales, use, ad valorem, receipts, value added, profits, license, withholding, payroll, employment, excise, property, net worth, capital gains, transfer, stamp, documentary, social security, payroll, environmental, alternative minimum, occupation, recapture and other taxes, and including any interest, penalties and additions imposed with respect to such amounts; (ii) liability for the payment of any amounts of the type described in clause (i) as a result of being a member of an affiliated, consolidated, combined, unitary or aggregate group (an “Affiliated Group”); and (iii) liability for the payment of any amounts as a result of an express or implied obligation to indemnify any other Person with respect to the payment of any amounts of the type described in clause (i) or (ii).

     “Tax Return” shall mean any report, return or other information required to be supplied to a Governmental Authority in connection with any Taxes.

     “Tax Statute of Limitations Date” shall mean the close of business on the 60th day after the expiration of the applicable statute of limitations with respect to any Tax, including any extensions thereof (or if such date is not a Business Day, the next Business Day).

     “Tax Warranty” shall mean a representation or warranty in Section 4.19.

     “Technology” shall mean trade secrets, confidential information, inventions, discoveries, know-how, formulae, practices, processes, procedures, ideas, specifications, engineering data, software, firmware, programs and source disks, source codes, databases and data collections,

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designs, registered and unregistered copyrights, composition services, research records, records of inventions, test information, market surveys and marketing know-how.

     “Termination Date” shall have the meaning set forth in Section 10.1(b).

     “Territory” shall mean the United States of America and Canada.

     “Test Systems Business” shall mean the development, manufacture, supply and installation of hardware and software systems used by telephone service providers for maintaining service to subscribers and qualifying lines for application of broadband technology including hardware and software systems (a) interfacing the system’s remote measurement units with access and switching network elements deployed within a service provider’s network to perform fault analysis of the transport facility used for its subscriber loops, (b) providing analysis of the loop to determine the suitability for transport of broadband services such as DSL and (c) consisting of auxiliary hardware used in applications to facilitate connection to the network element’s test access port. The Test Systems Business also provides installation, turn-up and engineering services to the service provider to adapt its system to the specific network elements and operational support systems used by the customer.

     “Third Party Claim” shall have the meaning set forth in Section 12.7(a).

     “Title and Authorization Warranty” shall mean a representation or warranty in Section 4.1, 4.2, 4.3 (other than Sections 4.3(b)(ii) and (v)), 4.7, 4.26, 5.1, 5.2 or 5.3 (other than Section 5.3(b)(ii) and (iv)) of this Agreement.

     “Trademark Assignment” shall mean the Trademark Assignment in the form of Exhibit J.

     “Transfer Taxes” shall mean any Liability for transfer, documentary, sales, use, registration, value added and other similar Taxes (including all applicable real estate transfer Taxes and real property transfer gains Taxes) and related amounts (including any penalties, interest and additions to Tax) incurred in connection with this Agreement, the Related Agreements, the Acquisition and the other transactions contemplated hereby and thereby.

     “Transferable Permits” shall have the meaning provided in Section 2.2.

     “Transferred Employee” shall have the meaning set forth in Section 11.1.

     “Transferred Intellectual Property” shall mean, collectively, the Transferred Trademarks, the Transferred Technology and the Transferred Patents.

     “Transferred Patents” shall mean the Group A Patents and the Group B Patents, including any and all related foreign counterpart patents and patent applications.

     “Transferred Technology” shall mean Technology owned by the Seller that (a) was substantially developed by the Access Business or was developed exclusively for the Access Business for use in the Access Business, but excluding Technology used by the OPPS Business for the OPPS Business; or (b) was used exclusively in the Access Business as presently

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conducted, including the Core Technology, but excluding the Technology listed in Schedule 1.25 of the Cross License Agreement.

     “Transferred Trademarks” shall have the meaning set forth in Section 2.1(e).

     “Transition Services Agreement” shall mean the transition services agreement between the Seller and the Purchaser in the form set forth in Exhibit K.

     “25% Losses” shall mean any Losses under or otherwise in connection with this Agreement, or any Conveyance Agreement or any other document delivered at the Closing that is not a Commercial Agreement or the transactions contemplated hereby or thereby other than (i) 50% Losses and (ii) 100% Losses.

     “2003 Financial Statements” shall have the meaning set forth in Section 6.17(a).

     “UKLA” shall mean the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of the Financial Services and Markets Act 2000 of England.

     “Unresolved Adjustments” shall have the meaning set forth in Section 3.2(c).

     “U.S. Affiliate” means, with respect to any specified Person, any Affiliate of such Person that is incorporated or organized under the laws of any of the states of the United States of America.

     “U.S. GAAP” shall have the meaning set forth in Section 6.17(a).

     “Vidar Claims” shall mean (i) all amounts awarded or received, or that may subsequently be awarded or received, to or by the Seller pursuant to or in settlement of the Vidar Proceedings and (ii) all other indemnities, rights or claims of the Seller against Vidar-SMS Co., Ltd. or any of its Affiliates arising from the matters subject to the Vidar Proceedings.

     “Vidar Proceedings” shall mean (i) Marconi Communications, Inc. vs. Vidar-SMS Co., Ltd., ICC International Court of Arbitration Case No. 11035/ESR/TE and (ii) Marconi Communications, Inc. v. Vidar-SMS Co., Ltd., Civil Action No. 3:00-CV-1293-L in the United States District Court for the Northern District of Texas, Dallas Division.

     “WARN Act” shall mean the Worker Adjustment and Retraining Notification Act of 1988, as amended, and any similar Law.

     “Welfare Plan” shall mean the Marconi Total Rewards Plan.

     1.2   Interpretation. The headings preceding the text of Articles and Sections included in this Agreement and the headings to Schedules attached to this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine, feminine or neuter gender or the singular or plural form of words herein shall not limit any provision of this Agreement. The use of the terms “including” or “include” shall in all cases herein mean “including, without limitation” or

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“include, without limitation,” respectively. The phrase “ordinary course of business consistent with past practices” and similar phrases as used herein with respect to the operation of the Access Business prior to the Closing shall refer to the operation of the Access Business between April 1, 2002 and the date hereof. Reference to any Person includes such Person’s successors and assigns to the extent such successors and assigns are permitted by the terms of any applicable agreement. Reference to a Person in a particular capacity excludes such Person in any other capacity or individually. Reference to any agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof. Underscored references to Articles, Sections, paragraphs, clauses, Exhibits or Schedules shall refer to those portions of this Agreement. The use of the terms “hereunder,” “hereof,” “hereto” and words of similar import shall refer to this Agreement as a whole and not to any particular Article, Section, paragraph or clause of, or Exhibit or Schedule to, this Agreement.

ARTICLE II

Sale and Purchase of Assets; Assumption of Assumed Obligations

     2.1   Purchase and Sale of Assets. Except as provided in Sections 2.3 and 2.4 and subject to the other terms and conditions of this Agreement, at the Closing, the Seller and Marconi IP, as the case may be, shall sell, assign, convey, transfer and deliver to the Purchaser, and, with respect to the Inventory only, AFCNA, free and clear of any Liens other than Permitted Liens, and the Purchaser and, with respect to the Inventory only, AFCNA, shall purchase and acquire from the Seller and Marconi IP, as the case may be, and take assignment and delivery from the Seller and Marconi IP, as the case may be, of all of the Seller’s or Marconi IP’s, as the case may be, right, title and interest in and to the following (wherever located, unless otherwise specifically stated, and other than the Excluded Assets):

     (a)   Equipment; Personal Property. All (i) equipment, machinery, computers, computer hardware, servers, network equipment and connections, in each case either (A) located at the Bedford Facility or (B) if primarily used or held for use in the Seller’s conduct and operation of the Access Business, located elsewhere, (ii) furniture, furnishings, tools, spare parts, and all other items of tangible personal property, in each case either (A) located at the Bedford Facility or (B) if primarily used or held for use in the Seller’s conduct and operation of the Access Business, located elsewhere and (iii) all vehicles primarily used in the Access Business, including with respect to subclauses (i), (ii) and (iii), those items of personal property set forth on Schedule 2.1(a), but in each case excluding the laboratory and other equipment listed on Schedule 2.4(x) (the assets described in this Section 2.1(a) being collectively referred to as the “Personal Property”);

     (b)   Inventory. All supplies, materials and other inventories of raw materials, works-in-progress and finished goods (wherever located) to the extent used in or held in connection with the Access Business, including any inventories on consignment with contract manufacturers or customers in connection with the Access Business (collectively, the “Inventory”);

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     (c)   Accounts Receivable. All accounts receivable, trade receivables, notes receivable and other receivables (excluding any receivables relating to any Benefit Plan) to the extent arising out of or from the operation of the Access Business, including receivables from suppliers but excluding receivables to the extent relating to the Excluded Assets and any claim, remedy or right to the foregoing (collectively, the “Accounts Receivable”);

     (d)   Information and Records. All sales and business records, service records, warranty records, books of account, ledgers, general, financial and accounting records, files, program documentation, tapes, manuals, forms, product guides and similar materials, proprietary information and invention agreements and similar agreements, invoices, inventory records, engineering, maintenance, operating and production records, cost and pricing information, business plans, catalogs, quality control records, files related to Assumed Proceedings, credit records of customers, customers’ and suppliers’ lists, other distribution lists, billing records, sales and promotional literature, customer and supplier correspondence (in all cases, in any form or medium), in each case, to the extent used or held for use in, or to the extent that arose or arise out of the operation or conduct of, the Access Business or to the extent related to any Asset or any Assumed Obligation (collectively, the “Information and Records”); provided, that, notwithstanding anything to the contrary in this Section 2.1(d), (i) “Information and Records” shall not include (A) any information or records which constitute “Technology”, (B) any Proceeding files other than files related to the Assumed Proceedings and (C) the portion of any information or records related to an Excluded Asset or Retained Obligation and (ii) if any particular record of the Seller contains both information to be transferred to the Purchaser pursuant to this Section 2.1(d) and other information, then the Seller can, at its option, either (A) provide a copy of such record to the Purchaser subject to the Purchaser’s obligations contained herein to keep such other information confidential or (B) create a new record that separates out the information to be transferred to the Purchaser pursuant to this Section 2.1(d) and provide a copy of such new record to the Purchaser;

     (e)   Trade Names. All (i) registered trade names, trademarks, service names and service marks (and applications for registration of the same) set forth on Schedule 2.1(e) and (ii) all unregistered trade names, trademarks, service names and service marks which are owned by the Seller and used exclusively in the Seller’s conduct of the Access Business (collectively, the “Transferred Trademarks”);

     (f)   Technology. The Transferred Technology;

     (g)   Patents. The Transferred Patents;

     (h)   Goodwill. All of the Seller’s and Marconi IP’s customer relationships and related goodwill to the extent generated by or associated with the Access Business, including the exclusive right to represent oneself as the successor of the Access Business (notwithstanding the foregoing, it is understood and agreed that the Seller is not transferring to the Purchaser (i) the customer relationships (or related goodwill) to the

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extent generated by or associated with the Other Businesses or (ii) any goodwill associated with the Marconi Name in and of itself);

     (i)   Products. All products of the Access Business sold prior to the Closing (including products returned after the Closing and rights of rescission, replevin and reclamation) (as such products exist without the inclusion of any services or products supplied by the Other Businesses);

     (j)   Credits. All credits and Prepaids to the extent used or held for use in, or that arose or arise out of, the operation or conduct of the Access Business or in connection with any Asset or any Assumed Obligation (excluding those credits relating to any Benefit Plan);

     (k)   Claims Proceeds. All Claims Proceeds except as provided in Sections 6.2(c)(iv)(A) and (B); and

     (l)   Other. All other properties and assets of every kind, character and description, tangible or intangible, primarily used or held for use in, or that primarily arose or arise out of, the operation or conduct of the Access Business to the extent not set forth above, whether or not similar to the items set forth above.

     2.2   Assignment of Permits and Contracts. Except as provided in Sections 2.3 and 2.4 and subject to the other terms and conditions of this Agreement, at the Closing, the Seller and Marconi IP, as the case may be, shall assign and transfer to the Purchaser, and the Purchaser shall take assignment of, all of the Seller’s and Marconi IP’s, as the case may be, right, title and interest in and to all Permits and all pending applications or renewals thereof that relate exclusively to the operation or conduct of the Access Business or are exclusively used or held for use in connection with any Asset including the Permits, applications and renewals set forth on Schedule 4.15, to the extent such Permits, applications and renewals are transferable (collectively, the “Transferable Permits”), and in and to the following Contracts or contractual rights of the Seller:

     (a)   Occupancy of Bedford Facility. Subject to Section 6.15, the Bedford Lease;

     (b)   Personal Property Leases. All leases of personal property related exclusively to the conduct or operation of the Access Business, including the leases set forth on Schedule 4.10(b) (except as otherwise noted on such schedule);

     (c)   Customer Contracts. (i) All sale orders and other Contracts for the provision of goods or services to customers arising exclusively from the operation or conduct of the Access Business, including those Contracts set forth on Schedule 4.14(a)(xi) and Schedule 2.2(c), (ii) the Shared Contracts listed as items 1, 2, 3, 12 and 13 on Schedule 7.9 and (iii) subject to the foregoing clause (ii) and except as otherwise provided on Schedule 7.9, the portion of each Shared Contract set forth on Schedule 1.1I under the heading “Shared Customer Contracts” to the extent pertaining to the operation or conduct of the Access Business after the Closing;

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     (d)   Vendor Contracts. (i) All purchase orders and other Contracts for the purchase of goods or services related exclusively to the operation or conduct of Access Business, including those Contracts set forth on Schedule 4.14(a)(iv) (except as otherwise noted on such schedule) and (ii) the portion of each Shared Contract set forth on Schedule 1.1I under the heading “Shared Vendor Contracts” to the extent pertaining to the operation or conduct of the Access Business after the Closing;

     (e)   Intellectual Property Licenses. (i) All agreements for the license to the Seller or Marconi IP of Intellectual Property that are used or held for use exclusively in the operation or conduct of the Access Business including all agreements set forth on Schedule 4.13(d) (except as otherwise noted on such schedule) and (ii) those certain rights under each Shared Contract set forth on Schedule 1.1I under the heading “Shared Intellectual Property Licenses” to the extent used or held for use in the operation or conduct of the Access Business;

     (f)   Other Contracts. (i) All other Contracts set forth on Schedule 2.2(f), (ii) those certain rights under each Shared Contract set forth on Schedule 1.1I under the heading “Other Shared Contracts” to the extent used or held for use in the operation or conduct of the Access Business and (iii) such other Contracts entered into between the date hereof and the Closing Date entered into in compliance with Section 6.2 to the extent used or held for use in the operation or conduct of the Access Business;

     (g)   Non-Disclosure Obligations. All non-disclosure, confidentiality and similar obligations owed to the Seller or any of its Affiliates to the extent related to the Access Business other than those non-disclosure or confidentiality agreements entered into in connection with the proposed sale of the Access Business;

     (h)   Claims. All warranties, indemnities, rights and claims against third parties to the extent arising out of or relating to the Access Business or any Asset or Assumed Obligation (collectively, “Claims”, it being agreed that “Claims” shall not include claims to the extent arising out of or relating to any Excluded Asset or Retained Obligation), including Claims in bankruptcy but excluding Claims arising under insurance policies (except as set forth in Section 6.8); and

     (i)   Employee Non-Compete Obligations. All rights with respect to any obligation of any Access Employee to refrain from competing with the Access Business.

     All of the property and assets to be transferred or assigned to the Purchaser and AFCNA hereunder pursuant to Sections 2.1 and 2.2 are herein referred to collectively as the “Assets”; provided, however, “Assets” shall not include the equity of, or any other ownership interest in, any Person.

     Notwithstanding the foregoing, the transfer of the Assets pursuant to this Agreement shall not include the assumption of any Liability related to the Assets unless the Purchaser expressly assumes that Liability pursuant to Section 2.5.

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     2.3   Certain Provisions Regarding Assignments.

     (a)   Anything in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign or transfer any Contract or other Asset or any claim, right, benefit or obligation thereunder or resulting therefrom if (i) an assignment or transfer thereof, without the Consent of a third party thereto, would constitute a breach or violation thereof or would in any way adversely affect the rights (upon transfer) of the Purchaser under such Contract or other Asset or result in the loss or cancellation thereof and (ii) such Consent is not obtained at or prior to the Closing (“Restricted Asset”) (it being understood that this Section 2.3(a) shall in no way limit any parties’ obligations under Section 6.3(c)).

     (b)   If the parties are not successful in obtaining a Consent at or prior to the Closing, then (i) the Seller shall continue to keep the applicable Restricted Asset in effect in accordance with its terms and shall provide the Purchaser with the benefits of the Restricted Asset in question accruing after the Closing Date to the extent that the Seller may provide such benefits (A) in a manner not in violation of the terms of such Restricted Asset (and subject to Section 2.3(d) below) and (B) without incurring any material expense or otherwise taking any material actions or measures (such as hiring additional employees) and (ii) if the Seller provides such benefits to the Purchaser, the Purchaser shall perform at its sole expense the obligations of the Seller to be performed after the Closing under the Restricted Asset in question. Once a Consent for the sale, assignment, assumption, transfer, conveyance and delivery of a Restricted Asset is obtained, the Seller shall promptly assign, transfer and deliver such Restricted Asset to the Purchaser, and the Purchaser shall assume the obligations under such Restricted Asset that relate to the period from and after the date of assignment, transfer and delivery of such Restricted Asset to the Purchaser. The terms of this Section 2.3(b) shall not apply with respect to Shared Contracts, it being understood that the treatment of Shared Contracts is addressed in Section 2.3(c).

     (c)   Prior to the Closing and subject to the provisions set forth in Schedule 7.9 with respect to certain Shared Contracts, the Seller and the Purchaser shall use their reasonable best efforts to work together (and, if necessary and desirable, to work with the third parties to the Shared Contracts) in an effort to (i) divide, modify and/or replicate (in whole or in part) the respective rights and obligations under and in respect of the Shared Contracts and (ii) if possible, novate the respective rights and obligations under and in respect of the Shared Contracts, such that, effective as of the Closing, (A) the Purchaser is the beneficiary of the post-Closing rights and is responsible for the post-Closing obligations related to that portion of the Shared Contract included in the Purchased Contracts (the “Access Portion”) (so that, subsequent to the Closing, the Seller shall have no post-Closing rights or post-Closing obligations with respect to the Access Portion of the Shared Contract) and (B) the Seller is the beneficiary of the rights and is responsible for the obligations related to the Shared Contract other than the Access Portion (the “Non-Access Portion”) (so that, subsequent to the Closing, the Purchaser shall have no rights or obligations with respect to the Non-Access Portion of the Shared Contract). If the parties are not able to enter into an arrangement to formally divide, modify and/or replicate one or more Shared Contracts prior to the Closing as contemplated by the

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previous sentence, then (i) the Purchaser shall be entitled to the benefits of the Access Portion of any such Shared Contract accruing after the Closing Date to the extent that the Seller may provide such benefits (A) in a manner not in violation of the terms of such Shared Contract (and subject to Section 2.3(d) below) and (B) without incurring any material expense or otherwise taking any material actions or measures (such as hiring additional employees) and (ii) if the Seller provides such benefits to the Purchaser, the Purchaser shall perform at its sole expense the obligations of the Seller to be performed after the Closing under the Access Portion of such Shared Contract.

     (d)   If any Consent with respect to a Restricted Asset is not obtained or any division, modification or replication with respect to a Shared Contract is not procured prior to the Closing, the Seller and the Purchaser shall cooperate (at their own expense) in any lawful and reasonable arrangement reasonably proposed by the Purchaser under which the Purchaser shall obtain the economic claims, rights and benefits under the Restricted Asset or Shared Contract with respect to which the Consent has not been obtained in accordance with this Agreement. Such reasonable arrangement may include subcontracting, sublicensing or subleasing to the Purchaser of any and all rights of the Seller, the Parent or Marconi IP under such Restricted Asset or Access Portion of a Shared Contract. To the extent the Purchaser receives the economic claims, rights and benefits under a Restricted Asset or Shared Contract as set forth above, the Purchaser shall be responsible for the Assumed Obligations, if any, arising under such Restricted Asset or Access Portion of a Shared Contract.

     2.4   Excluded Assets. Notwithstanding the provisions of Sections 2.1 and 2.2, neither the Seller nor Marconi IP shall sell, assign, convey, transfer or deliver to the Purchaser or AFCNA, and neither the Purchaser nor AFCNA shall purchase, acquire or take assignment or delivery of, any of the following assets or Contracts, or any right, title or interest therein (collectively, the “Excluded Assets”):

     (a)   Cash. Other than the Claims Proceeds, all cash, certificates of deposit, bank deposits, negotiable instruments, marketable securities and other cash equivalents, together with all accrued but unpaid interest thereon;

     (b)   Marconi Name. The Marconi Name and all goodwill associated therewith;

     (c)   Tax Refunds; Tax Returns. All claims for and rights to receive refunds, rebates, or similar payments of Taxes to the extent such Taxes were paid by or on behalf of the Seller or any of its Affiliates, all Tax Returns, and all notes, worksheets, files or documents relating thereto;

     (d)   Corporate Records. All minute books and corporate records of the Seller and its Affiliates;

     (e)   Employee Records. All personnel, employee compensation, medical and benefits and labor relations records relating to employees or past employees of the Seller and its Affiliates; provided, however, copies of all such materials relating to the Current

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Access Employees and any Former Access Employees who were employed in connection with the Access Business on or after April 1, 2002 shall be delivered to the Purchaser to the extent permitted by applicable Law; and provided, further, that, copies of benefit records relating to any benefit liability not being assumed by the Purchaser shall not be provided to the Purchaser;

     (f)   Sale Documents. All books and records prepared or received in connection with the proposed sale of the Access Business, including offers received from prospective purchasers, and the Seller’s and its Affiliates’ right, title and interest under this Agreement and the Related Agreements;

     (g)   Excluded Leases. Other than as provided in the Transition Services Agreement and in respect of the transfer of the Bedford Lease, all right, title and interest to (i) the Seller’s leased space located at 1000 Miller Cart West, Norcross, Georgia 30092, (ii) the Freeport Sublease, (iii) the Jabil Rationalization Agreement and (iv) all other leaseholds or interests in real property of the Seller (collectively the “Excluded Leases”);

     (h)   Group Contracts. Subject to clauses (ii) and (iii) of Section 2.2(c), all Group Contracts other than the respective Access Portions of the Shared Contracts;

     (i)   Disposed Assets. All assets sold or otherwise disposed of in the ordinary course of business and in compliance with Section 6.2 during the period from the date of this Agreement until the Closing Date;

     (j)   Insurance. Subject to Section 6.8, all insurance policies or insurance coverage relating to the Assets or the Access Business;

     (k)   Affiliate Contracts. All Affiliate Contracts and obligations thereunder;

     (l)   Intercompany Obligations. All obligations of any kind payable to or owing from any Affiliate of the Seller, including all intercompany accounts receivable and accounts payable relating to indebtedness for borrowed money;

     (m)   Global Patent Licenses. The Global Patent Licenses;

     (n)   Intellectual Property. All right, title and interest in or to any Intellectual Property or rights owned by, or leased or licensed to, the Seller or any of its Affiliates, other than as set forth in Sections 2.1 and 2.2, including the Retained Patents and Retained Technology and the Technology listed on Schedule 1.25 of the Cross License Agreement;

     (o)   Non-Disclosure Obligations. All non-disclosure, confidentiality, non-solicitation and similar rights or obligations to the extent related to the businesses (other than the Access Business) of the Seller or its Affiliates, including the Other Businesses (including the rights under the confidentiality agreements entered into in connection with the proposed sale of the Access Business);

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     (p)   Employee Non-Compete Obligations. All rights with respect to any obligation of any Access Employee to refrain from competing with any businesses (other than the Access Business) of the Seller or its Affiliates, including the Other Businesses;

     (q)   Vidar Claims. The Vidar Claims;

     (r)   Grande. Subject to Section 6.16, all of the Seller’s right, title and interest in and to the Grande Agreements;

     (s)   Indebtedness. All Contracts evidencing indebtedness for borrowed money and Guarantees, including the Indentures and Marconi Guarantees;

     (t)   Jabil. Except as provided in the Transition Services Agreement or Section 6.15, the Jabil Agreements;

     (u)   IT Assets. Except as provided in the Transition Services Agreement, all equipment, contracts and other assets of the Seller that have been transferred, or that are required to be transferred, to CSC International or British Telecommunications PLC (or their respective nominees) pursuant to the CSC Outsourcing Arrangement;

     (v)   Benefits. All Benefit Plans and the assets thereof;

     (w)   Administrative Assets. Other than as set forth in the Transition Services Agreement, all information technology assets, systems and networks exclusively used to administer payroll, employee benefits, financial accounting and tax matters for the Access Business and the Other Businesses; and

     (x)   Other Assets. All other assets (real or personal, tangible or intangible) and Contracts of the Seller not included in the Assets, including the laboratory and other equipment listed on Schedule 2.4(x).

     None of the Excluded Assets shall be included in the term “Assets,” “Purchased Contracts,” “Transferable Permits” or any other term defined in Sections 2.1 or 2.2.

     2.5   Assumed Obligations. At the Closing, subject to the provisions of Sections 2.3 and 2.6, the Purchaser shall assume, and shall agree to pay, perform and discharge when due, only the following Liabilities of the Seller (the “Assumed Obligations”):

     (a)   Purchased Contracts. Subject to Sections 2.5(c) and (d), all Liabilities of the Seller under the Purchased Contracts (other than under any material oral Contracts not set forth in Schedule 4.14(a)), including the Access Portion of the Shared Contracts, to the extent to which (i) the Seller provides the benefits of such Purchased Contracts, including the Access Portion of the Shared Contracts, to the Purchaser and (ii) such Liabilities arise and relate to the period from and after the Closing;

     (b)   Bedford Lease. Subject to Section 6.15, all Liabilities arising from and after the Closing under the Bedford Lease or the Jabil Rationalization Agreement;

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     (c)   Product Claims. All Liabilities (including any product returns or recalls) to the extent related to the performance, quality or condition of products or the quality of product support services sold by the Seller in the conduct of the Access Business under express or implied warranty (other than any warranty of non-infringement), contract, tort (including product liability) or provisions of the Uniform Commercial Code or comparable statutes governing the obligations of commercial sellers of goods and services (excluding provisions relating to non-infringement of Intellectual Property rights) (“Commercial Laws”), including all Liabilities arising with respect to the Special Warranty Matters, but excluding any Liability relating to or arising as a result of (i) fraud, (ii) any failure to obtain or hold any applicable Intellectual Property rights or (iii) any warranty or Contract for new product development, product evolution or introduction of new product features or functionality other than as set forth in a written Purchased Contract (it being understood that (A) in no event is the Purchaser assuming any Liability to pay for, or reimburse or indemnify another for the payment of, any fine or penalty to any Governmental Authority relating to the sale by the Seller or its Affiliates prior to Closing of products or services in violation of applicable Law and (B) Section 2.3 shall not limit the Liabilities assumed pursuant to this Section 2.5(c));

     (d)   Employee and Benefit Obligations. The Liabilities to or with respect to Access Employees specifically set forth, and only to the extent set forth, in Article XI;

     (e)   Accounts Payable. All Liabilities of the Seller with respect to accounts payable of the Access Business as of the Closing (including unbilled accounts payable), other than accounts payable related to Excluded Assets, but only to the extent and up to the amounts reflected in the final Statement of Working Capital (collectively, the “Accounts Payable”);

     (f)   Permits. All Liabilities arising from and after the Closing with respect to the Transferable Permits to the extent to which the Seller or Marconi IP provides the Purchaser the benefits of such Transferable Permits and only to the extent such Liabilities arise and relate to the period from and after the Closing; and

     (g)   Assumed Proceedings. The Liabilities arising from or associated with the matters set forth on Schedule 2.5(g) (the “Assumed Proceedings”).

     2.6    Retained Obligations. Notwithstanding anything to the contrary contained in this Agreement, neither the Purchaser nor AFCNA shall assume or otherwise be liable in respect of any Liability of the Parent, the Seller or Marconi IP or any of their Affiliates to the extent relating to, or arising out of the operation or conduct of, the Access Business other than to the extent set forth in Section 2.5. All Liabilities of the Parent, the Seller or Marconi IP or any of their Affiliates to the extent relating to, or arising out of the operation or conduct of, the Access Business that are not assumed by the Purchaser pursuant to Section 2.5 (the “Retained Obligations”) shall be retained by the Parent, the Seller, Marconi IP or their Affiliates. The Retained Obligations shall include the following:

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     (a)   General. Any Liability of the Parent, the Seller or Marconi IP or their Affiliates, except as specifically set forth in Section 2.5, to the extent relating to, or arising out of, the operation or conduct of the Access Business prior to the Closing;

     (b)   Taxes. Any Liability for Taxes whether or not accrued, assessed or currently due and payable (i) of the Parent, the Seller or Marconi IP or any of their Affiliates or (ii) relating to the operation or ownership of the Access Business or the Assets for any Tax period (or portion thereof) ending on or prior to the Closing Date;

     (c)   Other Businesses. Any Liability to the extent arising out of the operation or conduct by the Parent, the Seller, Marconi IP or any of their Affiliates of any business other than the Access Business;

     (d)   Purchased Contracts. Subject to Section 2.5(c), any Liability (i) arising out of any actual or alleged breach of, or nonperformance under, any Contract (including any Purchased Contract or Shared Contract) prior to the Closing or (ii) accruing under any Purchased Contract with respect to any period prior to the Closing;

     (e)   Proceedings. Subject to Section 2.5(g), any Liability of the Parent, the Seller or Marconi IP or any of their Affiliates to the extent arising out of any suit, action (including regulatory action), proceeding (including under any alternative dispute resolution procedure) or other litigation (“Proceeding”) (i) pending as of the Closing Date, (ii) based on any act or omission of the Parent, the Seller or Marconi IP occurring on or prior to the Closing or (iii) based on any actual or alleged violation by the Parent, the Seller or Marconi IP of any Law prior to or on account of the Closing;

     (f)   Accounts Payable. Subject to Section 2.5(e), any accounts payable of the Seller or any of its Affiliates to the extent of the amount not included in the final Statement of Working Capital;

     (g)   Excluded Assets. Any Liability to the extent (i) relating to or arising out of any Excluded Asset, (ii) arising out of the distribution to, or ownership or operation by, the Seller or any of its Affiliates of any Excluded Asset or (iii) associated with the realization by the Seller or any of its Affiliates of the benefits of any Excluded Asset;

     (h)   Indebtedness. Any Liability or indebtedness for borrowed money or any Liabilities relating to Guarantees;

     (i)   Products. Except as specifically set forth in Section 2.5(c), any Liability to the extent relating to or arising out of products manufactured, shipped or sold by or on behalf of the Access Business on or prior to the Closing Date;

     (j)   Infringement. Any Liability of the Parent, the Seller or Marconi IP or any of their Affiliates for infringement or misappropriation of Intellectual Property or Technology arising out of the operation of the Access Business or products manufactured, shipped or sold by or on behalf of the Parent, the Seller, Marconi IP or any of their Affiliates on or prior to the Closing Date;

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     (k)   Injury/Disability. Subject to the terms of Article XI, any Liability of the Parent, the Seller or Marconi IP or any of their Affiliates to the extent arising out of or related to any injury, disease or disability arising or occurring on or prior to the Closing Date, or exposure or alleged exposure on or prior to the Closing Date to any materials or chemicals in the work place by any Person (including any Transferred Employee or any other employee heretofore employed in the Access Business);

     (l)   Affiliates. Any Liability of the Parent, the Seller, Marconi IP or any of their Affiliates to each other or to their respective Affiliates existing as of the Closing;

     (m)   Environmental. Any Pre-Closing Environmental Liability;

     (n)   Excluded Leases. Any Liabilities of the Seller or any of its Affiliates with respect to the Excluded Leases;

     (o)   Settlement Agreements. Any Liabilities of the Seller under any settlement agreement other than any settlement agreement set forth on Schedule 2.2(f);

     (p)   Excluded Contracts. Any Liabilities of the Parent, the Seller or Marconi IP or any of their Affiliates under or with respect to any Contract that is not a Purchased Contract; and

     (q)   Employee Liabilities. Except as specifically set forth in Section 2.5(d), any Liabilities of the Seller, the Parent or Marconi IP or any of their Affiliates to or with respect to Access Employees and Liabilities under or with respect to employee benefit plans, programs, policies and arrangements.

     2.7    Prorations. The parties hereto agree that all of the items listed below relating to the Access Business and the Assets will be prorated as of the Closing Date, with the Seller liable to the extent such items relate to any time period up to and including the Closing Date and the Purchaser liable to the extent such items relate to periods subsequent to the Closing Date:

     (a)   the amount of any fees, royalties, rents or other charges which in any case are payable periodically by the Seller with respect to any of the Purchased Contracts (including the Access Portion of the Shared Contracts); and

     (b)   the amount of any fees or charges which in any case are payable periodically by the Seller with respect to any of the Transferable Permits.

     The Seller agrees to furnish the Purchaser with such documents and other records as the Purchaser reasonably requests in order to confirm all adjustment and proration calculations made pursuant to this Section 2.7. Final payments with respect to prorations contemplated by this Section 2.7 that are not ascertainable on or before the Closing Date shall be settled between the parties as soon as practicable after such prorations are ascertainable.

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ARTICLE III

Purchase Price; Adjustment; Allocation

     3.1    Payment of Purchase Price.

     (a)   The total consideration for the Assets shall consist of (i) the assumption by the Purchaser of the Assumed Obligations and (ii) the payment of $240,000,000 to the Seller (for itself and as agent for Marconi IP) (the amount referred to in this clause (ii), the “Purchase Price”). At the Closing, the Purchaser shall pay to the Seller the Purchase Price.

     (b)   All payments made hereunder shall be made in accordance with Section 13.4 and to such account or accounts as the receiving party shall designate in writing to the paying party.

     3.2    Purchase Price Adjustment.

     (a)   The Purchaser shall, as soon as practicable, and in any event no later than ninety (90) days after the Closing Date, (i) prepare the initial draft of a statement (the “Statement of Working Capital”) setting forth, as of 12:01 a.m. (central standard time) on the Closing Date, the amount equal to (y) the aggregate of the Net Inventory, the Net Accounts Receivable and the Prepaids less (z) the aggregate of the Net Accounts Payable, the Accrued Compensation and Benefits, the Other Current Liabilities and the Special Warranty Reserve (such net amount being the “Closing Working Capital”) and (ii) deliver the same to the Seller, together with a certificate from the Purchaser’s independent auditors to the effect that the initial draft Statement of Working Capital has been prepared in accordance with Section 3.2(g).

     (b)   The Seller and the Seller’s independent auditors shall review the initial draft Statement of Working Capital during the sixty (60)-day period commencing on the date that the Seller receives the initial draft Statement of Working Capital. At or prior to the end of such sixty (60)-day period, the Seller shall either:

          (i)   deliver a notice to the Purchaser confirming that no adjustments are proposed by the Seller to the initial draft Statement of Working Capital or the Purchaser’s calculation of Closing Working Capital (a “Notice of Acceptance”); or

          (ii)   (deliver a notice to the Purchaser to the effect that the Seller disagrees with the initial draft Statement of Working Capital and/or the Purchaser’s calculation of Closing Working Capital (a “Notice of Disagreement”), specifying the nature of such disagreement and the adjustments that the Seller seeks to the initial draft Statement of Working Capital and/or the calculation of Closing Working Capital (collectively, the “Proposed Adjustments”).

     (c)   To the extent that there are any Proposed Adjustments, the Purchaser will, no later than thirty (30) days after receipt of the Proposed Adjustments, notify the Seller which, if any, of the Proposed Adjustments it accepts or rejects. The Seller and the

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Purchaser shall seek in good faith to resolve any differences that remain in relation to the Proposed Adjustments and to reach agreement in writing on any Proposed Adjustments not accepted by the Purchaser. If any of the Proposed Adjustments are not so resolved (the “Unresolved Adjustments”) within forty-five (45) days after the Purchaser’s receipt of the Seller’s notice of the Proposed Adjustments, the Unresolved Adjustments may be submitted at the request of either the Seller or the Purchaser to the Cleveland office of PricewaterhouseCoopers (the “Accounting Firm”) for arbitration. The scope of the review by the Accounting Firm shall be limited to a determination of (i) whether the portions of the initial draft Statement of Working Capital and the calculation of Closing Working Capital related to the Unresolved Adjustments were prepared in accordance with Section 3.2(g) and (ii) based on its determinations of the matters described in clause (i), a final calculation of the Closing Working Capital. The Accounting Firm is not to make or be asked to make any determination other than as set forth in the previous sentence. The Seller and the Purchaser shall use reasonable best efforts to cause the Accounting Firm to render its written decision resolving the matters submitted to it as promptly as practicable and, if at all possible, within thirty (30) days after such submission of the Unresolved Adjustments. Judgment may be entered upon the determination of the Accounting Firm in any court having jurisdiction over the party against which such determination is to be enforced. The fees and expenses of the Accounting Firm incurred pursuant to this Section 3.2(c) shall be borne equally by the Seller, on the one hand, and the Purchaser, on the other hand. The fees and disbursements of the Purchaser’s independent auditors incurred in connection with the preparation and certification of the draft Statement of Working Capital and their review of any Proposed Adjustments or Unresolved Adjustments shall be borne by the Purchaser, and the fees and disbursements of the Seller’s independent auditors incurred in connection with their review of the draft Statement of Working Capital, the working papers of the Purchaser’s independent auditors and any Proposed Adjustments or Unresolved Adjustments shall be borne by the Seller.

     (d)   The Statement of Working Capital shall become final and binding on all parties upon the earliest of (i) the date that a Notice of Acceptance is delivered to the Purchaser pursuant to Section 3.2(b)(i) (in which case the final Closing Working Capital shall be as set forth in the Statement of Working Capital delivered pursuant to Section 3.2(a)), (ii) the date that is one (1) day after the sixty (60)-day review period specified in Section 3.2(b) has ended if no Notice of Disagreement has been delivered by the Seller to the Purchaser pursuant to Section 3.2(b)(ii) during such sixty (60)-day period (in which case the final Closing Working Capital shall be as set forth in the Statement of Working Capital delivered pursuant to Section 3.2(a)), (iii) the date of an agreement in writing by the Seller and the Purchaser that the Statement of Working Capital, together with any modifications thereto agreed by the Seller and the Purchaser, are final and binding (in which case the final Closing Working Capital shall be as so agreed upon by the parties) and (iv) the date on which the Accounting Firm finally resolves in writing any disputed matters (in which case the final Closing Working Capital shall be as determined by the Accounting Firm pursuant to Section 3.2(c)).

     (e)   The Purchaser shall provide the Seller and its independent auditors with reasonable access to the books, records, working papers and senior management and

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employees of the Access Business and shall cause its independent auditors to provide reasonable access to their working papers prepared for the purpose of the certificate rendered under Section 3.2(a) as the Seller and its independent auditors may request in connection with the finalization of the Statement of Working Capital or calculation of Closing Working Capital.

     (f)   In the event the final Closing Working Capital (as provided in Section 3.2(d)) is greater than or less than the Benchmark Amount by more than $100,000, the Purchase Price shall be increased by the amount by which the final Closing Working Capital (as provided in Section 3.2(d)) exceeds the Benchmark Amount, or decreased by the amount by which the final Closing Working Capital (as provided in Section 3.2(d)) is less than the Benchmark Amount. The Purchase Price as so increased or decreased shall hereafter be referred to as the “Adjusted Purchase Price.” If the Purchase Price is less than the Adjusted Purchase Price, the Purchaser shall, within two (2) Business Days after the Statement of Working Capital becomes final and binding on the parties, make payment by wire transfer in immediately available funds to one or more accounts designated by the Seller of the amount of such difference together with a sum equivalent to interest thereon at a rate equal to the LIBOR Rate, accrued from the Closing Date to and including the date of payment and calculated on the basis of the actual number of days elapsed divided by 360. If the Purchase Price is more than the Adjusted Purchase Price, the Seller shall, within two (2) Business Days after the Statement of Working Capital becomes final and binding on the parties, make payment by wire transfer in immediately available funds to an account designated by the Purchaser of the amount of such difference together with a sum equivalent to interest thereon at a rate equal to the LIBOR Rate, accrued from the Closing Date to and including the date of payment and calculated on the basis of the actual number of days elapsed divided by 360. “LIBOR Rate” shall mean the rate of interest announced publicly by the British Bankers Association as its three (3)-month LIBOR rate for U.S. dollars on the Business Day immediately following the day on which the Statement of Working Capital becomes final. The parties agree that any amounts paid pursuant to this Section 3.2(f) shall be allocated in a manner that is consistent with the allocation of the Purchase Price as set forth in Section 3.3.

     (g)   The Statement of Working Capital shall be prepared in the same way and using the same accounting policies, principles, bases and methods and using the same level of prudence as used in the preparation of the Management Accounts specified in Schedule 4.4(a), subject to the Calculation Principles referred to below. Notwithstanding the generality of the foregoing sentence, the Statement of Working Capital shall be prepared in accordance with the rules of calculation specified in Schedule 3.2(g) (the “Calculation Principles”). For purposes of the preparation of the Statement of Working Capital, in the event of any conflict or inconsistency between the accounting policies, principles, bases and methods referred to in the first sentence of this Section 3.2(g) and the Calculation Principles, the Calculation Principles shall control.

     3.3    Allocation of Consideration for Assets. Within 90 days following the Closing, the Purchaser and the Seller and their respective Affiliates shall consult with each other and agree upon the allocation of the Purchase Price among the Assets and file all necessary Tax Returns

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and other forms (including Internal Revenue Service Form 8594) to report the transactions contemplated herein for U.S. federal, state, local and non-United States income Tax purposes in accordance with such allocation, and shall not take any position inconsistent with such allocation. The parties agree and acknowledge that such allocation will be in accordance with U.S. GAAP and the appraisals of the Assets conducted on behalf of the Purchaser following the Closing. Any adjustment to the Purchase Price for the Assets shall be allocated as provided in Treasury Regulation Section 1.1060-1, and, in the event of such adjustment, the Purchaser and the Seller agree to revise and amend Form 8594 within 30 days of such adjustment.

ARTICLE IV

Representations and Warranties of
the Parent, the Seller and Marconi IP

     The Seller, the Parent and Marconi IP, jointly and severally, represent and warrant to the Purchaser and AFCNA as follows:

     4.1    Due Incorporation. Each of the Seller and Marconi IP (a) is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Delaware, (b) has all requisite corporate power and authority to own, operate and lease its assets and to conduct its businesses as presently conducted and (c) is duly qualified to do business and in good standing (with respect to those jurisdictions that recognize the concept of good standing) to do business as a foreign corporation in each state in which its ownership of the Assets or, in the case of the Seller, its conduct of the Access Business, makes such qualification necessary, other than such jurisdictions in which the failure to be so qualified or in good standing does not constitute a Seller Material Adverse Effect or a Business Material Adverse Effect. The Parent (a) is a public limited liability company duly incorporated, validly existing and in good standing under the laws of England and Wales, (b) has the requisite limited liability company power and authority to own, operate and lease its properties and to conduct its businesses as presently conducted and (c) is duly qualified to do business and in good standing (with respect to those jurisdictions that recognize the concept of good standing) to do business as a foreign company in each jurisdiction in which its ownership of assets or its conduct of its businesses makes such qualification necessary, other than such jurisdictions in which the failure to be so qualified or in good standing does not constitute a Seller Material Adverse Effect or a Business Material Adverse Effect. Each Marconi Entity other than the Seller, the Parent and Marconi IP (a) is a entity duly incorporated, validly existing and in good standing under the laws of its respective jurisdiction of formation, (b) has the requisite power and authority to own, operate and lease its properties and to conduct its businesses as presently conducted and (c) is duly qualified to do business and in good standing (with respect to those jurisdictions that recognize the concept of good standing) to do business as a foreign company in each jurisdiction in which its ownership of assets or its conduct of its businesses makes such qualification necessary, other than such jurisdictions in which the failure to be so qualified or in good standing does not constitute a Seller Material Adverse Effect or a Business Material Adverse Effect.

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     4.2    Due Authorization.

     (a)   Each of the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi Entities has full corporate power and authority to execute, deliver and perform this Agreement and its Related Agreements and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by each of the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi Entities of this Agreement and its Related Agreements and the consummation by each of the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi Entities of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action, including the approval of the boards of directors of each of the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi Entities. Each of the Parent, the Seller and Marconi IP has duly and validly executed and delivered this Agreement and, at or prior to the Closing, the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi Entities will have duly and validly executed and delivered each of its Related Agreements. Assuming the due authorization, execution and delivery of this Agreement and its Related Agreements by the other parties thereto, this Agreement constitutes, and each of the Seller’s, Marconi IP’s and, solely with respect to the Cross License Agreement, the other Marconi Entities’ Related Agreements will after the Closing constitute, legal, valid and binding obligations of the Parent, the Seller, Marconi IP or the applicable other Marconi Entity, as the case may be, and to the extent a party thereto, enforceable against each of them (to the extent a party thereto) in accordance with their respective terms, subject to the Enforceability Limitations.

     (b)   No vote of the holders of any class or series of capital stock or other securities of the Parent or any of its Affiliates (other than approval of FS Holdings Corp. as the sole shareholder of the Seller and the approval of the Seller as the sole shareholder of Marconi IP each of which has been obtained prior to the date hereof) is necessary in connection with the execution and delivery of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby.

     4.3    Consents and Approvals; Authority Relative to this Agreement.

     (a)   Except for the Governmental Required Consents or as set forth in Schedule 4.3(a), no Consent of or with any Governmental Authority is necessary in connection with the execution, delivery or performance by the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi Entities, of this Agreement or any of their respective Related Agreements or the consummation by the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi Entities of the transactions contemplated hereby or thereby.

     (b)   Except for the Governmental Required Consents or as set forth in Schedule 4.3(b), the execution, delivery and performance by the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi

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Entities of this Agreement and their respective Related Agreements, and the consummation by the Parent, the Seller, Marconi IP and, solely with respect to the Cross License Agreement, the other Marconi Entities of the transactions contemplated hereby and thereby, do not and will not conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit under, or to increased, additional, accelerated or guaranteed rights or entitlements of any Person under, or result in the creation of any Lien upon any of the properties or assets of the Parent, the Seller, Marconi IP or, solely with respect to the Cross License Agreement, the other Marconi Entities under, any provision of (i) the certificate of incorporation or by-laws or other organizational documents of the Parent, the Seller, Marconi IP or, solely with respect to the Cross License Agreement, the other Marconi Entities, (ii) any Contract to which the Parent, the Seller, Marconi IP or, solely with respect to the Cross License Agreement, the other Marconi Entities is a party or by which any of their respective properties or assets is bound, (iii) any Transferable Permit, (iv) any judgment, order or decree (“Judgment”) or Law applicable to the Parent, the Seller, Marconi IP or, solely with respect to the Cross License Agreement, the other Marconi Entities or their respective properties or assets or (v) any Contract with respect to any indebtedness of the Parent, the Seller, Marconi IP or, solely with respect to the Cross License Agreement, the other Marconi Entities, other than (A) in the case of clause (ii) above, any conflict, violation or other such item that does not constitute a Business Material Adverse Effect or a Seller Material Adverse Effect and (B) in the case of clauses (iii), (iv) and (v) above, any conflict, violation or other such item that does not constitute a Seller Material Adverse Effect.

     4.4    Management Accounts. Schedule 4.4(a) sets forth the statement of assets and liabilities to be transferred pursuant to this Agreement as of September 30, 2003 (“Balance Sheet”) and the statement of operating profit of the Access Business for the year ended March 31, 2003 and the six-month interim period ended September 30, 2003 (together with the Balance Sheet, the “Management Accounts”). Except as set forth on Schedule 4.4(b), the Management Accounts have been (a) prepared on the basis of accounting principles generally accepted in the United Kingdom at the time prepared, consistently applied (as modified by the exceptions set forth on Schedule 4.4(b), the “Applicable Accounting Principles”) and (b) properly extracted from the Seller’s books and records. Except as set forth on Schedule 4.4(c), on the basis of the Applicable Accounting Principles, the Balance Sheet fairly presents in all material respects as of September 30, 2003 the assets and liabilities of the Access Business to be transferred pursuant to this Agreement. The Benchmark Amount was properly extracted and calculated from the Management Accounts using the same level of prudence as used in the preparation of the Management Accounts, giving effect to the Calculation Principles.

     4.5    No Other Assumed Liabilities. Except for the Assumed Obligations or as set forth on Schedule 4.5, there is no Liability of the Seller or any of its Affiliates which will become a Liability of the Purchaser following the Closing, except:

     (a)   those set forth or reflected in the Balance Sheet which have not been paid or discharged since the date thereof;

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     (b)   those arising under agreements or other commitments to be expressly assumed by the Purchaser at the Closing; and

     (c)   those arising in the ordinary course of business consistent with past practices since September 30, 2003.

     4.6    No Adverse Effects or Changes. Since September 30, 2003, there has not been a Business Material Adverse Effect. Except (a) with respect to the Excluded Assets and the Retained Obligations, (b) as set forth in Schedule 4.6 or (c) as otherwise expressly permitted by this Agreement, since September 30, 2003, the Access Business has (i) been conducted in the ordinary course and in substantially the same manner as previously conducted and (ii) made reasonable efforts consistent with past practices to preserve the relationships of the Access Business with material customers, suppliers and distributors.

     4.7    Title to Assets; Affiliate Ownership of Assets.

     (a)   Except as set forth in Schedule 4.7(a), the Seller (i) has title to, and is the lawful owner of, all of the owned Assets (other than the Transferred Intellectual Property, the title to which is addressed exclusively in Section 4.13), free and clear of any Lien other than Permitted Liens and (ii) has a valid leasehold or license interest in or to all the assets that are the subject of personal property leases or licenses included in the Purchased Contracts (other than licenses related to Intellectual Property, the validity of the leasehold or license interest of which is addressed exclusively in Section 4.13). Except as set forth in Schedule 4.7(a) and subject to obtaining and making all applicable Consents, (A) the Seller has the full right to sell, convey, transfer, assign and deliver the Assets (other than the Transferred Intellectual Property) to the Purchaser or AFCNA, as the case may be, and (B) at the Closing the Seller shall convey to the Purchaser or AFCNA, as the case may be, good title to all of the Assets (other than the Transferred Intellectual Property, the transfer of which is addressed exclusively in Section 4.13), free and clear of any Lien (other than Permitted Liens). This Section 4.7(a) does not apply to title to Intellectual Property, it being agreed that the sole and exclusive representations and warranties regarding title to Intellectual Property are set forth in Section 4.13.

     (b)   Except as set forth on Schedule 4.7(b), no Affiliate of the Seller (other than Marconi IP) owns, licenses or leases any assets or properties used or held for use in the conduct or operation of the Access Business.

     4.8    Access Business Assets. Except as set forth on Schedule 4.8, the Assets are sufficient for the conduct of the Access Business by the Purchaser and AFCNA, operating together, following the Closing in substantially the same manner as currently conducted by the Seller and as was conducted by the Seller on September 30, 2003.

     4.9    Real Property.

     (a)   Other than the Bedford Facility and the real property that is the subject of the Excluded Leases, the Seller does not own or lease any real property that is primarily used in connection with the Access Business. The Seller and CAMI Industrial LLC have entered into a lease with respect to the Bedford Facility pursuant to which the Seller will

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lease the Bedford Facility effective upon the closing of the transaction contemplated by the Bedford Sale Agreement (the “CAMI Transaction”). A true and correct copy of such lease is attached hereto as Exhibit L (the “Bedford Lease”). Other than the Jabil Rationalization Agreement, the Bedford Sale Agreement and the Bedford Lease (it being understood that the effectiveness of the Bedford Lease is conditional on the closing of the CAMI Transaction), there are no other agreements or arrangements whatsoever relating to the Seller’s right to occupy the Bedford Facility. Except as set forth in Schedule 4.9(a), (i) the Seller is not in default under the Jabil Rationalization Agreement (nor does there exist any condition which, upon the passage of time or the giving of notice or both, would cause such a default) and (ii) to the Seller’s knowledge, no other party is in default under the Jabil Rationalization Agreement (nor does there exist any condition which, upon the passage of time or the giving of notice or both, would cause such a default). Upon the closing of the CAMI Transaction, the Bedford Lease shall be valid, binding and in full force and effect against the Seller, and, to the Seller’s knowledge, against the other party thereto in accordance with its terms. Further, assuming the closing of the CAMI Transaction, the Seller warrants that it will not have breached the provisions of the Bedford Lease or be in default under the Bedford Lease (nor will there exist any condition which, upon the passage of time or the giving of notice or both, would cause such a breach or default). To the Seller’s knowledge, there is no pending or threatened proceeding or action by any Governmental Authority to condemn or take by the power of eminent domain (or to purchase in lieu thereof) all or any part of the Bedford Facility. Except as set forth in Schedule 4.9(a), (i) the Bedford Facility is supplied with utilities and other services sufficient to operate the Access Business as presently conducted and (ii) the operation of the Access Business by the Seller at the Bedford Facility has not since January 1, 2003 violated and does not violate in any material manner any applicable building code, zoning requirement, or zoning, building use or occupancy classification or statute relating to the Bedford Facility. If, at the time of the Closing, the Bedford Lease is in effect, the Seller warrants that it will not have transferred, mortgaged or assigned any interest in such Bedford Lease. The Bedford Facility is suitable for the conduct of the Access Business as conducted as of September 30, 2003 and as currently conducted.

     (b)   The Seller has the right to transfer its right to occupy the Bedford Facility under the Jabil Rationalization Agreement to the Purchaser without the consent of Jabil. In the event the CAMI Transaction does not close, the Seller has the right to cause Jabil to sell the Bedford Facility to the Seller under the Jabil Rationalization Agreement.

     4.10    Personal Property; Leased Personal Property. Schedule 4.10(a) includes an accurate and complete list as of October 31, 2003 of all of the Personal Property having an individual book value in excess of $10,000. Schedule 4.10(b) sets forth an accurate and complete list of each lease of personal property used primarily in the Seller’s conduct or operation of the Access Business having aggregate minimum lease payments in excess of $10,000 (the “Material Personal Property Leases”). The Seller has made available to the Purchaser true and complete copies of the Material Personal Property Leases except as noted on Schedule 4.10(b). All Personal Property, whether owned or leased, is in all material respects in good working order and has been maintained in all material respects in accordance with the past practice of the Access Business.

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     4.11    Customers and Distributors; Suppliers.

     (a)   Except for the customers named in Schedule 4.11(a), the Access Business does not have any customer to which it made more than five percent (5%) of its sales during its most recent full fiscal year or during the six month period ended September 30, 2003. Except as set forth in Schedule 4.11(a) and except for fluctuations in volume in the ordinary course of business, since September 30, 2003 there has not been (i) to the Seller’s knowledge, any material adverse change in the relationship of the Access Business with any customer named in Schedule 4.11(a) or (ii) except for changes in prices in the ordinary course of business, any change in any material term (including credit terms) of the sales agreements or related agreements with any such customer. Since January 1, 2002, neither the Seller nor any of its Affiliates has received any written complaint concerning the products and services of the Access Business from a purchaser thereof, nor has the Seller nor any of its Affiliates had any such products returned by a purchaser thereof, other than complaints and returns that, individually or in the aggregate, do not constitute a Business Material Adverse Effect.

     (b)   Except for the suppliers named in Schedule 4.11(b), the Access Business has not purchased, from any single supplier, goods or services for which the aggregate purchase price exceeds five percent (5%) of the total value of goods and services purchased by the Access Business during its most recent full fiscal year or during the six month period ended September 30, 2003. Except as set forth in Schedule 4.11(b) and except for fluctuations in volume in the ordinary course of business, since September 30, 2003, there has not been (i) to the Seller’s knowledge, any material adverse change in the relationship of the Access Business with any supplier named in Schedule 4.11(b) or (ii) except for changes in prices in the ordinary course of business, any change in any material term (including credit terms) of the supply agreements or related arrangements with any such supplier.

     (c)   Schedule 4.11(c) sets forth a list of each material distributor or sales representative of the products of the Access Business and (i) indicates whether such distributor or sales representative has a written contract or oral arrangement with the Access Business and (ii) only with respect to such oral arrangements, contains a description of the terms of such oral arrangement with the Access Business with respect to territory, exclusivity and the term of the arrangement. To the Seller’s knowledge, no Affiliate of the Seller has entered into any arrangements that would contractually prevent the Purchaser from distributing or selling any products of the Access Business in the United States or Canada.

     4.12    Proceedings.

     (a)   Except as set forth in Schedule 4.12, there are no Proceedings pending, or, to the Seller’s knowledge, Proceedings or claims threatened against the Seller or any of its Affiliates the subject matter of which relates to the Access Business or against or affecting any of the Assets before any court or any other Governmental Authority that (i) involves more than $100,000, (ii) presents in large degree the same legal and factual issues as other Proceedings or claims and, together with such other Proceedings and

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claims, involves more than $100,000, (iii) seeks any injunctive relief or (iv) relates to or otherwise may give rise to any legal restraint on or prohibition against the transactions contemplated by this Agreement. Except as set forth in Schedule 4.12, neither the Seller, the Parent nor Marconi IP nor any of their respective Affiliates is (i) a party or subject to any Judgment that has had or would reasonably be expected to have a material adverse effect on (A) the Purchaser’s ability to conduct the Access Business or (B) any Asset or Assumed Obligation or (ii) in default under any Judgment, which default would reasonably be expected to have a material adverse effect on (A) the Purchaser’s ability to conduct the Access Business or (B) any Asset or Assumed Obligation. Except as set forth in Schedule 4.12, there is not any Proceeding or claim by the Seller, the Parent or Marconi IP pending, or which any of them intends to initiate, against any other Person arising out of the conduct of the Access Business which involves an amount greater than $100,000. Except as set forth in Schedule 4.12, to the Seller’s knowledge, there is no pending or threatened investigation of, or affecting the conduct of, the Access Business or any Asset or Assumed Obligation by a Governmental Authority. Except as disclosed in Schedule 4.12, neither the Seller nor any of its Affiliates (solely in relation to the operation of the Access Business) has entered into any agreement to settle or compromise any Proceeding pending or threatened against it which has involved any obligation other than the payment of money and for which it has any continuing obligation.

     (b)   There are no Proceedings pending, or, to the Seller’s knowledge, threatened, by or against the Seller or any of its Affiliates with respect to this Agreement or the Related Agreements, or in connection with the transactions contemplated hereby or thereby.

     4.13    Intellectual Property.

     (a)   Schedule 4.13(a) sets forth an accurate and complete list of all registration and applications for registration for the Transferred Patents, Transferred Trademarks and Transferred Technology. The Transferred Patents, Transferred Trademarks, Transferred Technology, Inbound Licenses, the Intellectual Property licensed under the Cross License Agreement and the Sublicenses , the Intellectual Property licensed under the Global Patent Licenses referenced at Items 3 and 4 of Schedule 1.1D and the so-called “shrink-wrap” or “click-wrap” license agreements referenced at Section 4.13(d) below are collectively sufficient for the conduct of the Access Business by the Purchaser and AFCNA, operating together, following the Closing in substantially the same manner as currently conducted by the Seller and as was conducted by the Seller on September 30, 2003.

     (b)   With respect to all Transferred Patents, Transferred Trademarks and Transferred Technology that are registered or subject to an application of registration, Schedule 4.13(a) sets forth a list of all jurisdictions in which such Transferred Patents, Transferred Trademarks and Transferred Technology are registered or registrations applied for and all registration and application numbers. Schedule 4.13(b)(i) lists all administrative actions that must be taken by the Purchaser within one hundred eighty (180) days after the Closing Date, including the payment of any registration, maintenance, renewal fees, annuity fees and taxes or the filing of any documents,

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applications or certificates, for the purposes of maintaining, perfecting or preserving or renewing Transferred Patents, Transferred Trademarks and Transferred Technology that is Intellectual Property set forth in Schedule 4.13(a). Except as set forth in Schedule 4.13(b)(ii), all such Transferred Patents, Transferred Trademarks and Transferred Technology that is Intellectual Property are in full force and effect, and each of the Parent, the Seller, Marconi IP and their respective Affiliates, to the extent applicable, has, in a timely manner (including extensions), taken those necessary administrative actions (including the payment of any applicable fees) that would reasonably be expected to ensure that all applications filed by or on behalf of the Parent, the Seller, Marconi IP and their respective Affiliates for the Transferred Patents, Transferred Trademarks and Transferred Technology remain in full force and effect.

     (c)   Except as set forth in Schedule 4.13(c) or as the result of the failure of Personnel to enter into an Employee IP Agreement under circumstances in which, under applicable Law, ownership of Intellectual Property rights in Transferred Intellectual Property developed or conceived by such Personnel would vest on creation in such Personnel and not in the Seller or Marconi IP, either the Parent, the Seller or Marconi IP is, and on the Closing Date, the Purchaser or the Purchaser’s designated Affiliate will be, the sole and exclusive owner of, and the Parent, the Seller or Marconi IP has, and on the Closing Date the Purchaser or the Purchaser’s designated Affiliate will have, in connection with the Access Business, all rights that accrue to a sole owner, without payment to any other Person, to all Transferred Patents, Transferred Trademarks and Transferred Technology. The consummation of the Acquisition, the ownership of the Access Business by the Purchaser and AFCNA and the other transactions contemplated hereby do not and will not conflict with, alter or impair any such sole ownership rights, other than as is not within the Seller’s knowledge or would not reasonably be expected to result in any material liability or have any Business Material Adverse Effect on the continued conduct of the Access Business, as such is currently conducted.

     (d)   Schedule 4.13(d) sets forth an accurate and complete list of all licenses, sublicenses and other agreements pursuant to which the Seller or any of its Affiliates is authorized or licensed to use any third party Intellectual Property or Technology that is used in connection with the Access Business as currently conducted, except for so-called “shrink-wrap” or “click-wrap” license agreements relating to off-the-shelf computer software licensed in the ordinary course of business (“Inbound Licenses”).

     (e)   Except as set forth in Schedule 4.13(e)(i), to the Seller’s knowledge, the conduct of the Access Business as currently conducted and as conducted on the Closing Date does not violate, conflict with or infringe or misappropriate the Intellectual Property or Technology that is Intellectual Property of any other Person that would result in any material liability or have any Business Material Adverse Effect on the continued conduct of the Access Business as conducted on the Closing Date. Except as set forth in Schedule 4.13(e)(i), (i) no claims are pending or, to the Seller’s knowledge, threatened, against the Seller or any of its Affiliates by any Person with respect to the ownership, validity (excluding administrative actions received in the normal course of business in connection with pending patent applications), enforceability or use in the Access Business of any Intellectual Property and (ii) during the past three (3) years the Seller and its Affiliates

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have not received any written or, to the Seller’s knowledge, oral communication alleging that the Seller or any of its Affiliates has in the conduct of the Access Business violated any rights relating to the Intellectual Property of any Person. During the past two (2) years neither the Parent, the Seller or Marconi IP has received any written or, to the Seller’s knowledge, oral, communication from any Person asserting any ownership interest in, or requesting that the Seller obtain a license to, any Transferred Patents, Transferred Trademarks or Transferred Technology. Schedule 4.13(e)(ii) contains a complete and accurate list of any pending challenges or adversarial proceedings before any patent or trademark authority to which the Seller and any of its Affiliates is a party (including any pending applications for reexamination of a patent) with respect to the Transferred Patents or Transferred Trademarks, a description of the subject matter of each proceeding, and the current status of each proceeding, including interferences, priority contests, opposition and protests. Except as set forth in Schedule 4.13(e)(iii), to the Seller’s knowledge, no third party is infringing, misappropriating or violating any of the Transferred Patents, Transferred Trademarks or Transferred Technology.

     (f)   The Parent, the Seller or Marconi IP have used all reasonable efforts to maintain all material Transferred Technology that constitutes confidential or trade secret information in confidence in accordance with protection procedures customarily used in the industry to protect rights of like importance. As to any claim against the Seller, Marconi IP or any of their Affiliates asserting that Personnel owns the Transferred Patents or Transferred Technology, no such claim has been asserted or, to Seller’s knowledge, is threatened. To the Seller’s knowledge, none of the current officers and employees of Marconi IP, the Seller or their Affiliates has any patents issued or applications pending for any device, process, design or invention of any kind that was conceived or developed within the scope of such officers’ or employees’ employment by Marconi IP, the Seller or the applicable Affiliate in the furtherance of the Access Business, which patents or applications have not been assigned to Marconi IP, the Seller or such Affiliates, with such assignment duly recorded in the United States Patent and Trademark Office.

     (g)   Neither (i) the execution and delivery of this Agreement by the Seller, the Parent and Marconi IP, (ii) the execution and delivery of the Cross License Agreement by the Marconi Entities nor (iii) the consummation of the transactions contemplated hereby or thereby by the Seller, the Parent, Marconi IP or the other Marconi Entities, as applicable, will result in (A) a loss of, or encumbrance or lien on, any Transferred Patents, Transferred Trademarks or Transferred Technology, (B) the grant, assignment, or transfer to any other person or entity of any license or other right or interest under, to, or in any of the Transferred Patents, Transferred Trademarks or Transferred Technology, or (C) the Purchaser being obligated to pay any royalties or other amounts to any third party in excess of those payable by the Seller or Marconi IP prior to the Closing, other than payments calculated based on product sales.

     4.14    Contracts.

     (a)   Schedule 4.14(a) is an accurate and complete list of all the Contracts (other than any Contract relating to any Benefit Plan) of the following types to which the

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Seller or Marconi IP is a party, or by which either is bound, that relate primarily to, or are material to the operation or conduct of, the Access Business or to which any of the Assets is subject:

          (i)   each Contract which requires, on an annual basis, a payment by any party in excess of, or a series of payments which in the aggregate exceed, $100,000 (as pertaining to the Access Business) or provides for the delivery of goods or performance of services, or any combination thereof, having a value in excess of $100,000 (as pertaining to the Access Business);

          (ii)   each Contract with a sales representative, manufacturer’s representative, distributor, dealer, broker, sales agency, advertising agency or other Person engaged in sales, distribution or promotional activities, or any Contract to act in one of the foregoing specified capacities on behalf of any Person;

          (iii)   each Contract pursuant to which the Seller or Marconi IP has made or will make loans or advances, or has incurred, or is obligated to incur, indebtedness for borrowed money or has become a guarantor or surety or pledged its credit for or otherwise become responsible with respect to any undertaking of another Person (“Guarantees”) (except for the negotiation or collection of negotiable instruments in transactions in the ordinary course of business) or any Contract granting a Lien upon any Assets other than Permitted Liens;

          (iv)   each Contract with suppliers (including purchase orders) which has a commitment of more than $100,000 on an annual basis;

          (v)   each covenant not to compete or other covenant of the Seller or any of its Affiliates restricting the development, manufacture, marketing or distribution of the products and services of the Access Business;

          (vi)   each material Contract with any Affiliate of the Seller (the “Affiliate Contracts”);

          (vii)   each Contract with any officer, director or employee of the Seller or any of its Affiliates (other than employment agreements and “at will” arrangements);

          (viii)   each lease, sublease or similar Contract with any Person under which the Seller is a lessor or sublessor of, or makes available for use to any Person, (A) any Assets or (B) any portion of the Bedford Facility;

          (ix)   each license, sublicense, option or other Contract relating, in whole or in part, to any Transferred Intellectual Property (including any license or other Contract under which the Seller or any of its Affiliates granted the right to use any Transferred Intellectual Property);

          (x)   each confidentiality agreement (other than (A) any confidentiality agreement entered into in the ordinary course of business with a Person who (together with such Person’s Affiliates) does not compete in any manner with the Access Business

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and (B) any confidentiality agreement entered into in connection with the sale of the Access Business);

          (xi)   each Contract with a customer (including sales order) that involves an obligation of the Seller to deliver products and services for payment of or having a fair market value of more than $100,000;

          (xii)   each Contract (A) for the sale of any Asset (other than inventory sales in the ordinary course of business), (B) for the grant of any preferential rights to purchase any Asset (other than inventory in the ordinary course of business) or (C) for the grant of any exclusive right to use any Asset;

          (xiii)   each Contract with any Governmental Authority;

          (xiv)   each Group Contract;

          (xv)   each Contract for any joint venture, partnership or similar arrangement; and

          (xvi)   each written Contract other than as set forth above to which the Parent, the Seller or Marconi IP is a party or by which it or any of its assets or business is bound or subject that is material to the Access Business.

     (b)   Except as set forth in Schedule 4.14(b), neither the Seller nor Marconi IP nor any Affiliate of the Seller or Marconi IP (as applicable) has since January 1, 2001 (with or without the lapse of time or the giving of notice, or both) materially breached the provisions of, or is in material default under, the terms of (i) any Contract listed on Schedule 4.14(a) that is a Purchased Contract or is material to the operation of the Access Business or (ii) any Material Personal Property Lease (collectively, the “Material Contracts”), and, to the Seller’s knowledge, no other party to any Material Contract is in material breach of the provisions of, or is in material default under the terms of, any Material Contract. Except as set forth in Schedule 4.14(b), all Material Contracts are valid, binding and in full force and effect and are enforceable against the Seller or Marconi IP (as applicable) and, to Seller’s knowledge, the other party thereto, in accordance with their terms, subject to the Enforceability Limitations. Neither the Seller nor Marconi IP nor any of their respective Affiliates has received any written notice of the intention of any party to terminate any Material Contract. Complete and correct copies of all Material Contracts have been delivered or made available to the Purchaser by the Seller, except as set forth in Schedule 4.10(b) or Schedule 4.14(a) (it being understood and agreed that certain pricing and product information related to the Other Businesses contained in the Material Contracts has not been made available or delivered to the Purchaser).

     (c)   Schedule 4.14(c) sets forth each Material Contract with respect to which the Consent of the other party or parties thereto must be obtained by virtue of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby or under the Related Agreements to avoid the invalidity of the

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transfer of such Material Contract, the termination thereof, a breach, violation or default thereunder or any other change or modification to the terms thereof.

     4.15    Permits. The Seller and Marconi IP possess all material Permits required by applicable Law for them to own or hold the Assets and necessary to conduct the Access Business as currently conducted. Schedule 4.15 is an accurate and complete list of all such Permits. All such Permits are validly held by the Seller and Marconi IP, as applicable, and each of the Seller and Marconi IP has complied in all material respects with all terms and conditions thereof. Since January 1, 2002, neither the Seller nor any of its Affiliates has received any written notice of any Proceedings relating to the revocation or modification of any such Permits the loss of which, individually or in the aggregate, constitutes a Business Material Adverse Effect or a Seller Material Adverse Effect. Except as set forth in Schedule 4.15, none of such Permits will be subject to suspension, modification, revocation or nonrenewal as a result of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby or the ownership of the Access Business or the Assets by the Purchaser and AFCNA.

     4.16    Insurance. The Seller maintains policies of fire and casualty, liability, workers’ compensation and other forms of insurance (and/or participates in insurance arrangements made by one or more of its Affiliates) with respect to the Access Business in such amounts, with such deductibles and against such risks and losses as are reasonable for the Access Business (it being understood that the Seller is self-insured with respect to workers’ compensation claims that may be brought by Former Access Employees whose primary place of employment at the time such employees worked for the Access Business was in Ohio). Except as set forth on Schedule 4.16, all such policies are in full force and effect, all premiums due and payable thereon have been paid (other than retroactive or retrospective premium adjustments that are not yet, but may be, required to be paid with respect to any period ending prior to the Closing Date under comprehensive general liability and worker’s compensation insurance policies), and no notice of cancellation or termination has been received by the Seller or any of its Affiliates with respect to any such policy which has not been replaced on substantially similar terms prior to the date of such cancellation. To the Seller’s knowledge, the Access Business has been conducted in a manner so as to conform in all material respects to all applicable provisions of such insurance policies.

     4.17    Employee Benefit Plans and Employment Agreements.

     (a)   General. Except as listed in Schedule 4.17, the Seller is not a party to or a participant in:

          (i)   any “employee benefit plan” (as defined in section 3(3) of ERISA);

          (ii)   any retirement or deferred compensation plan, incentive compensation plan, stock plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance or hospitalization program or any other fringe benefit arrangements for any Access Employee, which does not constitute an employee benefit plan; or

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          (iii)   any employment agreement or any written severance agreement with any Current Access Employee that provides for a severance payment in excess of twelve (12) months’ base annual salary.

     Nothing in this Section 4.17(a) shall require that Schedule 4.17 include any plans, policies, programs, arrangements or agreements unless the plan, policy, program, arrangement or agreement covers or has been entered into with any Access Employee or unless the plan, policy, program, arrangement or agreement covers other persons with respect to which a liability is being assumed by the Purchaser.

     (b)   Compliance With Laws; Liabilities. As to all Benefit Plans:

          (i)   all Benefit Plans comply, and have been administered in compliance, in all material respects, with all requirements of Law applicable thereto; and

          (ii)   each Benefit Plan which is an employee pension benefit plan (as defined in section 3(2) of ERISA) and which is intended to be qualified under section 401(a) of the Code is the subject of a favorable determination letter issued by the Internal Revenue Service.

     (c)   The Assets are not subject to any Lien imposed under ERISA or the Code on account of any pension benefit plan maintained or contributed to by the Seller or any of its Affiliates.

     (d)   The Seller has provided to the Purchaser a true and correct copy of each of the Marconi AIP, the Seller’s severance policies applicable to the Transferred Employees as in effect on the date of this Agreement, and the form of agreement for the thirteen agreements that are listed under the heading of “Special Severance Agreements” on Schedule 4.17. With the exception of the name of the individual covered by the applicable agreement, each of the thirteen Special Severance Agreements is identical to the form of agreement provided.

     4.18    Employment and Labor Matters.

     (a)   Schedule 1.1B sets forth an accurate and complete list of the names, titles or job descriptions, and a description of their status, i.e., whether active or on leave of absence) as of the date of this Agreement, of all employees (part- and full-time) of the Seller involved primarily in the Access Business. A complete and accurate list of (i) the annual compensation for the preceding and current fiscal year and (ii) accrued paid time off (and current rate of accrual) of each such person is set forth in that certain Memorandum from the Seller to the Purchaser titled “Section 4.18(a) — Compensation Information Memorandum” dated as of the date hereof and reflecting in the case of accrued paid time off accruals through December 6, 2003. Except as described in Schedule 4.18(a), there is, and since January 1, 2001 there has been, no labor strike, material labor dispute, material labor slow-down, material work stoppage or other material labor difficulty pending or, to the Seller’s knowledge, threatened, against the Seller and relating to the Access Business. Except as disclosed in Schedule 4.18(a), none of the employees of the Seller involved primarily in the Access Business is covered by

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any collective bargaining agreement, and, to the Seller’s knowledge, no attempt is currently being made or since January 1, 2001 has been made to organize any such employees to form or enter a labor union or similar organization.

     (b)   Except as set forth in Schedule 4.18(b), (i) the Seller is not engaged in any unfair labor practice in connection with the conduct of the Access Business; (ii) the Access Business is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, work place safety and health, terms and conditions of employment, immigration and wages and hours; (iii) to the Seller’s knowledge, there are no formal or informal grievances, complaints, investigations, audits or charges with respect to employment or labor matters (including charges of employment discrimination, retaliation, unfair labor practices, work place safety or health violations, terms and conditions of employment, violation of immigration laws or violation of wage and hours laws) pending or, to Seller’s knowledge, threatened in any judicial, regulatory or administrative forum, or under any dispute resolution procedure; and (iv) the Access Business is not currently subject to and since January 1, 2001 has not been subject to any consent decree, court order or settlement that creates an obligation on the Purchaser or a Current Access Employee in respect of any labor or employment matters.

     (c)   Except as set forth on Schedule 4.18(c) (which shall be delivered immediately prior to the Closing and which shall contain the name, job title, and date of separation of each affected employee), during the 90-day period prior to the Closing, none of the employees of the Access Business or any other employees of the Seller who are located at the Bedford Facility will suffer an “employment loss” (as defined in the WARN Act or any similar state or local law or regulation).

     (d)   Except as set forth on Schedule 4.18(d), to the Seller’s knowledge, the Acquisition and the other transactions contemplated by this Agreement and the Related Agreements will not adversely affect the authority of any employee of the Access Business to work in the United States. Except as set forth on Schedule 4.18(d), no employee of the Access Business is, to the Seller’s knowledge, a party to or bound by any Contract or subject to any Judgment that may materially interfere with the use of such person’s best efforts to promote the interests of the Access Business, or, other than as set forth on Schedule 4.18(d), that has had or could reasonably be expected to have a Business Material Adverse Effect.

     (e)   Except as set forth on Schedule 4.18(e), no independent contractor, temporary employee, leased employee or any other servant or agent employed or used with respect to the Access Business since January 1, 2001 has been or is compensated other than through wages reportable on a Form W-2 or a Form 1099 paid by the Seller or by a bona fide temporary or employee leasing agency. To the extent that any individuals set forth on Schedule 4.18(e) are used with respect to the Access Business, they are properly classified and treated in accordance with applicable laws and for purposes of all benefit plans and perquisites.

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     4.19    Taxes.

     (a)   All Tax Returns with respect to the Access Business and the Assets or income attributable thereto that are required by applicable Law to be filed on or before the Closing Date by the Seller have been filed or will be filed in a timely manner (within any applicable extension periods). The information provided on such Tax Returns is or will be complete and accurate in all respects and all Taxes owing by the Seller have been timely paid in full or will be timely paid in full. There are no material Liens for Taxes with respect to any of the Assets (other than Permitted Liens). The Seller is not a “foreign person” within the meaning of Section 1445 of the Code. The Seller is not the beneficiary of any extension of time within which to file any Tax Return relating to sales, real estate, personal property or ad valorem Taxes payable with respect to the Assets. The Seller has withheld and paid all Taxes related to the Access Business required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, stockholder or other third party and all Forms W-2 and 1099 required with respect thereto have been properly completed and timely filed.

     (b)   To the Seller’s knowledge, there is no material dispute or claim concerning any sales, real estate, personal property or ad valorem Tax liability with respect to the Assets claimed or raised by a Governmental Authority in writing.

     (c)   The Seller has delivered to the Purchaser complete and accurate copies of all real estate, personal property and ad valorem Tax Returns filed with respect to the Assets for taxable periods ending after December 31, 2002, and no such Tax Returns have been audited or are currently under audit.

     (d)   Neither the Seller nor any of its Subsidiaries is a party to a Tax allocation or sharing agreement regarding sales, real estate, personal property or ad valorem taxes.

     4.20    Compliance with Laws. Except as disclosed in Schedule 4.20, each of the Seller and Marconi IP has, since January 1, 2001, complied and is in compliance in all material respects with all Laws applicable and material to the Access Business. Except as set forth on Schedule 4.12, since January 1, 2001, neither the Seller nor any of its Affiliates has received any written notice from any Person that alleges that the Seller or Marconi IP is not in material compliance with any Law applicable and material to the Access Business. This Section 4.20 does not relate to matters with respect to Taxes (which are the subject of Section 4.19), to employee benefits (which are the subject of Section 4.17), to environmental matters (which are the subject of Section 4.21), to labor and employment matters (which are the subject of Section 4.18) or to Intellectual Property matters (which are the subject of Section 4.13).

     4.21    Environmental Matters. Except as disclosed in Schedule 4.21:

     (a)   the Seller (solely in relation to its conduct of the Access Business) has at all times been and is in compliance with all applicable Environmental Laws, except where the failure to so comply does not constitute a Business Material Adverse Effect or a Seller Material Adverse Effect;

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     (b)   the Seller is in possession of all Environmental Permits, if any, required for its operation of the Access Business as currently conducted and is in compliance with all of the requirements and limitations included in such Environmental Permits except where the failure to possess such Environmental Permits or to so comply does not constitute a Business Material Adverse Effect;

     (c)   to the Seller’s knowledge, there are no Hazardous Substances in, on, under or at the Bedford Facility that constitute a Business Material Adverse Effect;

     (d)   no written notice has been received by the Seller or any of its Affiliates from any Governmental Authority or third party claiming that the operation of the Access Business is in violation of any Environmental Law or Environmental Permit, or that any of them, solely in relation to the Access Business, is responsible (or potentially responsible) for the cleanup of any Hazardous Substances at any location; and

     (e)   neither the Seller nor any of its Affiliates (solely in relation to the operation of the Access Business) is the subject of any pending, or, to the Seller’s knowledge, threatened litigation, Proceeding or demand in any forum, judicial or administrative, involving a claim for damages, injunctive relief, penalties or other potential liability with respect to any Release or threatened Release of Hazardous Substances or violations of any Environmental Law.

     For purposes of this Section 4.21, the “Seller” shall refer only to Marconi Communications, Inc. and its corporate predecessors as in existence and operated from and since the acquisition of Reltec Communications, Inc. by General Electric Corporation in April 1999.

     4.22    Accounts Receivable. All the Accounts Receivable constituting Assets (a) represent actual indebtedness incurred by the applicable account debtors and (b) have arisen from bona fide transactions in the ordinary course of business. To the Seller’s knowledge, all the Accounts Receivable that constitute Assets are not factored or subject to any setoff or counterclaim. Since September 30, 2003, there have not been any write-offs as uncollectible of any Accounts Receivable, except for write-offs in the ordinary course of business and consistent with past practice.

     4.23    Inventory. Except as set forth in Schedule 4.23, since September 30, 2003, there have not been any write-downs of the value of, or establishment of any reserves against, any Inventory of the Access Business, except as made in the ordinary course of business consistent with past practice. Inventory is properly stated on the books and records of the Access Business at the lesser of cost and fair market value, with adequate obsolescence reserves, all as determined in accordance with the Applicable Accounting Principles.

     4.24    Product Warranties and Liabilities.

     (a)   Except as set forth in Schedule 4.24(a), each product manufactured, shipped or sold by the Access Business has been in conformity with all applicable contractual commitments and all express and implied warranties (except as properly disclaimed in the applicable Contract), and the Access Business does not have any liability (and, to the Seller’s knowledge, there is no basis for any present or future

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Proceeding, hearing, investigation, charge, complaint, claim or demand against it giving rise to any liability) for replacement or repair thereof or other damages in connection therewith, except for nonconformities and liabilities that would not reasonably be expected to have a material adverse effect on the Access Business’ relationship with any customer or distributor.

     (b)   The Seller has delivered to the Purchaser complete and correct copies of all Contracts to which the Seller is a party relating to the sale of products or services by the Access Business to (i) BellSouth Telecommunications, Inc. and its Affiliates, (ii) Communications Test Design, Inc., (iii) Grande, (iv) US WEST Business Resources, Inc. and its successors and (v) Sprint/North Supply Company and any Affiliate thereof (it being understood and agreed that certain product and pricing information related to the Other Businesses contained in such Contracts has not been delivered to the Purchaser).

     (c)   Except as set forth in Schedule 4.24(c), since January 1, 2001, there has been no material recall of any product manufactured, shipped or sold by the Access Business, nor, to the Seller’s knowledge, has any such recall been threatened.

     4.25 Effect of Transactions. Except as set forth in Schedule 4.25, to the Seller’s knowledge, no executive officer, people manager or engineer of the Access Business intends to terminate his or her employment with the Access Business. Except as set forth in Schedule 4.25, to the Seller’s knowledge, no customer identified on Schedule 4.11(a) or supplier identified on Schedule 4.11(b) intends to terminate, or otherwise change in a manner materially adverse to the Access Business, its relationship with the Access Business on account of the ownership of the Access Business by the Purchaser or the consummation of any transactions contemplated hereby.

     4.26    Solvency. On the Closing Date and immediately after the consummation of the Acquisition and the other transactions contemplated hereby and under the Related Agreements: (a) the Seller shall not intend, whether by virtue of the Acquisition (and the transactions contemplated hereby and under the Related Agreements) or otherwise, to hinder, defraud, or delay any of its present or future creditors, (b) the Seller shall be solvent (as such term is determined for purposes of Section 548 of Title 11 of the United States Code and under any applicable state Uniform Fraudulent Transfer Act or Uniform Fraudulent Conveyance Act), (c) the Seller shall not be engaged in business or a transaction, and shall not about to be engaged in business or a transaction, for which any property remaining with the Seller shall be an unreasonably small capital, and (d) the Seller shall not intend to incur, and shall not believe that it is about to incur, debts that would be beyond the Seller’s ability to pay as such debts matured.

ARTICLE V

Representations and Warranties of the Purchaser and AFCNA

     The Purchaser and AFCNA, jointly and severally, represent and warrant to the Seller, Marconi IP and the Parent as follows:

     5.1    Due Incorporation. Each of the Purchaser and AFCNA is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and

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has all requisite corporate power and authority to own, operate and lease its assets and to conduct its business as presently conducted.

     5.2    Due Authorization. Each of the Purchaser and AFCNA has full corporate power and authority to execute, deliver and perform this Agreement and its Related Agreements and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by the Purchaser and AFCNA of this Agreement and its Related Agreements, and the consummation by the Purchaser and AFCNA of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action, including the approval of the respective board of directors of the Purchaser and AFCNA. Each of the Purchaser and AFCNA has duly and validly executed and delivered this Agreement and, at or prior to the Closing, will have duly and validly executed and delivered each of its Related Agreements. Assuming the due authorization, execution and delivery of this Agreement and its Related Agreements by the other parties thereto, this Agreement constitutes, and each of the Purchaser’s and AFCNA’s Related Agreements will, after the Closing, constitute, legal, valid and binding obligations of the Purchaser and AFCNA, enforceable against each of them (to the extent a party thereto) in accordance with their respective terms, subject to Enforceability Limitations.

     5.3    Consents and Approvals; Authority Relative to this Agreement.

     (a)   Except for the Governmental Required Consents, no Consent of or with any Governmental Authority is necessary in connection with the execution, delivery or performance by the Purchaser or AFCNA of this Agreement or any of the Related Agreements or the consummation by the Purchaser or AFCNA of the transactions contemplated hereby or thereby.

     (b)   Except for the Governmental Required Consents, the execution and delivery by the Purchaser and AFCNA of this Agreement and of each of its Related Agreements do not, and the transactions contemplated hereby and thereby and compliance by the Purchaser and AFCNA with the terms hereof and thereof will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or to increased, additional, accelerated or guaranteed rights or entitlements of any Person under, or result in the creation of any Lien upon any of the properties or assets of the Purchaser or any of its Subsidiaries under, any provision of (i) the certificate of incorporation or by-laws or other organizational documents of the Purchaser or any of its Subsidiaries, (ii) any Contract to which the Purchaser or any of its Subsidiaries is a party or by which any of their respective properties or assets is bound, (iii) any Judgment, Law or Permit applicable to the Purchaser or any of its Subsidiaries or their respective properties or assets or (iv) any indebtedness of the Purchaser or any of its Subsidiaries, other than, in the case of clause (ii) above, any conflict, violation or other such items that (A) has not resulted in and would not reasonably be expected to result in a material adverse effect on the Purchaser and its Subsidiaries, taken as a whole and (B) does not constitute a Purchaser Material Adverse Effect.

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     5.4    Proceedings. There are no Proceedings or claims pending, or, to the Purchaser’s knowledge, Proceedings or claims threatened, by or against the Purchaser, AFCNA or any of their respective Affiliates with respect to this Agreement or the Related Agreements, or in connection with the transactions contemplated hereby or thereby.

     5.5    Financing. The Purchaser has internal resources available in connection with the acquisition of the Assets which are in an aggregate amount sufficient to consummate the transactions contemplated hereby. The financial statements of the Purchaser as of the end of the most recent fiscal quarter for which there are financial statements available and for the period then ended, which have been previously delivered to the Seller, fairly present the financial condition and results of operations of the Purchaser as of the date and for the period then ended.

     5.6    Independent Investigation. In making the decision to enter into this Agreement and the Related Agreements and to consummate the transactions contemplated hereby and thereby, other than reliance on the representations, warranties, covenants and obligations of the Parent, the Seller and Marconi IP set forth in this Agreement and in the Related Agreements to which they are or will be parties, the Purchaser and AFCNA have relied solely on their own independent investigation, analysis and evaluation of the Access Business and the Assets. Each of the Purchaser and AFCNA confirms to the Seller that it is sophisticated and knowledgeable about the industry in which the Access Business operates and is capable of evaluating the matters set forth above.

ARTICLE VI

Covenants

     6.1    Access to Information. From and after the date of this Agreement until the Closing Date, the Seller, Marconi IP and the Parent shall afford, and, to the extent reasonably necessary, cause each of its Affiliates to afford, to the Purchaser and its Representatives, on a reasonably timely basis, reasonable access, upon reasonable notice during normal business hours, to all the personnel (other than external professional advisors), work papers, information systems, properties, books, contracts, commitments, Tax Returns and records of, or relating to (and then only to the extent relating to), the Access Business and during such period shall furnish to the Purchaser and its Representatives any information relating to (and then only to the extent relating to) the Access Business, the Assets and the Assumed Obligations, and to Retained Obligations that arise from, relate to or affect, the Access Business, as the Purchaser or its Representatives may reasonably request (including all information reasonably necessary for purposes of transition planning and preparation for post-Closing integration purposes); provided, that, nothing herein will obligate the Seller, Marconi IP or the Parent to (i) take any actions that would unreasonably interrupt the normal course of the Access Business or (ii) violate any Law or the terms of any Contract to which the Seller, Marconi IP, or the Parent or any of their Affiliates is a party or to which any of their respective assets are subject; and provided, further, if any particular item of the Seller, Marconi IP or the Parent that the Purchaser has the right of access to pursuant to this Section 6.1 contains both information related to the Access Business and other information, then the Seller, Marconi IP and the Parent (as applicable) can, at its option either (A) provide a copy of such information to the Purchaser subject to the Purchaser’s obligations contained herein to keep such other information confidential or (B) create a new form of such

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information and provide the Purchaser with access to such new form of information (which new form of information shall incorporate all information that the Purchaser has the right to access to pursuant to this Section 6.1) (it being understood that, notwithstanding the foregoing, the Seller shall make available to the Purchaser the original complete copy of any particular item of information if the Purchaser has a reasonable need to review such original copy, subject to reasonable redaction that is not inconsistent with such reasonable need of the Purchaser). The Purchaser’s right of access to Tax Returns pursuant to this Section 6.1 shall be limited to Tax Returns relating to real estate, personal property or ad valorem Taxes payable with respect to the Assets.

     6.2    Preservation of Business. From the date of this Agreement until the Closing Date, except as set forth on Schedule 6.2 or as expressly permitted by this Agreement, the Seller and Marconi IP shall operate the Access Business in the ordinary course of business and in substantially the same manner as has been conducted between April 1, 2002 and the date hereof, and use reasonable best efforts to, and take such actions as the Purchaser reasonably requests in order to, keep intact the Access Business, keep available the services of the Current Access Employees and preserve the relationships of the Access Business with material customers, suppliers, licensors, licensees, distributors and others with whom the Access Business deals. Prior to the Closing, the Seller, the Parent and Marconi IP shall not, and shall not permit any of their Affiliates to, take any action that would or would reasonably be expected to (x) result in the failure of any of the conditions to the Closing contained in Articles VII or VIII or (y) cause any of the representations or warranties of the Seller, Marconi IP or the Parent made in this Agreement (other than the representations and warranties set forth in (i) the second sentence of Section 4.10, (ii) clause (ii) of the second sentence of Section 4.11(a), (iii) clause (ii) of the second sentence of Section 4.11(b), (iv) the first sentence of Section 4.11(c), (v) the third sentence of Section 4.12(a), (vi) the last sentence of Section 4.12(a), (vii) the first sentence of Section 4.13(a), (viii) the first two sentences of Section 4.13(b), (ix) Section 4.13(d), (x) Section 4.14(a), (xi) the second sentence of Section 4.15, (x) Section 4.17(a), (xi) the first sentence of Section 4.18(e), (xii) Section 4.19(c), (xiii) the first sentence of Section 4.19(d), (xiv) Section 4.24(b) and (xv) Section 4.24(c), it being agreed that nothing in this parenthetical shall be deemed to limit or modify the covenants of the Parent, the Seller or Marconi IP herein other than the covenant contained in this clause (y)) not to be true and correct as of the date of such action or as of the Closing Date.

     (a)   Negative Covenants. Without limiting the generality of the foregoing, except as set forth in the corresponding subsections of Schedule 6.2 or as expressly permitted or required by this Agreement, prior to the Closing, neither the Seller nor Marconi IP (in each case, solely in relation to the Access Business) shall without the prior written consent of the Purchaser:

          (i)   move from the Bedford Facility (if such asset is located at the Bedford Facility), sell, lease, license or otherwise dispose of any of its assets that would be Assets, except inventory of finished goods sold, obsolete inventory disposed of and other consumable assets used, in each case, in the ordinary course of business and consistent with past practice;

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          (ii)   make any capital expenditures in any calendar month that are in the aggregate more than 110% of the amount of capital expenditures forecast for such month in the Capital Spending Analysis for the Access Business attached to Schedule 6.2;

          (iii)   make any material changes in the accounting principles or practices of the Access Business other than those changes required by accounting principles generally accepted in the United Kingdom;

          (iv)   sell, transfer or lease any of the Assets to, or otherwise enter into any transaction or Contract with respect to the Access Business with, any Affiliates of the Seller, or amend or extend in a manner materially adverse to the Access Business any such transaction or Contract;

          (v)   increase the compensation or benefits of any Access Employee or independent contractor of the Access Business, or enter into any Contract to do so, except as required by existing Contracts or by Law or in the ordinary course of business consistent with past practices;

          (vi)   adopt or amend any Access Plan or enter into, adopt, extend (beyond the Closing Date), renew or amend any collective bargaining agreement or other Contract with any labor organization, union or association, except in each case as required by Law or in the ordinary course of business consistent with past practices;

          (vii)   permit or allow any Asset to become subjected to any Lien of any nature whatsoever, other than Permitted Liens and those Liens set forth in Schedule 4.7(a);

          (viii)   enter into or terminate, or amend or extend in a manner materially adverse to the Access Business, any material Contract in connection with the Access Business other than entering into Contracts with customers in the ordinary course of business;

          (ix)   enter into any Group Contract that relates to or binds the Access Business;

          (x)   acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets (other than Inventory) that are material, individually or in the aggregate, to the Access Business;

          (xi)   acquire fee title to, or an ownership interest in, any real property that would be an Asset or enter into any lease (or renewal of any lease) of real property that would be an Asset other than the Bedford Lease;

          (xii)   enter into, amend, terminate or extend any license, option or other material agreement pertaining to the Transferred Intellectual Property with any Person;

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          (xiii)   enter into any Contract containing a covenant not to compete or any other covenant restricting the development, manufacture, marketing or distribution of the products and services of the Access Business or amend or extend in a manner adverse to the Access Business any such covenant in any existing Contract of the Access Business;

          (xiv)   make any purchase commitment with terms and conditions not in the ordinary course of business consistent with past practice or for a period of greater than six months;

          (xv)   (A) subject to the covenant with respect to compensation contained in Section 6.2(a)(v), enter into, adopt or amend any employment, severance, consulting, termination or other agreement relating to any Current Access Employees or independent contractors employed to perform services in the Access Business or (B) except in the ordinary course of business consistent with past practice, hire any person to work as an employee or independent contractor in the Access Business other than as a replacement at the same job title, duties and compensation of a Current Access Employee or current independent contractor;

          (xvi)   incur or assume any liabilities, obligations or indebtedness for borrowed money or guarantee any such liabilities, obligations or indebtedness or otherwise take any action to incur or assume, or intentionally fail to take any action required by any obligation or duty that results in the incurrence of, any other material liabilities or obligations of any nature, other than in the ordinary course of business and consistent with past practice; provided, however, that in no event shall the Access Business incur, assume or guarantee any long-term indebtedness for borrowed money;

          (xvii)   cancel any material indebtedness (individually or in the aggregate) or waive any claims or rights of substantial value;

          (xviii) accelerate (A) the delivery of products or services under any Contract for the sale or distribution of any products manufactured by the Access Business other than at the request of the customer or (B) the collection of any outstanding Accounts Receivable;

          (xix)   enter into or amend in any manner materially adverse to the Access Business any Contract for the manufacture of products on behalf of the Access Business;

          (xx)   (A) institute, settle or agree to settle any Proceeding relating to or affecting the Access Business or Assets before any court or governmental body (other than settlements of Proceedings (1) not involving Intellectual Property matters, (2) involving solely the payment of monetary damages and (3) not involving an admission of liability) or (B) waive or surrender any rights related to any pending or threatened Proceeding to the extent relating to or affecting the Access Business or Assets; or

          (xxi)   authorize, commit to do or agree to take, whether in writing or otherwise, any of the foregoing actions.

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     (b)   Advise of Changes.

          (i)   From the date hereof until the Closing, promptly after the Seller acquires knowledge of any such matter, the Seller shall advise the Purchaser in writing of (A) any material failure of the Seller, Marconi IP or the Parent to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder and (B) the occurrence or nonoccurrence of any event, the occurrence or nonoccurrence of which would reasonably be likely to cause any condition to the obligations of the Purchaser to effect the Closing hereunder not to be satisfied or that calls into question the ability of the Seller, the Purchaser or Marconi IP to enter into or enforce any of the Related Agreements.

          (ii)   From the date hereof until the Closing, promptly after the Purchaser acquires knowledge of any such matter, the Purchaser shall advise the Seller in writing of (A) any material failure of the Purchaser or AFCNA to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder and (B) the occurrence or nonoccurrence of any event, the occurrence or nonoccurrence of which would reasonably be likely to cause any condition to the obligations of the Seller to effect the Closing hereunder not to be satisfied or that calls into question the ability of the Purchaser or AFCNA to enter into or enforce any of the Related Agreements.

     (c)   Affirmative Covenants. Until the Closing, the Parent, the Seller and, to the extent applicable, Marconi IP, shall:

          (i)   use reasonable best efforts to maintain the Assets in all material respects in good working order, in accordance with the past practice of the Access Business;

          (ii)   upon acquiring knowledge of any damage (other than immaterial damage), destruction or loss to, or condemnation of, any material Asset, (A) promptly notify the Purchaser, (B) make all available claims against insurance policies covering such Asset (the “Pre-Closing Insurance Claims”) and (C) consult with the Purchaser as to the application of any and all insurance proceeds with respect thereto to repair, replace or restore such Asset;

          (iii)   use reasonable best efforts to maintain its level and quality of Accounts Receivable and Inventory and spare parts in the ordinary course of business so as to be sufficient for the conduct of the Access Business by the Purchaser following Closing in substantially the same manner as conducted on September 30, 2003 and as currently conducted by the Seller; and

          (iv)   segregate any proceeds received prior to the Closing from any Claims (the “Claims Proceeds”) into a separate account and retain any such Claims Proceeds in such account until the Closing; provided, however, that (A) any Claims Proceeds received under an insurance policy as a result of damage to or destruction of an Asset (other than Inventory) may, subject to Section 6.2(c)(ii), be used to replace the damaged or destroyed Asset and (B) any Claims Proceeds received under an insurance

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policy as a result of damage to or destruction of Inventory need not be segregated into a separate account and may be used or disbursed in the Seller’s sole discretion.

     (d)   Consultation. Except to the extent that any such consultation would be in violation of applicable Laws, in connection with the continuing operation of the Access Business between the date of this Agreement and the Closing, to the extent reasonably requested by Purchaser, the Seller shall consult in good faith on a regular and frequent basis with representatives of the Purchaser to report material operational developments and the general status of ongoing operations. Any such consultation shall not constitute a waiver by the Purchaser of any rights under this Agreement, and the Purchaser shall not have any liability or responsibility for any actions of the Parent, the Seller or Marconi IP or any of their respective officers or directors with respect to matters that are the subject of such consultations.

     6.3    Consents and Approvals.

     (a)   On the terms and subject to the conditions of this Agreement, each party shall use its reasonable best efforts to cause the Closing to occur, including taking all reasonable actions necessary (i) to comply promptly with all legal requirements that may be imposed on it or any of its Affiliates with respect to the Closing and (ii) to obtain each Governmental Required Consent and each other Consent of or with a Governmental Authority which if not obtained or made would reasonably be expected to have a material adverse effect on the ability of the parties to consummate the transactions contemplated hereby. For purposes of this Section 6.3(a), the “reasonable best efforts” of the Purchaser shall include (1) opposing any motion or action for a temporary, preliminary or permanent injunction against or other prohibition of the Closing and (2) entering into a consent decree, other order or other agreement, or giving an assurance, commitment or undertaking, containing the Purchaser’s agreement to hold separate and divest (pursuant to any terms as may be required by any Governmental Authority) the business, products and assets of any product or service lines of the Access Business and/or any other business, product line, service line, division or subsidiary of the Purchaser and/or any Affiliate of the Purchaser and otherwise to take such other action as may be required by any Governmental Authority; provided, however, that neither the foregoing nor anything else in this Agreement shall require the Purchaser to take any action or agree to take or not to take any action if the taking of any such action or the agreement to take or not to take any such action would reasonably be expected to have a material adverse effect on the benefits (viewed as a whole) reasonably expected to be derived by the Purchaser from the Acquisition, including any action that would (x) involve a change in or restriction on the business, products, assets or operations of the Access Business, the Purchaser or any Affiliate of the Purchaser or (y) involve the disposition (whether by way of sale, lease, license or otherwise), before or after the Closing, of all or any portion of the business, products or assets (including Intellectual Property) of the Access Business, the Purchaser or any Affiliate of the Purchaser.

     (b)   In furtherance and not in limitation of the provisions of Section 6.3(a), each of the Seller, Marconi IP, the Parent, the Purchaser and AFCNA shall cooperate with the other with respect to obtaining and making the Consents of Governmental

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Authorities in connection with this Agreement and the transactions contemplated hereby. The Seller, Parent, Marconi IP, the Purchaser and AFCNA, or Persons nominated thereby, will promptly provide drafts to the others, allow reasonably adequate time for comment by the others and consult with the others as promptly as practicable with respect to the contents of all notifications, filings, submissions, further documentation and evidence to be submitted to all relevant Governmental Authorities. The Seller, Marconi IP, the Parent, the Purchaser and AFCNA shall, in each case where permitted by the relevant Governmental Authority, allow Persons nominated by the other party to attend all meetings with Governmental Authorities and, where appropriate, to make oral submissions at such meetings. Each of the Purchaser, Marconi IP, the Parent, the Seller and AFCNA shall (i) furnish to the other such necessary information and reasonable assistance as the other may require in connection with its preparation of any notification, filing, submission or further documentation or evidence that is necessary in obtaining and making Consents of Governmental Authorities and (ii) promptly disclose to the other all correspondence received from or sent to any relevant Governmental Authority in connection herewith and shall keep the other fully informed of any other related communication in whatever form with any of the relevant Governmental Authorities. The Purchaser, the Parent, Marconi IP, the Seller and AFCNA shall comply promptly with any inquiry or request for additional information from any relevant Governmental Authority in connection herewith and shall promptly provide any supplemental information requested in connection with the notifications, filings and/or submissions made hereunder for the purposes of obtaining and making the Consents of Governmental Authorities.

     (c)   Each party shall promptly notify the other parties in writing of any notice or other communication from any third party received by it alleging that the consent of such third party is or may be required in connection with the execution, delivery or performance of this Agreement or any Related Agreement or the consummation of the transactions contemplated hereby and thereby. The Seller shall, and shall cause its Affiliates to, use its reasonable best efforts to obtain, and the Purchaser shall, and shall cause its Affiliates to, cooperate with the Seller and its Affiliates in obtaining, all Consents from third parties required in connection with the execution, delivery or performance of this Agreement or any Related Agreement or the consummation of the transactions contemplated hereby and thereby; provided, however, that, subject to the exceptions set forth on Schedule 6.3(c) (incorporated herein), the parties shall not be required to pay or commit to pay any amount to (or incur any obligation in favor of) any Person from whom any such Consent may be required (other than nominal filing or application fees). The Purchaser and AFCNA acknowledge that certain Consents with respect to the transactions contemplated by this Agreement may be required from parties to Contracts and that such Consents have not been obtained. Except as expressly provided in this Agreement, and without limiting the representations, warranties and covenants of the Seller, the Parent and Marconi IP herein, including in this Section 6.3 and in Sections 4.3, 4.13, 4.14, and 4.15, so long as the Seller and its Affiliates have complied with their obligations under this Agreement and the Related Agreements in any way related to obtaining Consents and there has been no breach of any applicable representation or warranty by the Seller, the Parent or Marconi IP hereunder or under the applicable Related Agreement in any way implicated by the failure to obtain a Consent,

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the Seller, the Parent and Marconi IP shall not have any Liability to the Purchaser and AFCNA to the extent due to the failure to obtain any Consents that may be required in connection with the transactions contemplated by this Agreement or because of the termination of any Purchased Contract as a result thereof.

     (d)   Without limiting the terms of this Section 6.3, each of the Purchaser and the Seller will (i) as soon as reasonably practicable after the date of this Agreement file with the Antitrust Division and the FTC the notification and report form, if required by the HSR Act, for the transactions contemplated hereunder, requesting early termination of the waiting period thereunder, (ii) respond promptly to inquiries from the Antitrust Division or the FTC in connection with such filings, including providing any supplemental information that may be requested by the Antitrust Division or the FTC, and (iii) provide to the other party copies of any filings made under the HSR Act at the time they are filed with the Antitrust Division or the FTC.

     6.4    Marconi Name.

     (a)   The Purchaser and AFCNA acknowledge that the Marconi Name is and shall remain the property of the Seller or its Affiliates and that nothing in this Agreement shall transfer or shall operate as an agreement to transfer any right, title or interest in the Marconi Name to the Purchaser or any Affiliate of the Purchaser.

     (b)   Subject to Sections 6.4(c), (d) and (e), the Seller is not granting the Purchaser or AFCNA a license to use, and neither the Purchaser nor any of its Affiliates shall have any title, right or interest in or to, the Marconi Name after the Closing.

     (c)   The Purchaser and AFCNA agree:

          (i)   that, as soon as reasonably practicable following the Closing, but in any event, within sixty (60) days following the Closing Date and thereafter, no stationery, purchase order, invoice, receipt or other similar document containing any reference to the Marconi Name shall be printed, ordered or produced and that the Purchaser and AFCNA shall cease to use any stationery, purchase order, invoice, receipt or other similar document containing any reference to the Marconi Name or shall only use such stationery, purchase order, invoice, receipt or other similar document after having deleted, pasted over or placed a sticker over such references;

          (ii)   as soon as reasonably practicable after the Closing, and in any event no later than one hundred twenty (120) days after the Closing Date, to remove the Marconi Name from all premises, signs and vehicles which are included in the Assets or made available to the Purchaser and AFCNA in connection herewith;

          (iii)   that following the Closing, no brochures, leaflets or similar documents and no packaging containing any reference to the Marconi Name shall be printed, ordered or produced and, with respect to existing brochures, leaflets or similar documents and packaging that remain in the Purchaser’s possession, custody or control and that contain a reference to the Marconi Name, that the Purchaser and AFCNA shall use their reasonable best efforts to ensure that, as soon as reasonably practicable but in no

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event later than sixty (60) days following the Closing Date, such references are deleted, pasted over or a sticker is put over such references; and

          (iv)   that the Purchaser and AFCNA shall use their respective reasonable best efforts to ensure that, from and following the Closing, no stocks, goods, products, services or software are manufactured, produced or provided showing, having marked thereon or using the Marconi Name.

     (d)   For the avoidance of doubt, the Purchaser and AFCNA shall have no obligation to remove the Marconi Name from any products (or related packaging, documentation or other materials) sold, licensed, leased, delivered or otherwise provided by the Access Business to a third party prior to the Closing.

     (e)   The Purchaser and AFCNA shall have the right to continue to use “marconi.com” as an e-mail address for Transferred Employees for a period of three (3) months following the Closing Date.

     6.5    Brokers. Regardless of whether the Closing shall occur, (a) the Seller, Marconi IP and the Parent shall indemnify the Purchaser and its Affiliates against, and hold the Purchaser and its Affiliates harmless from, any and all liability for any brokers’ or finders’ fees or other commissions arising with respect to brokers or finders retained or engaged by the Parent, the Seller or any of its Affiliates in respect of the transactions contemplated by this Agreement, and (b) the Purchaser and AFCNA shall indemnify the Seller and its Affiliates against, and hold the Seller and its Affiliates harmless from, any and all liability for any brokers’ or finders’ fees or other commissions arising with respect to brokers or finders retained or engaged by the Purchaser or any of its Affiliates in respect of the transactions contemplated by this Agreement.

     6.6    Assignments. The Seller and Marconi IP, as applicable, shall prepare all assignments of Transferred Intellectual Property required hereunder and provide such assignments to the Purchaser in recordable form reasonably acceptable to the Purchaser. The Seller and the Parent shall reimburse the Purchaser for one-half of all filing or recordation fees incurred in connection with such assignments.

     6.7    Orderly Transition; Preservation of Books and Records; Access and Assistance.

     (a)   Upon reasonable request and during normal business hours, the Purchaser, AFCNA, the Seller, the Parent and Marconi IP shall reasonably cooperate with each other, and shall cause their respective Representatives to reasonably cooperate with each other, after the Closing to ensure the orderly transition of the Access Business from the Seller and Marconi IP to the Purchaser and AFCNA and to minimize any disruption to the Access Business and the other respective businesses of the Seller and the Purchaser that might result from the transactions contemplated hereby. Notwithstanding the previous sentence, no party shall be required to incur material out-of-pocket expenses of any kind in connection with complying with this Section 6.7(a).

     (b)   After the Closing, upon reasonable notice, the Purchaser and AFCNA, on one hand, and the Seller, Marconi IP and the Parent, on the other hand, shall furnish or cause to be furnished to the other and their respective Representatives access, during

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normal business hours, to such information relating to the Access Business (to the extent within the control of such party or any of its Affiliates) as is reasonably necessary for financial reporting and/or accounting matters (including (i) responding to inquires or other demands of any Governmental Authority (including the Securities and Exchange Commission) and (ii) in the case of the Purchaser, confirming the information contained in the Audit to be delivered by the Seller to the Purchaser pursuant to Section 6.17). Notwithstanding the previous sentence, if any particular item of the Seller, Marconi IP or the Parent that the Purchaser or AFCNA has the right of access to pursuant to this Section 6.7(b) contains both information related to the Access Business and other information that is not reasonably necessary for financial reporting and/or accounting matters, then the Seller, Marconi IP or the Parent, as applicable, can, at its option, either (i) provide a copy of such information to the Purchaser or AFCNA subject to the Purchaser’s and AFCNA’s obligations contained herein to keep such other information confidential or (ii) create a new form of such information and provide the Purchaser and AFCNA with access to such new form of information.

     (c)   From and after the Closing, the Purchaser and AFCNA shall preserve and retain all Information and Records and other accounting, legal, auditing and other books and records (including any documents relating to any governmental or non-governmental claims, actions, suits, proceedings or investigations with respect to the Seller) relating to the conduct of the Access Business and the ownership of the Assets on or prior to the Closing Date in a manner consistent with the Purchaser’s document retention policy.

     (d)   In the event and for so long as any party hereto is contesting or defending against or prosecuting any third-party charge, complaint, action, suit, Proceeding, hearing, investigation, claim or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving the Access Business, each other party hereto will (A) fully cooperate with it and its counsel in, and assist it and its counsel with, the contest, defense or prosecution, (B) make available its personnel (including for purposes of fact finding, consultation, interviews, depositions and, if required, as witnesses), and (C) provide such information, testimony and access to its books and records, in each case as shall be reasonably requested in connection with the contest, defense or prosecution, all at the sole cost and expense (not including employee compensation and benefits costs) of the contesting, defending or prosecuting party (unless the contesting, defending or prosecuting party is entitled to indemnification therefor under Article XII). For the avoidance of doubt, this Section 6.7(d) shall not apply with respect to disputes between the parties hereto.

     (e)   Each party shall reimburse the other parties for reasonable out-of-pocket administrative costs and expenses incurred at the request of the other in assisting the other pursuant to this Section 6.7. No party shall be required by this Section 6.7 to take any action that would unreasonably interfere with the conduct of its business or unreasonably disrupt its normal operations (or, in the case of Purchaser, the Access Business). Any information received by any party pursuant to this Section 6.7 shall be subject to Section 6.9.

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     6.8    Insurance. The Purchaser and AFCNA acknowledge that (a) all of the insurance policies maintained by the Seller or any of its Affiliates prior to the Closing Date will be terminated with respect to the Access Business effective as of the Closing Date and (b) upon such termination, the Access Business will cease to be covered under such policies and the Purchaser and AFCNA will have to obtain replacement coverage (including coverage as the Purchaser deems appropriate for the Assets, the operation of the Access Business and the satisfaction of the Assumed Obligations). To the extent the Seller or any of its Affiliates receive any proceeds from any Pre-Closing Insurance Claims following the Closing, the Seller shall, and shall cause the relevant Affiliate to, promptly remit such insurance claim proceeds to the Purchaser.

     6.9    Confidentiality.

     (a)   Pre-Closing Confidentiality Terms and Other Confidentiality Agreements. The parties have previously entered into several confidentiality agreements covering specific purposes (collectively, the “Other Confidentiality Agreements”), and a confidentiality agreement dated December 12, 2002 (as amended, the “December CA”) specifically addressing the purchase transaction contemplated by this Agreement. The parties intend that all rights, obligations and causes of action that existed or arose under the Other Confidentiality Agreements and the December CA, respectively, prior to the effective date of this Agreement, shall continue to be governed by and subject to the terms of the Other Confidentiality Agreements and the December CA, respectively, and nothing in this Agreement shall be deemed to be a waiver of any rights or a release of any party with respect to those rights, obligations and causes of action. From and after the effective date of this Agreement, and except with respect to the December CA, the parties intend that their obligations, rights and causes of action arising under the Other Confidentiality Agreements shall continue to be governed by and subject to the terms of the Other Confidentiality Agreements, respectively, and nothing in this Agreement shall be deemed to be a waiver of any rights or a release of any party with respect to those rights, obligations and causes of action. It is the intent of the parties that the Other Confidentiality Agreements shall continue in full force and effect with respect to the subject matter and purposes for which they were entered into, and this Agreement shall not modify, affect or otherwise impact the Other Confidentiality Agreements. With respect to the December CA, (i) prior to the effective date of this Agreement, the December CA shall govern the information provided by a disclosing party to the others in connection with the transactions contemplated hereby or by the Related Agreements, and (ii) from and after the effective date of this Agreement, this Section 6.9 shall govern the information provided by a disclosing party to the others in connection with the transactions contemplated by this Agreement, and for all rights, obligations and causes of action arising from and after the effective date of this Agreement, the December CA is hereby superceded by this Agreement.

     (b)   Permitted Disclosures. Each of the following reasons shall be deemed to be a “Permitted Disclosure” and collectively, the “Permitted Disclosures”, subject to the terms and conditions applicable to any such Permitted Disclosure as set forth below or as otherwise expressly set forth in this Section 6.9:

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          (i)   making any filing with a Governmental Authority that is required in connection with the consummation of the transactions contemplated hereby;

          (ii)   subject to obtaining reasonable assurances of confidentiality, obtaining any Consent from a third party to transfer any Purchased Contract or Transferable Permit, provided that the party seeking Consent shall only disclose the identity of the other parties and the general nature of the transaction to such third party;

          (iii)   defending or prosecuting any litigation, Proceeding or dispute;

          (iv)   as otherwise required by Law or administrative process;

provided that in the event of (iii) or (iv) above, (A) the scope of the information to be disclosed shall be solely that which is reasonably necessary for the respective purpose stated above, (B) the receiving parties shall provide written notice to the disclosing parties as to the need for such disclosure and such scope, as soon as the receiving parties first becomes aware of such, in order to give the disclosing parties the opportunity to appear and object, if it so chooses and (C) the court may review such information under seal, upon the disclosing parties making a motion for such, to which the receiving parties shall make no objection;

          (v)   disclosing to any and all Persons, without limitation of any kind, the U.S. federal and state tax treatment and tax structure (tax structure shall mean any fact that may be relevant to understanding the U.S. federal or state tax treatment of the transaction) contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the party making the disclosure relating to such tax treatment and tax structure except to the extent maintaining confidentiality of such information is necessary to comply with any federal or state securities laws;

          (vi)   making any public announcement or disclosure required by the rules of any stock exchange, the Panel on Takeovers and Mergers, the UKLA or any other Law or Judgment (in which case the party required to make the disclosure shall promptly notify the other parties and give such parties a reasonable opportunity to oppose such disclosure or request confidential treatment of such disclosure if available);

          (vii)   subject to reasonable assurances of confidentiality, disclosing this Agreement or any of the Related Agreements or their contents or the transactions contemplated hereby or thereby to Representatives of the parties and their Affiliates with a bona fide need to know such information;

          (viii)   disclosing this Agreement or any of the Related Agreements or their contents or the transactions contemplated hereby or thereby (A) subject to the terms of a confidentiality agreement protecting the confidentiality of such information, to current or potential lenders to, investors in and purchasers of the parties or their Affiliates (or any portion thereof) so long as (1) the due diligence investigation by the lender, investor or purchaser, as applicable, of such party and its Affiliates is substantially complete, (2) the definitive agreement with respect to such loan, investment or purchase, as applicable, is substantially complete and substantially all of the material terms with

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respect thereto (including, (x) with respect to a loan, the loan amount and interest rate, (y) with respect to an investment, the amount to be invested and the price per security to be issued, and (z) with respect to a purchase, the purchase price) have been agreed in principle and (3) the board of directors (or the senior management) of such party or its Affiliates (as applicable) and the potential lender, investor or purchaser, as the case may be, have (xx) in the case of a loan from a bank or similar entity that is in the business of lending money, reviewed and approved the commitment letter or term sheet setting forth the material terms of such loan and (yy) in the case of all other transactions contemplated by this clause (3), been apprised of such transaction and have consented to further negotiations subject to final board (or senior management) approval, and (B) without limiting any other Permitted Disclosure, to those Persons whose approval, agreement or opinion, as the case may be, is required for consummation of such particular transaction or transactions;

          (ix)   disclosing information as permitted in accordance with Section 13.8 of this Agreement; or

          (x)   enforcing the parties’ rights hereunder, or under any of the Related Agreements.

Additional reasons for disclosure of confidential information of a party may be permitted as expressly set forth in this Section 6.9.

     (c)   Purchaser’s Obligations. The Purchaser and AFCNA shall keep confidential and shall not use or disclose except as expressly permitted or required by this Agreement or the Related Agreements, and shall cause their Affiliates and each of the Representatives of the Purchaser, AFCNA and such Affiliates to keep confidential and not use or disclose except as expressly permitted or required by this Agreement or the Related Agreements, all information regarding the Seller, Marconi IP, the Parent or their Affiliates or any of their businesses, products, processes or financings being provided by Seller, Marconi IP, the Parent or any of their Affiliates or Representatives in connection with the transactions contemplated hereby (excluding, from and after the Closing Date, the Information and Records, Transferred Technology and information arising from the Assumed Obligations), except (i) as necessary or required in connection with a Permitted Disclosure, (ii) for information that is available to the public on the Closing Date, or thereafter becomes available to the public, other than as a result of a breach of this Section 6.9 or the December CA, and (iii) for information that is or was independently developed by the Purchaser or AFCNA or any of their Affiliates without reference to any confidential information of the Seller, Marconi IP, the Parent or any of their Affiliates or (iv) for information that is known or becomes known to the Purchaser or AFCNA (other than by disclosure by the Seller, Marconi IP or the Parent) without any breach of any obligation of confidentiality or not in connection with the transactions contemplated hereby. The Purchaser and AFCNA agree to use, and agree to cause their respective Affiliates and Representatives to use, at least the same degree of care to protect such confidential information of the Seller, Marconi IP and the Parent and their Affiliates as the Purchaser and AFCNA use to protect their confidential information of like importance and in any event using not less than a reasonable degree of care.

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     (d)   Seller’s Obligations. The Seller, Marconi IP and the Parent shall keep confidential and shall not use or disclose except as expressly permitted or required by this Agreement or the Related Agreements, and shall cause their Affiliates and each of the Representatives of the Seller, Marconi IP, the Parent and such Affiliates to keep confidential and not use or disclose except as expressly permitted or required by this Agreement, (i) all information regarding the Purchaser, AFCNA or any of their Affiliates or any of their businesses, products, processes or financings being provided by Purchaser, AFCNA or any of their Affiliates or Representatives in connection with the transactions contemplated hereby or by the Related Agreements and (ii) after the Closing, all Information and Records, Transferred Technology and information arising from the Assumed Obligations, except (A) as necessary or required in connection with a Permitted Disclosure, (B) for information that is available to the public prior to or on the Closing Date, or thereafter becomes available to the public, other than as a result of a breach of this Section 6.9 or the December CA, (C) with respect to clause (i) above only, for information that (1) is or was independently developed by the Seller, Marconi IP or the Parent or any of their Affiliates without reference to any information described in clause (i) above or (2) is known or becomes known to the Seller, Marconi IP or the Parent (other than by disclosure by the Purchaser or AFCNA) without any breach of any obligation of confidentiality or not in connection with the transactions contemplated hereby. The Seller, Marconi IP and the Parent agree to use, and agree to cause their respective Affiliates and Representatives to use, at least the same degree of care to protect such confidential information of the Purchaser and AFCNA as the Seller, Marconi IP and the Parent use to protect their confidential information of like importance and in any event using not less than a reasonable degree of care.

     (e)   Disclosures under the December CA and this Agreement. Notwithstanding anything to the contrary herein or in the December CA, the Purchaser and AFCNA, on the one hand, and the Seller, the Parent and Marconi IP, on the other hand, shall each be permitted to disclose information regarding the other parties, or their businesses, products, processes or financings, being provided to them in connection with the transactions contemplated by this Agreement only to the extent necessary or required in connection with any Permitted Disclosure, or as otherwise expressly set forth in this Section 6.9.

     (f)   Post-Closing Confidentiality Obligations of Seller. Effective upon, and only upon, the Closing, (i) the terms of this Section 6.9 (excluding Section 6.9(c)) shall apply to the Seller, Marconi IP and the Parent with respect to Information and Records, Transferred Technology and information arising from the Assumed Obligations, and (ii) subject to Section 6.9(i) below, any Information and Records, Transferred Technology or information arising from the Assumed Obligations shall be deemed the confidential information of the Purchaser, and the Purchaser’s obligations from and after the Closing under this Section 6.9, the December CA and the Other Confidentiality Agreements with respect to such information shall cease.

     (g)   Return or Destruction of Access Business Information. Promptly following the date hereof, each of the Seller, Marconi IP and the Parent shall use reasonable best efforts to secure the return or destruction of all information and materials

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relating to the Access Business, the Assets and the Assumed Obligations provided to any Person who is or was a potential purchaser of the Access Business. To the extent any Person returns such information and materials to the Seller, Marconi IP or the Parent, the Seller shall destroy all such information and materials. To the extent possible, the Seller shall provide the Purchaser with all information reasonably requested by the Purchaser regarding the status of such process.

     (h)   Return or Destruction of Seller Information. The Purchaser and AFCNA agree that upon written notice from the Seller, Marconi IP or the Parent, the Purchaser and AFCNA shall promptly (and in any case within 14 days of the request) return to the Seller, Marconi IP or the Parent, as the case may be, all confidential information of the Seller, Marconi IP and the Parent provided by them in connection with the transactions contemplated by this Agreement to the Purchaser, AFCNA, any of their Affiliates or their Representatives, except Notes (as defined in the December CA), and cause all Notes (and copies thereof) to be destroyed, and certify in writing to the Seller, Marconi IP and the Parent that all such material has been returned or destroyed in compliance with this Agreement; provided, however, that this obligation shall not apply from and after the Closing Date to any Information and Records, Transferred Technology or information arising from the Assumed Obligations.

     (i)   Retention of Information. Upon and after the Closing Date, each of the Seller, Marconi IP, the Parent and their respective Affiliates shall retain only such copies of the Transferred Technology as are maintained as of the date of this Agreement by each of the Seller, Marconi IP, the Parent or their respective Affiliates in the conduct of their respective businesses other than the Access Business in the ordinary course of business. In addition, upon and after the Closing Date, each of the Seller, Marconi IP and the Parent and their respective Affiliates shall retain only such copies of confidential information of the Purchaser and AFCNA as may be necessary to perform their respective obligations under the Related Agreements, in each case in accordance with the terms and conditions provided in such agreements. Finally, the Seller, Marconi IP and the Parent shall be entitled to retain one copy of such information as they deem necessary for archive purposes for a record of the transactions contemplated by this Agreement and the Related Agreements.

     (j)   No Representations or Warranties; No Licenses. Except as expressly set forth in this Agreement or in any of the Related Agreements, neither the Purchaser nor AFCNA nor any of their Affiliates, on the one hand, nor the Seller, Marconi IP or the Parent or any of their Affiliates, on the other hand, makes any representations or warranties with respect to any of the information provided by them in connection with the transactions contemplated hereby or by the Related Agreements. In addition, except as expressly set forth in this Agreement or any Related Agreements, neither the Purchaser nor AFCNA or any of their Affiliates, on the one hand, nor the Seller, Marconi IP or the Parent or any of their Affiliates, on the other hand, grants any licenses or rights in any information provided by such party in connection with the transactions contemplated hereby or by the Related Agreements.

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     (k)   Privilege Savings Clause. Each party providing any information in connection with this Agreement is not waiving, and will not be deemed to have waived or diminished, any of its attorney work product protections, attorney-client privileges or similar protections and privileges as a result of disclosing such information (including information related to pending or threatened litigation) to the other party, regardless of whether such disclosing party has asserted, or is or may be entitled to assert, such privileges and protections. The parties (i) share a common legal and commercial interest in all of such information that is subject to such privileges and protections; (ii) may become joint defendants in Proceedings to which such information covered by such protections and privileges relates; (iii) intend that such privileges and protections remain intact should any party become subject to any actual or threatened Proceeding to which such information covered by such protections and privileges relates; and (iv) intend that after the Closing the receiving party shall have the right to assert such protections and privileges. No receiving party shall admit, claim or contend, in Proceedings involving either party or otherwise, that any party disclosing such information waived any of its attorney work-product protections, attorney-client privileges or similar protections and privileges with respect to any information, documents or other material disclosed to a party due to a disclosing party disclosing information (including information related to pending or threatened litigation) to such receiving party.

     (l)   Additional Mutual Obligations. On and after the effective date of this Agreement, except for the Permitted Disclosures, each of the Seller, Marconi IP and the Parent, and their respective Affiliates, and the Purchaser and AFCNA and their respective Affiliates, agree to hold confidential the terms and provisions of this Agreement and the Related Agreements and the terms of the transactions contemplated hereby and thereby.

     6.10    Taxes.

     (a)   Property Taxes. All real estate, personal property, and ad valorem Taxes relating to the Assets which shall have accrued and become payable prior to the Closing Date shall be paid by the Seller. All such Taxes which shall be accrued but unpaid shall be prorated to the Closing Date. In connection with such proration, in the event the actual Tax figures are not available at the Closing Date, proration of Taxes shall be based on 105% of the actual Taxes for the preceding year for which actual Tax figures are available. The amount due one party as a result of such proration shall be paid to the other party at the Closing.

     (b)   Taxes Related to Transaction. The Seller and the Purchaser shall each pay one-half of the cost of all property transfer, sales, use or Transfer Taxes, and all recording costs, arising out of the transfer of the Assets pursuant to this Agreement and all costs and expenses incurred in connection with the transferring and recording of title to the Assets. The sales, use and transfer Tax Returns required by reason of said transfer shall be timely prepared and filed by the party legally obligated to make such filing. The parties agree to cooperate with each other in connection with the preparation and filing of such Tax Returns, in obtaining all available exemptions from such sales, use and transfer Taxes and in timely providing each other with resale certificates and any other documents necessary to satisfy any such exemptions.

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     (c)   Access to Tax Records. After the Closing, upon reasonable written notice, the Purchaser, AFCNA, the Seller, the Parent and Marconi IP shall furnish or cause to be furnished to each other and their respective Representatives, as promptly as practicable, such information and assistance (to the extent within the control of such party) relating to the Assets (including access to books and records) as is reasonably necessary for the filing of all Tax Returns (including Form 8594), and making of any election related to Taxes, the preparation for any audit by any Taxing Authority, and the prosecution or defense of any claim, suit or Proceeding related to any Tax Return. The Parent, Marconi IP, the Seller, the Purchaser and AFCNA shall cooperate with each other in the conduct of any audit or other Proceeding relating to Taxes involving the Access Business. In the event that the Seller or any of its Affiliates or the Purchaser or any of its Affiliates shall after the Closing take any position in any Tax Return, or reach any settlement or agreement on audit, which is in any manner inconsistent with any position taken by the Seller or its Affiliates in any filing, settlement or agreement made by the Seller or its Affiliates prior to the Closing and such inconsistent position (i) might require the payment by the Purchaser or the Seller (or one of their respective Affiliates) of more Tax than would have been required to be paid had such position not been taken or such settlement or agreement not been reached, (ii) affects the determination of useful life, basis or method of depreciation, amortization or accounting of any of the Assets or any of the properties, assets or rights of the Purchaser or one of its Affiliates or (iii) might accelerate the time at which any Tax must be paid by the Purchaser or the Seller, then the Purchaser or the Seller, as the case may be, shall provide timely and reasonable notice to the other party hereto of such position.

     6.11    Agreement Not to Compete.

     (a)   The Parent, the Seller and Marconi IP understand that the Purchaser and AFCNA would not have entered into this Agreement absent the provisions of this Section 6.11 and, therefore, for a period of five (5) years from the Closing Date, none of the Parent, the Seller nor Marconi IP shall, and each shall cause each of its Affiliates to not, directly or indirectly (including by owning any interest in, managing, operating or controlling any other business enterprise):

          (i)   sell, provide, deliver or supply any Restricted Product to any BellSouth Entity for use, delivery or deployment within the Nine-State Region, or call on, solicit or attempt to induce any BellSouth Entity to order or purchase any Restricted Product for use, delivery or deployment within the Nine-State Region; or

          (ii)   solicit, recruit or hire any person who is employed in the Access Business as operated by the Purchaser and its Affiliates after the Closing, provided, however, that this clause (ii) shall not prohibit hiring any person (A) who responds to a public advertisement which is disseminated generally and is not targeted at such person or at other employees of the Access Business, and who otherwise has not been solicited or recruited in violation of this clause (ii), or (B) who is first approached, solicited or recruited when no longer an employee of the Purchaser or any of its Affiliates and whose resignation or other termination of employment with the Purchaser or any of its Affiliates

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was not solicited or induced, directly or indirectly, by the Parent, the Seller, Marconi IP or any of their Affiliates.

     (b)   Notwithstanding the terms of Section 6.11(a), (i) nothing in Section 6.11(a) shall prohibit or otherwise restrict the Parent, the Seller, Marconi IP or any of their Affiliates from carrying on or engaging in the Other Businesses (it being understood and agreed that the Seller and its Affiliates in conducting the Other Businesses (A) currently sell, provide, develop, deliver and supply Other Business Products and Other Business Services to, and may continue to sell, provide, develop, deliver and supply Other Business Products and Other Business Services to, Persons unaffiliated with the Parent, the Seller, Marconi IP and their other Affiliates that, in turn, package or combine such Other Business Products with, or use such Other Business Services in support of, Restricted Products that are or will be sold to a BellSouth Entity, (B) currently sell, provide, develop, deliver and supply Other Business Products and Other Business Services to, and may continue to sell, provide, develop, deliver and supply Other Business Products and Other Business Services to, a BellSouth Entity that are or will be used in connection with Restricted Products) and (C) may (1) obtain from any Person other than the Parent or any of its Affiliates Restricted Products (or components thereof) that do not incorporate or use any Core Technology and (2) incorporate or combine Other Business Products or Other Business Services into or with such Restricted Product, and then sell the resulting product(s) to a BellSouth Entity), (ii) in the event that any Person directly or indirectly acquires a majority equity interest in the Parent or any of its Affiliates (including the Seller) (each an “Acquired Entity”), then Section 6.11(a) shall apply only to each Acquired Entity and not to the acquiring Person or any of such Person’s Affiliates other than any Acquired Entity (provided that, if the applicable Acquired Entity elects upon written notice provided to the Purchaser on or before the closing of such acquisition to terminate the licenses granted to it under the Cross License Agreement effective as of the closing of such acquisition pursuant to Section 4.1.4 of the Cross License Agreement, then Section 6.11(a) shall apply to neither such Acquired Entity, the acquiring Person nor any of such Person’s other Affiliates unless the acquiring Person or such Affiliate of the acquiring Person is otherwise licensed under the Cross License Agreement) and (iii) in the event that any Person acquires all or a portion of the business or assets of the Parent or any of its Affiliates (including the Seller), regardless of the form of such transaction (other than a transaction of the type described in the previous clause (ii)), then Section 6.11(a) shall apply to the acquiring Person or such Person’s Affiliates to the extent and only to the extent of the products, materials and services of the acquired business or acquired assets (or Evolutions thereof) that after the closing of the acquisition continue to be subject to the licenses under the Cross License Agreement; provided that, in the case of each of clause (ii) and (iii), Section 6.11(a) shall apply to the acquiring Person if such Person is the Parent or an Affiliate of the Parent immediately prior to such acquisition.

     (c)   Section 6.11(a) shall not be deemed to be breached solely as a result of the ownership by the Parent, the Seller, Marconi IP and their Affiliates (taken collectively) of less than an aggregate of 5% of any class of equity of a publicly traded Person which sells, provides, delivers or supplies Restricted Products.

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     (d)   If, at the time of enforcement of the covenants contained in this Section 6.11 (collectively, the “Restrictive Covenants”), a court holds that the duration, scope or area restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration, scope or area reasonable under such circumstances shall be substituted for the stated duration, scope or area and that the court shall be allowed and directed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by Law. Upon advice of legal counsel, each of the Parent, the Seller and Marconi IP has determined and hereby acknowledges that the Restrictive Covenants are reasonable in terms of duration, scope and area restrictions.

     (e)   If the Parent, the Seller, Marconi IP or any of their respective Affiliates breaches, or threatens to commit a breach of, any of the Restrictive Covenants, then the Purchaser shall have the rights and remedies with respect to such breach as are set forth in Article XII (and for such purpose, Losses shall include Competition Damages) and Section 13.20 hereof. For purposes of this clause (e), “Competition Damages” shall mean the right and remedy to require the Seller and the Parent, jointly and severally, to account for and pay over to the Purchaser any profits or other benefits derived or received by the Person breaching such Restrictive Covenant as the result of any transactions constituting such a breach.

     6.12    Collection of Receivables. From and after the Closing, the Purchaser shall have the right and authority to collect for its own account (at its own cost and risk) all Accounts Receivable that are included in the Assets and to endorse with the name of the Seller any checks or drafts received with respect to any Accounts Receivable (noting that such endorsement is explicitly without recourse). The Seller shall promptly deliver to the Purchaser any cash or other property received directly or indirectly by it or any of its Affiliates with respect to the Accounts Receivable, including any amounts received as interest on such Accounts Receivable.

     6.13    Release of Liens. Each of the Seller, Marconi IP and the Parent shall (a) take all actions required of the Seller, Marconi IP or the Parent (and shall cause their Affiliates to take all actions required of such Affiliate) under the Indentures and the applicable security agreements related thereto to cause the Liens encumbering the Assets under the Indentures and the applicable security agreements related thereto to be terminated and released at the Closing and (b) take all actions required of the Seller, Marconi IP or the Parent (and shall cause their Affiliates to take all actions required of such Affiliate) to cause any other Liens encumbering the Assets (other than Permitted Liens) to be terminated and released at the Closing. Each of the Seller, Marconi IP and the Parent shall use (and shall cause their Affiliates use) its respective reasonable best efforts to cause all other actions necessary for such Liens to be terminated and released at the Closing to be taken at or prior to the Closing. Within one Business Day after the Closing Date, the Seller, Marconi IP and the Parent, as applicable, shall make all filings (including UCC-3s), or use their reasonable best efforts to cause the holders of the Liens encumbering the Assets to make such filings, in all local, state and foreign jurisdictions necessary to publicly notice the termination and release of such Liens. All such releases and filings shall be in the form and substance reasonably acceptable to the Purchaser.

     6.14    Nonsolicitation. Neither the Parent, the Seller nor Marconi IP shall, nor shall any of them authorize or permit any of their respective Affiliates or Representatives to, directly or

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indirectly, (a) solicit, initiate or encourage (including by way of furnishing information) any “other bid,” (b) take any other action to knowingly facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to any “other bid,” (c) engage in any discussion or negotiations relating thereto (other than discussions solely related to informing a third party of the existence of this provision) or (d) accept any “other bid.” The Parent, Marconi IP and the Seller shall instruct each of its Representatives to observe the terms of this Section 6.14. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the first two sentences of this Section 6.14 by any Representative, whether or not such Person is purporting to act on behalf of the Parent, Marconi IP or the Seller or otherwise, shall be deemed to be a breach of this Section 6.14 by the Parent, Marconi IP and the Seller. Subject to contractual confidentiality restrictions in place as of the date of this Agreement, the Parent or the Seller promptly shall advise the Purchaser orally and in writing of any “other bid” made after the execution of this Agreement or any inquiry made after the execution of this Agreement which could reasonably be expected to lead to any “other bid” and the identity of the Person making any such “other bid” or inquiry. As used in this Section 6.14, “other bid” shall mean any proposal or offer from any Person to directly or indirectly acquire in any manner any substantial portion of the assets of the Access Business.

6.15   Bedford Facility.

   (a)   If the CAMI Transaction closes prior to the Closing, then at the Closing the Seller shall transfer the Bedford Lease to the Purchaser, and the Purchaser shall assume the Seller’s rights and obligations thereunder.

   (b)   If (i) the CAMI Transaction does not close prior to the Closing and (ii) at the time of the Closing the Bedford Sale Agreement has not been terminated, then at the Closing the Seller shall transfer the Seller’s right to occupy the Bedford Facility under the Jabil Rationalization Agreement to the Purchaser and the Purchaser shall assume the Seller’s obligations with respect to such occupancy right set forth in Section 3.9(b), the fourth sentence of (c), (d) and (e) of the Jabil Rationalization Agreement; provided, however, that notwithstanding the foregoing, the Purchaser shall have no obligations to any Person (including Jabil or the Seller) under such sections in excess of the aggregate monthly rent for the Bedford Facility under the CAMI Lease (the “Maximum Rent”). The Purchaser shall thereafter occupy the Bedford Facility under the Seller’s occupancy rights under the Jabil Rationalization Agreement until the earlier of (A) the closing of the CAMI Transaction (at which point the Seller shall transfer the Bedford Lease to the Purchaser and the Purchaser shall assume the Seller’s rights and obligations thereunder) and (B) the termination of the Bedford Sale Agreement (in which case the terms of Section 6.15(c) shall apply).

   (c)   If the Bedford Sale Agreement is terminated either before or after the Closing, then the Seller shall (or shall cause a third-party buyer to) purchase the Bedford Facility from Jabil as soon as reasonably practicable after such termination pursuant to the terms of the Jabil Rationalization Agreement and lease the Bedford Facility to the Purchaser (or a wholly-owned subsidiary of the Purchaser) pursuant to a lease containing substantially the same terms as the Bedford Lease (the “Seller Bedford Lease”). If such purchase is not effected prior to the Closing, then at the Closing the Seller shall transfer

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the Seller’s right to occupy the Bedford Facility under the Jabil Rationalization Agreement to the Purchaser (and the Purchaser shall assume the Seller’s obligations with respect to such occupancy right set forth in Section 3.9(b), the fourth sentence of (c), (d) and (e) of the Jabil Rationalization Agreement up to the Maximum Rent) until such time as the Seller purchases (or causes a third-party to purchase) the Bedford Facility from Jabil and the Seller or the third-party purchaser leases the Bedford Facility to the Purchaser or a wholly-owned subsidiary of the Purchaser pursuant to the Seller Bedford Lease.

   (d)   Notwithstanding anything to the contrary set forth in this Section 6.15 and subject to the immediately following sentence, the Seller shall be solely responsible for any and all repairs or maintenance of the Bedford Facility during the period, if any, that the Purchaser occupies the Bedford Facility under the Jabil Rationalization Agreement pursuant to Section 6.15(b) and (c) above. In the event the Purchaser occupies the Bedford Facility pursuant to Section 6.15(b) and (c) above under the Jabil Rationalization Agreement and then either enters into the CAMI Lease or the Seller Bedford Lease, the Purchaser shall promptly reimburse the Seller for all such repair and maintenance costs and expenses incurred by the Seller that the Purchaser would otherwise have been liable for under the CAMI Lease assuming the Purchaser had been a party to the CAMI Lease and leased the Bedford Facility pursuant to such lease during the period that the Purchaser occupied the Bedford Facility under the Jabil Rationalization Agreement. Furthermore, during the period, if any, that the Purchaser occupies the Bedford Facility under the Jabil Rationalization Agreement pursuant to Section 6.15(b) and (c) above, the Purchaser agrees to use reasonable best efforts to prevent waste to the Bedford Facility from occurring; provided, however, the Purchaser shall not have any affirmative obligation of inspection.

     6.16   Grande. Between the date hereof and the Closing, each of the Seller and the Purchaser shall use their reasonable best efforts to comply with the provisions of Schedule 6.16 with respect to the System Purchase Agreement, dated as of October 29, 2001, between Grande and the Seller, as amended by the Letter Agreement, dated December 16, 2002, between Grande and the Seller (collectively, the “System Purchase Agreement”), which such System Purchase Agreement is a Shared Contract.

     6.17   Audit.

   (a)   Without limiting the parties’ other obligations under this Article VI, the Seller agrees to prepare “special purpose financial statements” of the Access Business, including a statement of Assets to be acquired by the Purchaser and Assumed Obligations as of September 30, 2003, and the related statements of operations and of cash flows for the year then ended (the “2003 Financial Statements”), including related footnotes, otherwise (except for the omission of assets not acquired and liabilities not assumed) in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), and agrees to engage the Seller’s independent public accountants, Deloitte & Touche LLP (“Deloitte”), to commence an audit of the 2003 Financial Statements under auditing standards generally accepted in the United States (the “Audit”). Promptly after execution of this Agreement, the Seller shall use its reasonable best efforts to prepare the

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2003 Financial Statements on the basis provided in this paragraph (a) (or, if applicable, on such other basis as may be required pursuant to paragraph (b) below), and cause Deloitte to commence and complete the Audit of such financial statements as soon as reasonably practicable after the execution of the engagement letter. The Seller agrees to cause such engagement letter to be prepared, and the Seller will be prepared to execute such letter on its own behalf, promptly after the date hereof. The Seller and the Purchaser will both be signatories to Deloitte’s engagement letter for the Audit. The Seller represents that subject to the “special purpose” nature of the financial statements, the 2003 Financial Statements will fairly present the financial condition, results of operations and cash flows of the Access Business as of and for the applicable period, and will be consistent with the books and records of the Seller.

   (b)   The Seller will, and will use its reasonable best efforts to cause its independent public accountants to, cooperate with the Purchaser with respect to the preparation and presentation of a written request by the Purchaser pursuant to Rule 3-13 of Regulation S-X (the “Request”) for appropriate relief from the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC’s Staff”) in order to permit the filing and use by the Purchaser of “special purpose financial statements” of the Access Business as contemplated in Section 6.17(a) to fulfill its obligations under Rule 3-05 of Regulation S-X. The Seller (and to the extent required, the Parent and/or Marconi IP) will promptly prepare a letter addressed to the Purchaser that contains such information as may be reasonably required for purposes of the Request, including an explanation of the appropriateness of the “special purpose financial statement” basis contemplated by Section 6.17(a). The Seller will provide the Purchaser with any information reasonably required to respond to any comments or inquiries of the SEC’s Staff received with respect to the Request. If the SEC’s Staff denies the Request or otherwise indicates to the Purchaser that the 2003 Financial Statements must be prepared on a different basis than that stated in the Request, then the Purchaser will promptly notify the Seller of the basis on which the 2003 Financials must be prepared pursuant to such communication from the SEC’s Staff, and the Seller will cause the 2003 Financial Statements to be prepared under U.S. GAAP on the basis so notified by the Purchaser.

   (c)   Prior to the Closing, the Seller and the Parent shall, and shall cause their Affiliates to, cooperate fully with Deloitte in connection with the Audit, including providing Deloitte with reasonable access to personnel, books and records as is requested by Deloitte to complete the Audit. Subsequent to the Closing, each of the Seller and the Parent shall, and shall cause their respective Affiliates to, use reasonable best efforts to cooperate fully with the Purchaser, Deloitte and any other auditors of the Purchaser in connection with the Audit and the financial statements that are the subject of the Audit, including (i) providing reasonable access to personnel, books and records (including reasonable access to personnel, books and records of the Other Businesses to the extent necessary) as may be requested by Deloitte to complete the Audit, (ii) cooperating with the reasonable requests of the Purchaser and its independent accountants in order to permit the Purchaser and its Affiliates to prepare and submit the Request and to respond to inquiries or other demands of any Governmental Entity (including the Securities Exchange Commission) related to such financial statements of the Access Business or to

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confirm the information upon which such financial statements are based (including for purposes of any “comfort letter” requested by the Purchaser), and (iii) facilitating discussions between the Purchaser and Deloitte with respect to the completed Audit to the extent reasonably requested by the Purchaser. The Seller and the Parent acknowledge and agree that the foregoing cooperation could involve the provision of information concerning non-Access Business units (such as the Other Businesses) to the extent relevant to the preparation and audit of such financial statements of the Access Business, provided, that, such information will be provided only to the auditors (and not to the Purchaser except to the extent reasonably necessary for the purposes set forth in clause (ii) above), subject to customary confidentiality restrictions. It is acknowledged and agreed that it is the intention of the parties to facilitate the completion of the Audit as soon as reasonably practicable after the date hereof.

   (d)   As soon as reasonably practicable after issuance of Deloitte’s report on the Audit of the 2003 Financial Statements, the Seller shall provide a copy of the 2003 Financial Statements and an Audit report to the Purchaser. After the delivery of the 2003 Financial Statements and Audit report by the Seller to the Purchaser, the Purchaser shall reimburse the Seller for all fees and reasonably documented expenses billed by Deloitte (consistent with their engagement letter) and paid by the Seller in connection with the Audit, within five (5) Business Days of the presentation to the Purchaser of reasonably detailed documentation of such fees and expenses. Notwithstanding the foregoing, (i) if the Purchaser terminates this Agreement pursuant to Section 10.1(c)(i), then the Seller shall be responsible for all fees and expenses of Deloitte in connection with the Audit and shall promptly reimburse the Purchaser for any and all fees and expenses paid by the Purchaser to Deloitte directly or to the Seller pursuant to the reimbursement provisions of the immediately preceding sentence and (ii) if this Agreement is terminated other than (A) by the Purchaser pursuant to Section 10.1(c)(i) or (B) by the Seller pursuant to Section 10.1(d)(i), then the Purchaser and the Seller shall share equally all fees and expenses of Deloitte in connection with the Audit and the Seller shall promptly reimburse the Purchaser for one-half of any and all fees and expenses paid by the Purchaser to Deloitte directly or to the Seller pursuant to the reimbursement provisions of the immediately preceding sentence.

   (e)   Until the Audit report has been delivered to the Purchaser, the Seller shall use its reasonable best efforts to arrange a weekly conference call with the Purchaser at a mutually agreeable time at which representatives of the Seller will inform the Purchaser of the timing and general status of the Audit. The Seller represents that such information will accurately summarize the timing and status of the Audit in all material respects.

   (f)   To the extent required by the Purchaser under the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the “Exchange Act”), with respect to each quarterly financial reporting period ending prior to the Closing Date, commencing with the calendar quarter ending December 31, 2003, the Seller will prepare financial statements on a basis consistent with the 2003 Financial Statements per Section 6.17(a) as of and for the applicable quarterly period ended (the “Interim Financial Statements”). The Seller agrees to engage Deloitte to perform an audit of the Interim Financial Statements under auditing standards generally accepted in the

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United States (the “Interim Audit”). The Seller shall use its reasonable best efforts to prepare the Interim Financial Statements and cause Deloitte to commence and complete the Interim Audit as soon as reasonably practicable upon determination by the Purchaser that such financial statements are required by the Purchaser and to furnish to the Purchaser the Interim Financial Statements at least five (5) days prior to the date that the Purchaser is required to file its report with the SEC under the Exchange Act. Subject to the “special purpose” nature of the financial statements, the Seller represents such Interim Financial Statements will fairly present the financial condition, results of operations and cash flows of the Access Business as of and for the applicable period, and will be consistent with the books and records of the Seller, subject only to the absence of footnotes. The provisions of paragraphs (c), (d) and (e) of this Section 6.17 will apply to the parties’ obligations replacing “the Audit” with “the Interim Audit” as applicable and replacing “the 2003 Financial Statements” with “the Interim Financial Statements” as applicable.

ARTICLE VII
Conditions Precedent to Obligations of the Purchaser and AFCNA

     The obligations of the Purchaser and AFCNA to consummate the Acquisition and the other transactions contemplated hereby are subject to the satisfaction or written waiver by the Purchaser of the following conditions precedent on or before the Closing Date:

7.1   Warranties True.

   (a)   Other than with respect to the representations and warranties contained in Section 4.26, the representations and warranties of the Parent, the Seller and Marconi IP contained herein shall have been accurate, true and correct on and as of the date hereof, and, except to the extent that any such representation or warranty is made solely as of the date hereof or as of another date earlier than the Closing Date, shall also be accurate, true and correct on and as of the Closing Date as though made on the Closing Date (without giving effect to any limitation as to “materiality,” “material adverse effect,” or similar qualifying language set forth therein), except to the extent that any breach (in the aggregate with all other such breaches) does not constitute a Business Material Adverse Effect or a Seller Material Adverse Effect.

   (b)   The representations and warranties of the Seller and Marconi IP contained in Section 4.26 shall have been accurate, true and correct on and as of the date hereof, and shall also be accurate, true and correct on and as of the Closing Date as though made on the Closing Date.

     7.2   Compliance with Agreements and Covenants. Each of the Parent, the Seller and Marconi IP shall have in all material respects performed and complied with all of its covenants and obligations contained in this Agreement and in the Transition Services Agreement to be performed and complied with by it on or prior to the Closing Date.

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     7.3   Certificate of Compliance. The Parent, the Seller and Marconi IP shall have delivered to the Purchaser a certificate of the Parent, the Seller and Marconi IP dated as of the Closing Date, executed by an authorized officer of each, certifying as to compliance with Sections 7.1 and 7.2.

     7.4   Hart-Scott-Rodino. Any applicable waiting period under the HSR Act shall have expired or been earlier terminated without action by the Antitrust Division or the FTC to prevent consummation of the transactions contemplated by this Agreement.

     7.5   No Injunctions or Other Legal Restraints. No applicable Law, injunction or other legal restraint or prohibition enacted, entered, promulgated, enforced or issued by any Governmental Authority preventing the consummation of the Acquisition shall be in effect.

     7.6   Absence of Proceedings. There shall not be any Proceeding pending or threatened in writing by any Governmental Authority or any other Person that has a reasonable possibility of success (i) challenging or seeking to restrain or prohibit the Acquisition or any of the other transactions contemplated hereby or by the Related Agreements or the enforceability of any material covenant (including Section 6.11 hereof) contained herein or in any Related Agreement, which Proceeding is based on facts or circumstances that, if true, would not involve a breach of any representation or warranty of the Purchaser hereunder, (ii) seeking to obtain from the Purchaser or any of its Affiliates in connection with the Acquisition any material damages, which Proceeding is based on facts or circumstances that, if true, would not involve a breach of any representation or warranty of the Purchaser hereunder, or (iii) imposing or seeking to impose (including by requiring the Purchaser to take any action or to agree to take or not to take any action) a change in or restriction on the business, assets or operations of the Access Business, the Purchaser or any Affiliate of the Purchaser or requiring or seeking to require the Purchaser or any of its Affiliates to take any action or agree to take or not to take any action, including the disposition (whether by way of sale, lease, license or otherwise), before or after the Closing, of all or any portion of the business, products or assets (including Intellectual Property assets) of the Access Business, the Purchaser or any Affiliate of the Purchaser, if such change, restriction, requirement or disposition would reasonably be expected to have a material adverse effect on the benefits (viewed as a whole) reasonably expected to be derived by the Purchaser from the Acquisition.

     7.7   Certificates. The Parent, the Seller and Marconi IP shall have delivered to the Purchaser a duly executed certificate from an authorized officer of each certifying to their respective (a) organizational documents, (b) resolutions or minutes of the boards of directors and, with respect to the Seller and Marconi IP, shareholders pertaining to the authorization of this Agreement and the Related Agreements and the transactions contemplated hereby and thereby and (c) incumbency of their executing officers.

     7.8   FIRPTA Certificate. The Seller shall have delivered to the Purchaser a duly executed certificate from an authorized officer certifying, under penalty of perjury, that the Seller and Marconi IP are not foreign persons within the meaning of section 1445 of the Code in substantially the form attached hereto as Exhibit M (the “FIRPTA Certificate”).

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     7.9   Consents. The Seller shall have delivered to the Purchaser written consents from the third parties to the Contracts listed on Schedule 7.9, in form and substance reasonably acceptable to the Purchaser, necessary to transfer such listed Contracts to Purchaser at the Closing in the manner provided on Schedule 7.9.

     7.10   Material Adverse Effect. There shall not have occurred any Business Material Adverse Effect during the period from the date hereof to the Closing.

     7.11   Other Documents. Each of the Parent, the Seller, Marconi IP and the Marconi Entities shall have furnished to the Purchaser all agreements and documents required to be delivered by such parties pursuant to Section 9.2, and each such agreement shall be in full force and effect.

     7.12   Release of Liens. The Liens on the Assets, other than Permitted Liens, shall have been terminated and released and the Release Agreement shall have been executed by the parties thereto and delivered to the Purchaser.

     7.13   Opinion of Counsel. The Purchaser shall have received the legal opinions of (a) Mayer, Brown, Rowe & Maw LLP with respect to certain U.S. legal issues in substantially the form attached hereto as Exhibit N, (b) Mayer, Brown, Rowe & Maw LLP with respect to certain U.K. legal issues in substantially the form attached hereto as Exhibit O, (c) Mayer, Brown, Rowe & Maw LLP, or other outside legal counsel reasonably acceptable to the Purchaser, acting as special counsel to the Marconi Entities under the Cross License Agreement substantially in the same form and content as the legal opinions referred to in clause (a) or clause (b) above, as applicable, and (d) Allen & Overy with respect to certain legal issues related to the Indentures in substantially the form attached hereto as Exhibit P.

     7.14   Solvency Opinion. The Purchaser shall have received the opinion of Valuation Research Corporation, or another nationally recognized, independent valuation firm reasonably acceptable to the Purchaser and the Seller, dated as of the Closing Date, in the form attached hereto as Exhibit Q.

ARTICLE VIII

Conditions Precedent to Obligations of the Seller, Marconi IP and
the Parent

     The obligations of the Parent, the Seller and Marconi IP to consummate the Acquisition and the other transactions contemplated hereby are subject to the satisfaction or written waiver by the Seller of the following conditions precedent on or before the Closing Date:

     8.1   Warranties True. The representations and warranties of the Purchaser and AFCNA contained herein shall have been accurate, true and correct on and as of the date hereof, and, except to the extent that any such representation or warranty is made solely as of the date hereof or as of another date earlier than the Closing Date, shall also be accurate, true and correct on and as of the Closing Date as though made on the Closing Date (without giving effect to any limitation as to “materiality,” “material adverse effect,” or similar qualifying language set forth therein), except to the extent that any breach (in the aggregate with all other such breaches)

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would not reasonably be expected to have a material adverse effect on the Purchaser and its Subsidiaries taken as a whole or does not constitute a Purchaser Material Adverse Effect.

     8.2   Compliance with Agreements and Covenants. The Purchaser and AFCNA shall have in all material respects performed and complied with all of its respective covenants and obligations contained in this Agreement and the Transition Services Agreement to be performed and complied with by it on or prior to the Closing Date.

     8.3   Certificate of Compliance. The Purchaser and AFCNA shall have delivered to the Seller a certificate of the Purchaser and AFCNA dated as of the Closing Date, executed by an authorized officer of each, certifying as to compliance with Sections 8.1 and 8.2.

     8.4   Hart-Scott-Rodino. Any applicable waiting period under the HSR Act shall have expired or been earlier terminated without action by the Antitrust Division or the FTC to prevent the consummation of the transactions contemplated by this Agreement.

     8.5   No Injunctions or Other Legal Restraints. No applicable Law, injunction or other legal restraint or prohibition enacted, entered, promulgated, enforced or issued by any Governmental Authority preventing the consummation of the Acquisition shall be in effect.

     8.6   Absence of Proceedings. There shall not be any Proceeding pending or threatened in writing by any Governmental Authority or any other Person that has a reasonable possibility of success challenging or seeking to restrain or prohibit the Acquisition or any of the other transactions contemplated hereby or by the Related Agreements, which Proceeding is based on facts or circumstances that, if true, would not involve a breach of any representation or warranty of the Parent, the Seller or Marconi IP hereunder.

     8.7   Other Documents. Each of the Purchaser and AFCNA shall have furnished to the Seller all agreements and documents required to be delivered by the Purchaser and AFCNA pursuant to Section 9.3, and each such agreement shall be in full force and effect.

     8.8   Purchase Price. The Seller, for itself and as agent for Marconi IP, shall have received from the Purchaser the Purchase Price pursuant to Section 3.1.

     8.9   Certificates. The Purchaser and AFCNA shall have delivered to the Seller a duly executed certificate from an authorized officer of each certifying to their respective (a) organizational documents, (b) resolutions or minutes of their respective boards of directors and, if applicable, shareholders pertaining to the authorization of this Agreement and its Related Agreements and the transactions contemplated hereby and thereby and (c) incumbency of their executing officers.

     8.10   Opinion of Counsel. The Seller shall have received the legal opinion of Pillsbury Winthrop LLP in substantially the form attached hereto as Exhibit R.

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ARTICLE IX

Closing

     9.1   Closing. Subject to Articles VII and VIII, the Closing shall take place at the offices of Pillsbury Winthrop LLP, 50 Fremont Street, San Francisco, California 94150, at 10:00 a.m. (pacific standard time) on the third Business Day after all the conditions set forth in Articles VII and VIII have been satisfied (or, to the extent permitted, waived by the parties entitled to the benefits thereof), or at such other place, time and date as shall be agreed between the Seller and the Purchaser. The Closing, and all transactions to occur at the Closing, shall be deemed to have taken place at, and shall be effective as of, 12:01 a.m. (central standard time) on the Closing Date.

     9.2   Deliveries by the Seller. At the Closing the Seller or Marconi IP, as applicable, shall deliver to the Purchaser the following:

   (a)   the Assignment and Assumption Agreement, duly executed by the Seller;

   (b)   the Bill of Sale, duly executed by the Seller;

   (c)   subject to Section 6.16, the Supply Agreements, duly executed by the Seller;

   (d)   the Transition Services Agreement, duly executed by the Seller;

   (e)   the Cross License Agreement, duly executed by the Marconi Entities;

   (f)   the Sublicenses, duly executed by the Seller;

   (g)   the Patent Assignment, duly executed by Marconi IP;

   (h)   the Copyright Assignment, duly executed by the Seller;

   (i)   the Trademark Assignment, duly executed by the Seller;

   (j)   a cross receipt verifying the receipt by the Seller of the Purchase Price; and

   (k)   the FIRPTA Certificate.

     9.3   Deliveries by the Purchaser. At the Closing the Purchaser or AFCNA, as applicable, shall deliver to the Seller the following:

   (a)   the Assignment and Assumption Agreement, duly executed by the Purchaser;

   (b)   the Bill of Sale, duly executed by the Purchaser and AFCNA;

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   (c)   subject to Section 6.16, the Supply Agreements, duly executed by the Purchaser or, at the option of the Purchaser, an Affiliate of the Purchaser (it being understood that if an Affiliate of the Purchaser is the primary party to the Supply Agreements, the Purchaser nonetheless shall remain responsible for the performance of all of such Affiliate’s obligations thereunder);

   (d)   the Transition Services Agreement, duly executed by the Purchaser or, at the option of the Purchaser, an Affiliate of the Purchaser (it being understood that if an Affiliate of the Purchaser is the primary party to the Transitions Services Agreement, the Purchaser nonetheless shall remain responsible for the performance of all of such Affiliate’s obligations thereunder);

   (e)   the Cross License Agreement, duly executed by the Purchaser or, at the option of the Purchaser, an Affiliate of the Purchaser (it being understood that if an Affiliate of the Purchaser is the primary party to the Cross License Agreement, the Purchaser nonetheless shall remain responsible for the performance of all of such Affiliate’s obligations thereunder);

   (f)   the Sublicenses, duly executed by the Purchaser or, at the option of the Purchaser, an Affiliate of the Purchaser (it being understood that if an Affiliate of the Purchaser is the primary party to the Sublicenses, the Purchaser nonetheless shall remain responsible for the performance of all of such Affiliate’s obligations thereunder);

   (g)   the Purchase Price in accordance with Sections 3.1 and 13.4; and

   (h)   tax resale certificates with respect to the Inventory duly executed by the Purchaser or AFCNA, as applicable.

ARTICLE X

Termination

     10.1   Termination. This Agreement may be terminated, and the transactions contemplated herein may be abandoned, at any time on or prior to the Closing Date:

   (a)   with the mutual written consent of the Seller and the Purchaser;

   (b)   by the Seller or the Purchaser, if the Closing shall not have taken place on or before July 31, 2004 (the “Termination Date”); provided, that, the right to terminate this Agreement under this Section 10.1(b) shall not be available to (i) the Seller if the failure of the Seller or any of its Affiliates to fulfill any of their obligations under this Agreement caused the failure of the Closing to occur on or before such date or (ii) the Purchaser if the failure of the Purchaser or any of its Affiliates to fulfill any of their obligations under this Agreement caused the failure of the Closing to occur on or before such date;

   (c)   by the Purchaser, (i) if there shall have been a breach of any representation or warranty of the Seller, Marconi IP or the Parent hereunder and the breach of such

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representation or warranty constitutes a Business Material Adverse Effect or a Seller Material Adverse Effect, or if there shall have been a material breach of any covenant or obligation of the Seller, Marconi IP or the Parent hereunder and, if such breach is curable, such breach shall not have been remedied within thirty (30) days after receipt by the Seller of a notice in writing from the Purchaser specifying the breach and requesting such breach be remedied or (ii) if any of the other conditions set forth in Article VII shall have become incapable of fulfillment on or prior to the Termination Date and shall not have been waived by the Purchaser (unless the failure of such condition is the result of a material breach of this Agreement by the Purchaser or AFCNA); or

   (d)   by the Seller, (i) if there shall have been a material breach of any covenant, obligation, representation or warranty of the Purchaser or AFCNA hereunder, and, if such breach is curable, such breach shall not have been remedied within thirty (30) days after receipt by the Purchaser of notice in writing from the Seller specifying the breach and requesting such breach be remedied or (ii) if any of the other conditions set forth in Article VIII shall have become incapable of fulfillment on or prior to the Termination Date and shall not have been waived by the Seller (unless the failure of such condition is the result of a material breach of this Agreement by the Seller, the Parent or Marconi IP).

     In the event of termination by the Seller or the Purchaser pursuant to this Section 10.1 (other than Section 10.1(a)), written notice thereof shall be given to the other parties hereto.

     10.2   Effect of Termination. If this Agreement is terminated pursuant to Section 10.1, all obligations of the parties hereunder shall terminate, except for the obligations set forth in Sections 6.5 (Brokers), 6.9 (Confidentiality), 13.1 (Expenses) and 13.8 (Publicity), each of which shall survive the termination of this Agreement (it being understood and agreed, however, that (a) no such termination shall relieve any party from liability for any prior breach of this Agreement and (b) for purposes of determining such liability, the terms of Article XII (other than Section 12.1 and Section 12.8) shall survive the termination of this Agreement).

ARTICLE XI

Employees and Employee Benefits

     11.1   Offers of Employment. The Purchaser shall offer each Current Access Employee employment with the Purchaser effective as of the Closing Date. The Purchaser’s offers of employment shall be for employment on substantially the same terms and conditions and at the same level of cash compensation as applied to such employees immediately prior to the Closing Date as employees of the Seller and its Affiliates (excluding any amounts payable in connection with the transactions contemplated by this Agreement) except as otherwise specifically provided by this Article XI with respect to employment terms and conditions other than cash compensation, during their continued employment with the Purchaser until such terms and conditions or cash compensation are changed by the Purchaser in the ordinary course of business. Each such individual who accepts the Purchaser’s offer of employment shall become an employee of the Purchaser as of the Closing and shall be referred to herein as a “Transferred Employee”.

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     11.2   Employee Benefits — Generally. Subject to the provisions of this Article XI, as of the Closing Date, the Purchaser shall provide or cause to be provided to Transferred Employees employee benefits which are, in the aggregate, substantially similar to those provided to similarly situated employees of the Purchaser and its Affiliates. Each of the Parent and the Seller agree that neither the Purchaser nor any of its Affiliates shall assume sponsorship or have any responsibility or Liability under any employee benefit plan, program, policy or arrangement maintained by the Seller or any of its Affiliates, and the Purchaser agrees that none of Parent, the Seller or any of their Affiliates shall have any responsibility or Liability under any employee benefit plan, program, policy or arrangement maintained by the Purchaser or any of its Affiliates (collectively, the “Purchaser Benefit Plans”). Notwithstanding the foregoing, the Purchaser, the Seller and their respective Affiliates shall have the obligations and responsibilities as otherwise specifically provided in this Article XI.

     11.3   Service Credit. The Purchaser shall cause each Purchaser Benefit Plan to provide to the Transferred Employees credit for their service with the Seller and its Affiliates and their predecessors for all purposes under the Purchaser Benefit Plans provided, that, the crediting of service with the Seller, its Affiliates and their predecessors under the Purchaser Benefit Plans will occur as set forth below:

   (a)   Purchaser 401(k) Plan. For purposes of the Purchaser 401(k) Plan, service shall be credited to each Transferred Employee for all purposes from the hire date used by the Marconi 401(k) Plan to determine service for the purposes of vesting and credit for a year of service will be provided for the calendar year in which such hire date occurred and each calendar year commencing after such hire date and before the Closing Date (provided that this provision shall not require double-counting of service otherwise credited under the Purchaser 401(k) Plan).

   (b)   Purchaser Sabbatical Plan. For purposes of the Purchaser’s Sabbatical Plan, each Transferred Employee shall be given credit for two months of service for each year from the hire date used by the Marconi 401(k) Plan to determine service for purposes of vesting.

   (c)   Purchase Stock Option Plans. No credit will be given for service with the Seller, its Affiliates or their predecessors under the Purchaser’s stock option plans.

   (d)   All Other Purchaser Plans. For purposes of the Purchaser Benefit Plans other than as described in Section 11.3(a), (b) or (c), each Transferred Employee shall be given credit for service in accordance with the rules of the applicable Purchaser Benefit Plan by deeming service to have commenced with the Purchaser from the hire date used by the Marconi 401(k) Plan to determine service for the purposes of vesting.

     Within 30 days of the date hereof the Seller shall provide the Purchaser with a list setting forth the hire date used by the Marconi 401(k) Plan to determine service for vesting purposes for all Current Access Employees determined as of the date this Agreement was executed; provided, however, that for purposes of determining this hire date, any individual for whom service to Jabil was required to be credited under paragraph 2 of the Twelfth Amendment of the Marconi USA

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Employees’ Retirement Plan (the “Marconi Retirement Plan”) shall be deemed service with the Seller.

     11.4   Welfare Benefits. Each Transferred Employee shall be entitled to coverage effective as of the Closing Date under all of the medical, dental, vision, prescription drug, life insurance plans or other welfare benefit plans (the “Purchaser’s Welfare Plans”) maintained by the Purchaser for its employees, which medical, dental, vision and prescription drug coverage, through December 31, 2004, shall be available at the same employee contribution rates as applied under the corresponding welfare benefit plans of the Seller (the “Seller’s Welfare Plans”) as of the date of this Agreement. Any waiting periods or pre-existing condition limitations in the Purchaser’s Welfare benefit Plans shall be waived unless coverage would have been denied on a similar basis under the Seller’s Welfare Plans and deductibles shall be waived for claims incurred prior to April 1, 2004. The Seller will retain all liabilities for payment of claims under the Seller’s Welfare Plans and none of the Purchaser nor any of its Affiliates shall have any Liability under or with respect to the Seller’s Welfare Plans. The Seller and its Affiliates shall be responsible for providing continuing group health coverage, which satisfies the requirements of COBRA applicable to the Seller and any applicable state laws which require continuation of health coverage, to all Access Employees (and their eligible dependents) who incur a qualifying event on or prior to the Closing Date and to any person who is an M&A qualified beneficiary within the meaning of Treasury Regulations issued under Section 4980B of the Code. None of the Seller or any of its Affiliates shall have any Liability under or with respect to the Purchaser’s Benefit Plans, including the Purchaser’s Welfare Plans.

     11.5   Paid Time Off. With respect to any accrued but unused paid time off (“PTO”) to which any Transferred Employee is entitled as of the Closing Date pursuant to the PTO policy applicable to such Transferred Employee immediately prior to the Closing Date (the “PTO Policy”), the Purchaser shall assume the liability for accrued PTO of Transferred Employees in the amounts set forth in the memorandum furnished to the Purchaser pursuant to Section 4.18(a) (which amounts shall be updated as of the Closing Date based on accruals from and after December 6, 2003 (the date as of which accruals were provided in the memorandum furnished to the Purchaser pursuant to Section 4.18(a)) consistent with the PTO Policy in effect as of the date hereof) and shall permit such Transferred Employees to use such accrued PTO or pay in cash to each such Transferred Employee an amount equal to the wages relating to any such PTO which the Purchaser does not permit the Transferred Employee to use. Transferred Employees shall be entitled to accrue future paid time off under the Purchaser’s vacation policy based on service credited pursuant to Section 11.3 and service with the Purchaser and its Affiliates after the Closing. Further, effective as of the Closing Date, the Purchaser shall credit each Transferred Employee with 5 sick days.

     11.6   Disability. If a Transferred Employee is on short-term disability leave as of the Closing Date, the Purchaser shall provide such Transferred Employee with short-term disability benefits in accordance with the short-term disability policy of the Seller and its Affiliates and the Seller and its Affiliates shall cease to have any liability for such payments and benefits after the Closing. The Purchaser shall provide all other Transferred Employees with short-term disability benefits in accordance with the terms and conditions of the short-term disability plans of the Purchaser. The Seller shall retain all liabilities under the long-term disability plan of the Seller, including liabilities for Transferred Employees who are eligible upon the satisfaction of any

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waiting or elimination period to receive benefits under such plan as of the Closing; provided, however, that if a Transferred Employee returns to active employment with the Purchaser under conditions that would require a new waiting or elimination period under the Seller’s long-term disability plan, any future long-term disability benefits shall be the responsibility of the Purchaser and none of the Seller, its Affiliates or the Seller’s long-term disability plan shall have any responsibility or liability therefor.

     11.7   Bonus. The Purchaser agrees to pay each Transferred Employee the amount of the bonus that the Purchaser determines would otherwise have been paid to such Transferred Employee under the terms of the Marconi AIP for service through March 31, 2004.

     11.8   Retirement Plans. The Seller shall retain all liabilities and obligations of the Seller and its Affiliates under its “employee pension benefit plans” (as defined in Section 3(2) of ERISA) (the “Seller’s Pension Plans”) and all assets thereunder and none of the Seller or any of its Affiliates shall have any Liability under or with respect to any “employee pension benefit plans” of the Purchaser or its Affiliates. The Seller shall cause all Transferred Employees to become 100% vested in their accrued benefits under the Marconi USA Wealth Accumulation Plan (the “Marconi 401(k) Plan”) and the Marconi Retirement Plan, and the Purchaser and its Affiliates shall not have any responsibility with respect to the Seller’s Pension Plans. The Purchaser shall cooperate with the Seller to provide such current information regarding Transferred Employees as permitted by law on an ongoing basis as may be necessary to facilitate payment of pension benefits from the Seller’s Pension Plans. To the extent necessary, the Seller shall cause the sponsor of the “Marconi 401(k) Plan” to amend the Marconi 401(k) Plan to permit, after the Closing Date to the extent permitted under the requirements of the Code applicable to qualified retirement plans, Transferred Employees to elect to receive a distribution of benefits under the Marconi 401(k) Plan and to permit Transferred Employees to elect to roll over such amounts (including any outstanding loans) to a defined contribution plan of the Purchaser (“Purchaser 401(k) Plan”) satisfying the requirements of Section 401(a) of the Code and including a cash or deferred arrangement satisfying the requirements of Section 401(k) of the Code. The Purchaser shall cause the sponsor of the Purchaser 401(k) Plan to amend the Purchaser 401(k) Plan to the extent necessary and to the maximum extent permitted by applicable law to accept rollover contributions of all amounts (including promissory notes evidencing outstanding loans) distributed to or on behalf of Transferred Employees from the Marconi 401(k) Plan.

     11.9   Workers and Unemployment Compensation. The Seller shall retain liability for all workers compensation and unemployment events for Access Employees occurring prior to the Closing Date. The Purchaser shall be responsible for all workers compensation and unemployment events for Transferred Employees occurring after the Closing Date.

     11.10   Wages. The Purchaser shall assume liability for all salary, wages and bonuses earned by Transferred Employees after the Closing Date. The Seller shall retain all other liability for salary, wages and bonuses earned by and payable to Access Employees for periods prior to and including the Closing Date (other than bonuses under the Marconi AIP which are payable by Purchaser in accordance with Section 11.7).

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     11.11   Severance. The Purchaser agrees to provide to any Transferred Employee whose employment with the Purchaser and its Affiliates is terminated on or before the later of December 31, 2004 or nine (9) months after the Closing Date, severance benefits that are at least equal to the benefits that would have been provided to such Transferred Employee under the Seller’s severance policies as in effect on the date of this Agreement. Further, the Purchaser shall assume and satisfy all obligations under the thirteen agreements set forth on Schedule 4.17 that are listed under the heading of “Special Severance Agreements.” The Seller agrees that the Purchaser shall not be responsible for any other severance obligations of the Seller or its Affiliates to any Access Employees, whether or not they are Transferred Employees.

     11.12   Cooperation. The Seller shall cooperate with the Purchaser in its efforts to screen and hire Transferred Employees but only to the extent of providing non confidential information on Access Employees and in publishing and disseminating communications of the Purchaser regarding the employment of Transferred Employees.

     11.13   Employment Claims. Except as otherwise stated in this Article XI, the Seller shall retain all Liability for all employment related claims of Access Employees, including claims of violation of state and federal Laws regarding discrimination, payment of wages, and WARN, and claims of breach of employment contract and wrongful discharge, arising or relating to the period prior to the Closing. The Purchaser shall be liable for all employment related claims made by Transferred Employees, including claims of violation of state and federal Laws regarding discrimination, payment of wages, and WARN, and claims of breach of employment contract and wrongful discharge, arising and relating to the period after the Closing. For the avoidance of doubt, it is agreed that (a) the Seller is liable for any WARN notices or payments in lieu of notice for “mass layoffs” and “plant closings” (as those terms are defined in the WARN Act) occurring prior to the Closing Date and (b) the Purchaser is liable for any WARN notices or payments in lieu of notice for “mass layoffs” and “plant closings” occurring after the Closing Date, including but not limited to any liability for those persons suffering an employment loss prior to the Closing Date but to whom notice was not required to be given until the occurrence of events after the Closing Date.

ARTICLE XII

Indemnification

     12.1   Survival. The representations and warranties of the parties hereto contained herein and in the Conveyance Agreements shall survive the Closing for a period of eighteen (18) months after the Closing, except that (a) the representations and warranties set forth in (i) Sections 4.8, 4.13, 4.17, 4.18, 4.20 and 4.21 of this Agreement, (ii) Section 5 of the Cross License Agreement and (iii) Section 3 of either Sublicense Agreement shall survive the Closing for a period of four (4) years after the Closing, (b) the Tax Warranties shall survive until the Tax Statute of Limitations Date, (c) the Title and Authorization Warranties shall survive forever, (d) without prejudice to the obligation of the Seller, Marconi IP and the Parent to indemnify the Purchaser Indemnified Parties with respect to Retained Obligations, the representations and warranties in Section 4.5 shall not survive the Closing and (e) the representations and warranties in Section 4.24(a) and (c) shall not survive the Closing. All representations and warranties of the Seller, Marconi IP and the Parent set forth in this Agreement and in any document delivered

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pursuant to this Agreement that is not a Commercial Agreement shall be deemed to have been made again by such parties on and as of the Closing Date except to the extent such representations and warranties are expressly made as of an earlier date. If the Closing occurs, neither the Purchaser, AFCNA, the Seller, Marconi IP nor the Parent shall have any liability with respect to claims first asserted in connection with any representation or warranty after the expiration of the survival period specified therefor in this Section 12.1.

     12.2   Indemnification by the Parent, the Seller and Marconi IP. Subject to Section 12.4, the Parent, the Seller and Marconi IP, jointly and severally, agree to indemnify the Purchaser and its Affiliates and each of their respective officers, directors, employees, stockholders, agents and representatives (each, a “Purchaser Indemnified Party”) against, and agree to hold the Purchaser Indemnified Parties harmless from, any and all Losses incurred or suffered by the Purchaser Indemnified Parties to the extent arising out of or resulting from any of the following:

   (a)   any breach of or any inaccuracy in any representation or warranty made by the Parent, Marconi IP or the Seller in this Agreement, any Conveyance Agreement or any other document delivered by the Seller, Marconi IP or the Parent hereunder at the Closing that is not a Commercial Agreement, provided, that, if the Closing occurs, none of the Parent, the Seller or Marconi IP shall have any liability under this Section 12.2(a) for any breach of or inaccuracy in any representation or warranty unless a claim for indemnification therefor is asserted in accordance with Section 12.6 or Section 12.7 (as applicable), in each case before the expiration of the survival period applicable to such representation or warranty under Section 12.1; and provided, further, that for purposes of Purchaser Indemnified Parties’ rights to indemnification pursuant to this Section 12.2(a), the representations and warranties of the Parent, Marconi IP and the Seller (other than the representations and warranties contained in (i) the third sentence of Section 4.4, (ii) the first sentence of Section 4.6, (iii) Section 4.11, or (iv) Section 4.14(a)), shall not be qualified by any references therein to materiality (including references to “Business Material Adverse Effect” or “Seller Material Adverse Effect,” and whether or not any breach results or may result in a Business Material Adverse Effect or Seller Material Adverse Effect) as if such qualifications were deleted from such representation or warranty;

   (b)   any breach of or failure by the Parent, the Seller or Marconi IP to perform any covenant or obligation of the Parent, the Seller or Marconi IP set out in this Agreement, any Conveyance Agreement or any other document delivered by the Parent, the Seller or Marconi IP hereunder at the Closing that is not a Commercial Agreement;

   (c)   the Excluded Assets or the Retained Obligations, other than Retained Obligations to the extent arising from the effect of a change in Law occurring after the Closing based on a fact, condition or circumstance existing prior to the Closing (for this purpose, “Law” shall not include Judgments to which any of the Seller, the Parent or Marconi IP is a party or by which the Access Business or the Assets are bound);

   (d)   the failure by the Seller, Marconi IP or the Parent to comply with statutory provisions relating to bulk sales and transfers in connection with the transactions contemplated hereby;

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   (e)   one-half of the aggregate amount of product costs incurred by the Purchaser or its Affiliates with respect to Liabilities assumed pursuant to Section 2.5(c) (including product costs incurred with respect to Special Warranty Matters) in excess of $10,000,000 (it being understood and agreed that for purposes of this clause (e) the term “product costs” (i) shall, subject to clause (iii), mean all out-of-pocket costs and expenses of any kind (including costs and expenses for materials and replacement parts or products) incurred by the Purchaser or its Affiliates as a result of Section 2.5(c), (ii) for purposes of clarification, shall not include any overhead costs or overhead expenses of the Purchaser or any of its Affiliates, including costs and expenses associated with salary or other compensation or benefits of any employee of the Purchaser or its Affiliates, or any other cost or expense not referred to in clause (i) above and (iii) shall not include any amounts to the extent arising from the Purchaser’s or any of its Affiliates’ treatment of the customer making a claim with respect to a Liability assumed by the Purchaser pursuant to Section 2.5(c) in a manner more favorable to the customer than the Purchaser’s customary treatment of its customers for similar claims related to the Purchaser’s other comparable products or services);

   (f)   any Personnel that is not a party to an Employee IP Agreement (or any assigns or successors-in-interest of such Personnel) having or claiming to have any Intellectual Property rights in any Transferred Technology or any Transferred Patents developed or conceived by such Personnel under circumstances in which, under applicable Law, ownership of the Intellectual Property rights in such Transferred Technology or Transferred Patents would vest on creation in such Personnel in the absence of an Employee IP Agreement; provided that the Purchaser or its Affiliates must notify the Seller of any claims arising or resulting from the above in accordance with Section 12.6 or Section 12.7 of this Agreement, as applicable, on or prior to the fourth anniversary of the Closing Date; or

   (g)   claims (whether as a part of a Proceeding or otherwise) by the Persons identified at Items 4 or 5 of Schedule 4.13(e)(i) (or any Affiliates thereof or assigns or successors in interest thereto) to the extent arising out of infringement of any Patents identified in any correspondence described in such Items by a Current Access Product; provided that the Purchaser or its Affiliates must notify the Seller of any claims arising or resulting from the above in accordance with Section 12.6 or Section 12.7 of this Agreement, as applicable, on or prior to the fourth anniversary of the Closing Date.

     The Purchaser Indemnified Parties’ right to indemnification under this Article XII shall not be affected by any investigation (including any environmental or intellectual property investigation or assessment) conducted with respect to, or any knowledge acquired (or capable of being acquired) by, the Purchaser or AFCNA at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with any representation, warranty, covenant or obligation.

     12.3   Indemnification by the Purchaser and AFCNA. Subject to Section 12.4, the Purchaser and AFCNA, jointly and severally, agree to indemnify the Seller and its Affiliates and each of their respective officers, directors, employees, stockholders, agents and representatives (each, a “Seller Indemnified Party”) against, and agree to hold the Seller Indemnified Parties

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harmless from, any and all Losses incurred or suffered by the Seller Indemnified Parties to the extent arising out of or resulting from any of the following:

   (a)   any breach of or any inaccuracy in any representation or warranty made by the Purchaser, AFCNA or AFAC in this Agreement, any Conveyance Agreement or any other document delivered by the Purchaser, AFCNA or AFAC hereunder at the Closing that is not a Commercial Agreement, provided, that, if the Closing occurs neither the Purchaser, AFCNA nor AFAC shall have any liability under this Section 12.3(a) for any breach of or inaccuracy in any representation or warranty unless a claim for indemnification therefor is asserted in accordance with Section 12.6 or Section 12.7 (as applicable), in each case before the expiration of the survival period applicable to such representation or warranty under Section 12.1; and provided,further, that for purposes of Seller Indemnified Parties’ rights to indemnification pursuant to this Section 12.3(a), the representations or warranties of the Purchaser, AFCNA and AFAC shall not be qualified by any references therein to materiality as if such qualifications were deleted from such representation and warranty;

   (b)   any breach of or failure by the Purchaser, AFCNA or AFAC to perform any covenant or obligation of the Purchaser, AFCNA or AFAC set out in this Agreement, any Conveyance Agreement or any other document delivered by the Purchaser, AFCNA or AFAC hereunder at the Closing that is not a Commercial Agreement;

   (c)   the Assumed Obligations; or

   (d)   the operation of the Access Business subsequent to the Closing (excluding, for the avoidance of doubt, the Retained Obligations and the matters for which the Purchaser Indemnified Parties are entitled to indemnification under Section 12.2).

12.4   Limitations on Liability.

   (a)   The Purchaser Indemnified Parties shall have the right to receive payment by the Parent, the Seller or Marconi IP, jointly and severally, under Section 12.2(a) and Section 12.2(f) only if, and only to the extent that, the Purchaser Indemnified Parties shall have incurred indemnifiable Losses in excess of $2,000,000. The Seller Indemnified Parties shall have the right to receive payment by the Purchaser and AFCNA, jointly and severally, under Section 12.3(a) only if, and only to the extent that, the Seller Indemnified Parties shall have incurred indemnifiable Losses in excess of $2,000,000.

   (b)   Neither the Seller nor any of its Affiliates, on the one hand, and neither the Purchaser nor any of its Affiliates, on the other hand, shall have any Liability under this Agreement, any Conveyance Agreement or any document delivered by any such Person at the Closing that is not a Commercial Agreement for (i) 25% Losses in excess of $60,000,000 in the aggregate, (ii) 25% Losses and 50% Losses in excess of $120,000,000 in the aggregate and (iii) 25% Losses, 50% Losses and 100% Losses in excess of the Purchase Price in the aggregate; for the avoidance of doubt, in no event shall the Seller’s and its Affiliates’, on the one hand, or the Purchaser’s and its Affiliates’, on the other

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hand, aggregate liability under this Agreement, the Conveyance Agreements and the documents delivered by them at the Closing that are not Commercial Agreements exceed the Purchase Price in the aggregate.

   (c)   EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THIS AGREEMENT, THE SOLE AND EXCLUSIVE LIABILITY OF THE SELLER AND ITS AFFILIATES TO THE PURCHASER AND ITS AFFILIATES, AND THE SOLE AND EXCLUSIVE LIABILITY OF THE PURCHASER AND ITS AFFILIATES TO THE SELLER AND ITS AFFILIATES, UNDER THIS AGREEMENT, THE CONVEYANCE AGREEMENTS AND THE OTHER DOCUMENTS DELIVERED HEREUNDER THAT ARE NOT COMMERCIAL AGREEMENTS OR IN RESPECT OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (INCLUDING FOR ANY BREACH OF OR INACCURACY IN ANY REPRESENTATION OR WARRANTY OR FOR ANY BREACH OF ANY COVENANT OR OBLIGATION OR FOR ANY OTHER REASON), AND THE SOLE AND EXCLUSIVE REMEDY OF THE PURCHASER AND ITS AFFILIATES AND OF THE SELLER AND ITS AFFILIATES (RESPECTIVELY) WITH RESPECT TO ANY OF THE FOREGOING, SHALL BE AS SET FORTH IN THIS ARTICLE XII, SECTION 6.5, SECTION 6.11(e) AND SECTION 13.20 OF THIS AGREEMENT, and Section 6.14 of the Cross License Agreement, Section 6.14 of the Sublicense Attached hereto as Exhibit H-1 and Section 7.14 of the Sublicense attached hereto as Exhibit H-2. Except with respect to Losses arising out of or relating to a breach of the Commercial Agreements, to the extent that the Purchaser or any of its Affiliates (on the one hand) or the Seller or its Affiliates (on the other hand) has any Losses for which it may assert any right to indemnification, contribution or other monetary recovery from the Seller or any of its Affiliates or from the Purchaser or any of its Affiliates (as the case may be) (whether under this Agreement, any Conveyance Agreement, any other document delivered hereunder that is not a Commercial Agreement or under any common law theory or any statute or other Law, including any Environmental Law, or otherwise), other than pursuant to the provisions of this Article XII, the Purchaser and the Seller (respectively) each hereby waives, releases and agrees not to assert such right, and the Purchaser and the Seller (respectively) each agrees to cause each of its Affiliates to waive, release and agree not to assert such right.

   (d)   Neither the Seller nor any of its Affiliates shall have any liability under or otherwise in connection with this Agreement, any Conveyance Agreement or any other document delivered hereunder that is not a Commercial Agreement or the transactions contemplated hereby or thereby for any Loss to the extent accrued, provided or reserved for in the Statement of Working Capital.

     12.5   Mitigation. With respect to claims subject to the indemnity at Section 12.2(g), the Purchaser and its Affiliates shall reasonably cooperate to mitigate Losses, including, if reasonable, modifying, redesigning or replacing the product in question so as to make the product non-infringing (it being understood and agreed that the costs and expenses relating to such modification, redesign or replacement shall be indemnified Losses to the extent provided in this Article XII).

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     12.6   Claims. As promptly as is reasonably practicable after becoming aware of a claim for indemnification under this Agreement not involving a claim, or the commencement of any suit, action or Proceeding, of the type described in Section 12.7, the Indemnified Person shall give written notice to the Indemnifying Person of such claim, which notice shall specify the material facts alleged to constitute the basis for such claim, including, if applicable, the representations, warranties, covenants and obligations alleged to have been breached, if known, and the amount (if known) that the Indemnified Person seeks hereunder from the Indemnifying Person, together with such information (to the extent known by the Indemnified Person) as may be necessary for the Indemnifying Person to determine that the limitations in Section 12.4 have been satisfied or do not apply; provided, that, the failure of the Indemnified Person to give such notice shall not relieve the Indemnifying Person of its obligations under this Article XII except to the extent (if any) that the Indemnifying Person demonstrates that it has been prejudiced thereby. Unless it would reasonably be expected that the Indemnified Person will be prejudiced by such two-week delay, for a period of at least two weeks from the date the Indemnifying Person receives the written notice of a claim pursuant to this Section 12.6, the Indemnified Person and the Indemnifying Person shall consult with each other regarding resolution of such claim and attempt to resolve such claim; provided that neither party shall be obligated to take or refrain from taking any action to enforce its rights.

     12.7   Notice of Third Party Claims; Assumption of Defense.

   (a)   The Indemnified Person shall give notice to the Indemnifying Person within fifteen (15) days of the assertion of any claim, or the commencement of any suit, action or Proceeding, by any Person not a party hereto (such claim, suit, action or Proceeding, as it pertains to the Indemnified Person, a “Third Party Claim”) in respect of which indemnity may be sought under this Agreement (which notice shall specify in reasonable detail the nature and amount (to the extent known by the Indemnified Person) of such claim together with such information (to the extent known by the Indemnified Person) as may be necessary for the Indemnifying Person to determine that the limitations in Section 12.4 have been satisfied or do not apply); provided, that, the failure of the Indemnified Person to give such notice shall not relieve the Indemnifying Person of its obligations under this Article XII except to the extent (if any) that the Indemnifying Person demonstrates that it has been prejudiced thereby.

   (b)   The Indemnifying Person may, at its own expense, defend the Indemnified Person against the Third Party Claim with counsel of its own choice reasonably satisfactory to the Indemnified Person so long as (i) the Indemnifying Person notifies the Indemnified Person in writing, within fifteen (15) days after the Indemnified Person has given notice of the Third Party Claim, that the Indemnifying Person will indemnify the Indemnified Person from and against any Losses the Indemnified Person may suffer resulting from, or arising out of such Third Party Claim (whether or not otherwise required hereunder), (ii) the Indemnifying Person possesses financial resources that would reasonably be expected to be sufficient to defend against the Third Party Claim and to fulfill its indemnification obligations hereunder, (iii) the Third Party Claim does not seek an injunction or other equitable relief that would adversely impact the Access Business, if granted, (iv) the Third Party Claim does not relate to or arise in connection with any criminal action, indictment, allegation, investigation or Proceeding, (v) the

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Third Party Claim does not relate to or arise in connection with any action, allegation, investigation or Proceeding involving (A) Transferred Intellectual Property or (B) other Intellectual Property licensed to the Purchaser or any of its Affiliates under the Cross License Agreement or either Sublicense if the Purchaser’s (or its Affiliate’s) operation of the Access Business is the primary focus of such Third Party Claim, (vi) settlement of, or an adverse judgment with respect to, the Third Party Claim would not reasonably be likely to establish a precedential custom or practice that would reasonably be expected to be materially adverse to the continuing business interests of the Indemnified Person or its Affiliates, (vii) the Indemnified Person has not been advised in writing by counsel reasonably acceptable to the Indemnifying Person that, based on the defenses and positions expected to be asserted as of the time of such advice, a conflict of interest between the Indemnified Person and the Indemnifying Person exists or would reasonably be expected to exist or arise in connection with such Third Party Claim and (viii) the Indemnifying Person conducts the defense of the Third Party Claim with substantially the same amount of diligence as the Indemnifying Person would, acting with a reasonable degree of prudence, exert in defending a comparable claim against itself; provided, that, notwithstanding the foregoing, the Seller shall in all cases be entitled to retain the defense of (1) any Third Party Claim pending on the date hereof that is a Retained Obligation and (2) so long as the foregoing clauses (ii), (iv), (vii) and (viii) are satisfied, (x) any Third Party Claim relating to or arising in connection with any action, allegation, investigation or Proceeding involving Intellectual Property licensed to the Purchaser or any of its Affiliates under the Cross License Agreement or either Sublicense (other than Third Party Claims of the type described in the foregoing clause (v)(B)) and (y) any claims described in Section 12.2(g). If the Indemnified Person assumes the defense of the Third Party Claim pursuant to the previous sentence, the Indemnifying Person shall have the right to consult with the Indemnified Person regarding the counsel used by the Indemnified Person in connection with such defense.

   (c)   So long as the Indemnifying Person is conducting the defense of the Third Party Claim in accordance with Section 12.7(b) above, (i) the Indemnified Person may, at its election, retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim, (ii) the Indemnified Person will not consent to the entry of any judgment or enter into any settlement or compromise with respect to the Third Party Claim without the prior written consent of the Indemnifying Person (which consent shall not be unreasonably withheld or delayed), (iii) the Indemnifying Person will not consent to the entry of any judgment or enter into any settlement or compromise with respect to the Third Party Claim unless either (A) the Indemnifying Person obtains a written agreement releasing the Indemnified Person from all Loss and Liability thereunder, (B) the settlement agreement entered into in connection therewith includes a written agreement releasing the Indemnified Person from all Loss and Liability thereunder or (C) the Indemnifying Person obtains the written consent of the Indemnified Person (which consent shall not be unreasonably withheld or delayed) and (iv) if the Third Party Claim relates to or arises in connection with any action, allegation, investigation or Proceeding involving Intellectual Property licensed to the Purchaser or any of its Affiliates under the Cross License Agreement or either Sublicense, the Indemnifying Person shall defend any such Third Party Claim with a view only to the interest of the Purchaser and its Affiliates (it being understood and agreed that use of the

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same counsel for the Purchaser Indemnified Parties and the Indemnifying Parties will not, in and of itself, be deemed to result in a conclusion that the Indemnifying Party is not acting with a view only to the interest of the Purchaser and its Affiliates) and shall consult with the Purchaser at all reasonable times as may be reasonably requested by the Purchaser concerning matters specified by the Purchaser related to the defense of any such Third Party Claim.

   (d)   In the event any of the conditions in Section 12.7(b) above is or becomes unsatisfied, however, (i) the Indemnified Person may assume and control the defense of the Third Party Claim and may consent to the entry of any judgment or enter into any settlement or compromise with respect thereto (subject to the prior consent of the Indemnifying Person, which consent shall not be unreasonably withheld or delayed), (ii) the Indemnifying Person may participate in such defense at its sole cost and expense and will, subject to the terms and conditions of Article XII, reimburse the Indemnified Person for the fees, costs and expenses of defending against the Third Party Claim (including reasonable attorneys’ fees and expenses) and (iii) the Indemnifying Person will remain responsible for any Losses the Indemnified Person may suffer resulting from or arising out of the Third Party Claim, subject to the applicable limitations provided in this Article XII.

   (e)   Whether or not the Indemnifying Person assumes the defense of the Third Party Claim, all of the parties hereto shall cooperate in the defense thereof.

     12.8   Time Limits. Any right to indemnification or other recovery under Section 12.2(a) or under Section 12.3(a) shall only apply to Losses arising from claims with respect to which the Indemnified Person shall have notified the applicable Indemnifying Person in writing within the applicable survival period set forth in Section 12.1; provided, however, that such rights (and the Indemnifying Parties’ obligations to indemnify and hold harmless hereunder) shall not terminate with respect to any Losses arising from claims as to which the Indemnified Person shall have, before the expiration of the applicable survival period, previously delivered a notice pursuant to Section 12.6 or Section 12.7 to the Indemnifying Person.

     12.9   Net Losses and Subrogation.

   (a)   Notwithstanding anything contained herein to the contrary, the amount of any Losses incurred or suffered by any Indemnified Person shall be calculated after giving effect to (i) any insurance proceeds received by the Indemnified Person (or any of its Affiliates) with respect to such Losses and (ii) any recoveries obtained by the Indemnified Person (or any of its Affiliates) from any other third party, in each case less the out-of-pocket costs reasonably incurred by the Indemnified Person in connection with obtaining such proceeds or recoveries (including the amount of the first retrospective or experience-based insurance premium adjustment to the extent resulting therefrom). Each Indemnified Person (or any of its Affiliates) shall exercise reasonable best efforts to obtain such proceeds and recoveries. If any such proceeds or recoveries are received by an Indemnified Person (or any of its Affiliates) with respect to any Losses after an Indemnifying Person has made a payment to the Indemnified Person with respect thereto, the Indemnified Person (or such Affiliate) shall promptly pay to the Indemnifying Person

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the amount of such proceeds or recoveries (up to the amount of the Indemnifying Person’s payment).

   (b)   Upon making any payment to an Indemnified Person in respect of any Losses, the Indemnifying Person will, to the extent of such payment, be subrogated to all rights of the Indemnified Person (and its Affiliates) against any third party in respect of the Losses to which such payment relates except for third parties, other than insurers, if providing the Indemnifying Party such a right of subrogation would reasonably be expected to have a material adverse impact on a then-current or then-proposed bona fide commercial relationship between the Indemnified Person and such third party. Such Indemnified Person (and its Affiliates) and Indemnifying Person will execute upon request all instruments reasonably necessary to evidence or further perfect such subrogation rights.

     12.10   Purchase Price Adjustments. To the extent permitted by Law, any amounts payable under Section 12.2 or Section 12.3 shall be treated by the parties hereto as an adjustment to the Purchase Price.

     12.11   Reimbursement of Expenses. The Indemnifying Person shall reimburse the Indemnified Person on an as-incurred basis for any expenses for which the Indemnified Person is entitled to indemnification hereunder unless there is a dispute about whether the Indemnified Person is in fact entitled to indemnification (it being understood that this provision is not intended to negate a party’s right to dispute a claim for indemnification in accordance with the terms of this Agreement).

ARTICLE XIII

Miscellaneous

     13.1   Expenses. Except as otherwise specifically contemplated by this Agreement, each party hereto shall bear its own fees and expenses with respect to the transactions contemplated hereby; provided, however, that (a) the filing fees under the HSR Act and (b) the fees and expenses of any economist or other expert retained with the mutual agreement of each of the Seller and the Purchaser in connection with the filing under the HSR Act shall each be borne equally by the Seller and the Purchaser.

     13.2   Amendment. Except as provided in Section 13.17, this Agreement may be amended, modified or supplemented only in writing signed by the Purchaser, AFCNA, the Parent, the Seller and Marconi IP.

     13.3   Notices. Any notice, request, instruction or other document to be given hereunder by a party hereto shall be in writing and shall be deemed to have been given, (a) when received if given in person or by courier or a courier service, or (b) on the date of transmission if sent by facsimile transmission (receipt confirmed) on a Business Day during the normal business hours of the intended recipient, and if not so sent on such a day and at such a time, on the following Business Day:

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(i) If to the Purchaser or AFCNA, addressed as follows: 

Advanced Fibre Communications, Inc.
1465 North McDowell Blvd.
Petaluma, California 94954
Attention: General Counsel
Facsimile: (707) 794-7777

with a copy to:

Pillsbury Winthrop LLP
50 Fremont Street
San Francisco, California 94105
Attention: Blair W. White
Facsimile (415) 983-1200

(ii) If to the Parent, the Seller or Marconi IP, addressed as follows:

Marconi Communications, Inc.
1000 Marconi Drive
Warrendale, Pennsylvania 15086
Attention: General Counsel — Americas
Facsimile: (724) 742-7100

Marconi Intellectual Property (Ringfence) Inc.
333 Pierce Road
Suite 370
Itasca, Illinois 60143
Attention: Pat Hoffman
Facsimile: (630) 285-1514

with copies to:

Mayer, Brown, Rowe & Maw LLP
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Paul M. Crimmins
Facsimile: (312) 701-7711

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Marconi Corporation plc
Marrable House
The Vineyards
Great Baddow
Chelmsford
Essex CM2 7QS
England
Attention: Colin Hoste
Facsimile: (44) 1245 707610

or to such other individual or address as a party hereto may designate for itself by notice given as herein provided.

     13.4   Payments in Dollars. Except as otherwise provided herein or in a Related Agreement, all payments pursuant hereto shall be made by wire transfer in Dollars in same day or immediately available funds without any set-off, deduction or counterclaim whatsoever.

     13.5   Waivers. Except as otherwise provided in Article XII, the failure of a party hereto at any time or times to require performance of any provision hereof or claim damages with respect thereto shall in no manner affect its right at a later time to enforce the same. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty.

     13.6   Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, that, except with the written consent of the other parties, no assignment of this Agreement or any rights or obligations hereunder, by operation of law or otherwise, may be made by any party, other than to an Affiliate of such party (but no such assignment shall relieve the assigning party of its obligations hereunder). Notwithstanding the foregoing, so long as any such Affiliate agrees in writing to be bound by the applicable terms of this Agreement, the Purchaser may (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates, and (ii) designate one or more of its Affiliates to perform its obligations hereunder (and in such case the Purchaser nonetheless shall remain responsible for the performance of all of its obligations hereunder). For a period of four (4) years from the date hereof, the Parent agrees that it will not, directly or indirectly, sell, convey, assign, transfer, lease, license or otherwise dispose of, more than 90% of its properties or assets (as measured on a net book value basis) to any Person in one or more related transactions unless, prior to or concurrently with such disposition, (a) such Person agrees, in writing reasonably satisfactory to and for the express benefit of Purchaser and AFCNA, to be bound by the Parent’s obligations pursuant to this Agreement and (b) the Purchaser is provided with an original executed copy of such agreement. Any purported sale, conveyance, assignment, transfer, lease, license or other disposition in violation of this Section 13.6 shall be null and void.

     13.7   No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and, to the extent expressly provided herein, their respective Affiliates (and, solely

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with respect to Article XII, the Indemnified Persons as defined therein), and no provision of this Agreement shall be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right.

     13.8   Publicity. Prior to the Closing Date, no public announcement or other publicity regarding the existence of this Agreement or any of the Related Agreements or their contents or the transactions contemplated hereby or thereby shall be made by the Purchaser, the Seller or any of their respective Affiliates or Representatives, without the prior written agreement of the Purchaser and the Seller, in any case, as to form, content, timing and manner of distribution or publication. Nothing in this Section 13.8 is intended to limit or otherwise affect a party’s rights to disclose confidential information or make a public announcement, in each case as provided in Section 6.9 of this Agreement.

     13.9   Further Assurances. Upon the reasonable request of the Purchaser, the Seller and Marconi IP shall on and after the Closing Date, without further consideration, execute and deliver, and cause to be executed and delivered, to the Purchaser such deeds, assignments and other instruments, and take such other reasonable actions, as may be reasonably requested by the Purchaser and are required or desirable to effectuate completely the transfer and assignment to the Purchaser and AFCNA of the Seller’s and Marconi IP’s right, title and interest in and to the Assets, and to otherwise carry out the purposes of this Agreement.

     13.10   Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

     13.11   Entire Understanding. This Agreement, the Related Agreements and the December CA set forth the entire agreement and understanding of the parties hereto with respect to the transactions contemplated hereby and thereby and supersede any and all prior agreements, arrangements and understandings among the parties relating to the subject matter hereof.

     13.12   Language. The Parent, the Seller, Marconi IP, the Purchaser and AFCNA agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that no rule of strict construction is to be applied against the Parent, the Seller, Marconi IP, the Purchaser or AFCNA. Each of the Parent, the Seller, Marconi IP, the Purchaser and AFCNA and their respective counsel have reviewed and negotiated the terms of this Agreement.

     13.13   Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without giving effect to the principles of conflicts of law thereof.

     13.14   Remittances. All remittances, payments, mail and other communications relating to the Assets or the Assumed Obligations received by the Seller, Marconi IP or the Parent at any time after the Closing Date shall be promptly turned over to the Purchaser by the Seller, Marconi IP or the Parent. All remittances, payments, mail and other communications relating to the

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Excluded Assets or the Retained Obligations received by the Purchaser or AFCNA at any time after the Closing Date shall be promptly turned over to the Seller by the Purchaser or AFCNA.

     13.15   Bulk Sales. The Purchaser and AFCNA hereby waive compliance by the Seller and Marconi IP with the provisions of the Laws of any jurisdiction relating to a bulk sale or transfer of assets that may be applicable to the transfer of the Assets.

     13.16   Jurisdiction of Disputes; Waiver of Jury Trial. Each party to this Agreement hereby: (a) agrees that any litigation, Proceeding or other legal action in connection with or relating to this Agreement, any Related Agreement or any matters contemplated hereby or thereby, shall be brought by any party in a court of competent jurisdiction located within the County of New York, in the State of New York, whether a state or federal court; (b) agrees that in connection with any such litigation, Proceeding or action, such party will consent and submit to personal jurisdiction in any such court described in clause (a) of this Section 13.16 and to service of process upon it in accordance with the rules and statutes governing service of process; (c) agrees to waive to the full extent permitted by Law any objection that it may now or hereafter have to the venue of any such litigation, Proceeding or action in any such court or that any such litigation, Proceeding or action was brought in an inconvenient forum; (d) designates, appoints and directs CT Corporation System as its authorized agent to receive on its behalf service of any and all process and documents in any such litigation, Proceeding or action in the County of New York, in the State of New York; (e) agrees to notify the other parties to this Agreement immediately if such agent shall refuse to act, or be prevented from acting, as agent and, in such event, promptly to designate another agent in the County of New York, in the State of New York to serve in place of such agent and deliver to the other parties written evidence of such substitute agent’s acceptance of such designation; (f) agrees as an alternative method of service to service of process in any such litigation, Proceeding or action by mailing of copies thereof to such party at its address set forth in Section 13.3; (g) agrees that any service made as provided herein shall be effective and binding service in every respect; and (h) agrees that nothing herein shall affect the rights of any party to effect service of process in any other manner permitted by Law. EACH PARTY HERETO IRREVOCABLY AND ABSOLUTELY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY DISPUTE IN CONNECTION WITH, ARISING UNDER OR RELATING TO THIS AGREEMENT, ANY RELATED AGREEMENT OR ANY MATTERS CONTEMPLATED HEREBY OR THEREBY, AND AGREES TO TAKE ANY AND ALL ACTION NECESSARY OR APPROPRIATE TO EFFECT SUCH WAIVER.

     13.17   Schedules. Neither the specification of any Dollar amount or any item or matter in any provision of this Agreement or any Related Agreement nor the inclusion of any specific item or matter in any Schedule hereto or thereto is intended to imply that such amount, or higher or lower amounts, or the item or matter so specified or included, or other items or matters, are or are not material, and no party shall use the fact of the specification of any such amount or the specification or inclusion of any such item or matter in any dispute or controversy between the parties as to whether any item or matter is or is not material for purposes of this Agreement or any Related Agreement. Neither the specification of any item or matter in any provision of this Agreement or any Related Agreement nor the inclusion of any specific item or matter in any Schedule hereto or thereto is intended to imply that such item or matter, or other items or matters, are or are not in the ordinary course of business, and no party shall use the fact of the specification or the inclusion of any such item or matter in any dispute or controversy between

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the parties as to whether any item or matter is or is not in the ordinary course of business for purposes of this Agreement or any Related Agreement. The Seller, Marconi IP and the Parent shall, from time to time until the Closing, by notice in accordance with the terms of this Agreement, promptly after acquiring knowledge of any such matter, supplement or amend the Schedules hereto with respect to any matter hereafter arising or discovered that, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules hereto; provided, however, that no supplement or amendment to any Schedule (other than Schedule 4.18(c)), shall have any effect for (a) the purpose of determining the satisfaction of the conditions set forth in Section 7.1 or (b) except as provided in the following sentence, for the purpose of determining the accuracy of any representation or warranty herein or whether any Person is otherwise in breach of this Agreement or whether any Person is entitled to indemnification pursuant to Article XII or to any other remedy permitted under the terms of this Agreement. Notwithstanding clause (b) of the previous sentence, if the Closing occurs, any such supplement or amendment of the Schedules, to the extent relating to (i) a matter arising after the date hereof which is expressly assumed by the Purchaser pursuant to Section 2.5(c) or (ii) the matters described in Section 4.25, will be effective to cure and correct for purposes of the Seller’s and its Affiliates’ indemnification obligations under Article XII, any inaccuracy in or breach of any representation, warranty, covenant or obligation which would have existed if the Seller had not made such supplement or amendment, and all references to any Schedule hereto which is supplemented or amended as provided in this sentence shall, for purposes of the Seller’s and its Affiliates’ indemnification obligations under Article XII after the Closing, be deemed to be a reference to such Schedule as so supplemented or amended.

     13.18   Disclaimer of Warranties. The Seller, Marconi IP and the Parent make no representations or warranties with respect to any projections, forecasts or forward-looking statements made available to the Purchaser. There is no assurance that any projected or forecasted results will be achieved. For the avoidance of doubt, the foregoing does not apply to any forward-looking representation or warranty herein or in any Related Agreement or any forward-looking statement made in the Schedules. EXCEPT TO THE EXTENT OF THE EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT AND THE RELATED AGREEMENTS, (a) THE SELLER, MARCONI IP AND THE PARENT ARE SELLING THE ASSETS ON AN “AS IS, WHERE IS” BASIS AND DISCLAIM ALL OTHER WARRANTIES, REPRESENTATIONS AND GUARANTEES, WHETHER EXPRESS OR IMPLIED AND (b) THE SELLER, MARCONI IP AND THE PARENT MAKE NO REPRESENTATION OR WARRANTY AS TO MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE AND NO IMPLIED WARRANTIES WHATSOEVER. WITHOUT LIMITING THE FOREGOING, AND EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT AND THE RELATED AGREEMENTS, THE SELLER AND MARCONI IP DISCLAIM ANY WARRANTY OF TITLE OR NON-INFRINGEMENT AND ANY WARRANTY ARISING BY INDUSTRY CUSTOM OR COURSE OF DEALING. THE PURCHASER AND AFCNA ACKNOWLEDGE AND AGREE THAT THEY ARE NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT AND THE RELATED AGREEMENTS. The Purchaser and AFCNA acknowledge and agree that neither the Seller, Marconi IP, the Parent, their respective Affiliates, any of their respective Representatives nor any other Person has made any representation or warranty, express or implied, as to the accuracy or completeness of any

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memoranda, charts, summaries, schedules or other information heretofore made available by the Seller, Marconi IP, the Parent, their respective Affiliates or their respective Representatives to the Purchaser, any of its Affiliates or their Representatives (including the Confidential Descriptive Memorandum dated December 2002) or any information that is not included in or covered by this Agreement, the Related Agreements or the Schedules and Exhibits hereto and thereto, and neither the Seller, Marconi IP, the Parent, their respective Affiliates, any of their respective Representatives nor any other Person will have or be subject to any liability to the Purchaser, any of its Affiliates or their Representatives resulting from the distribution of any such information to, or the use of any such information by, the Purchaser, any of its Affiliates or any of their agents, consultants, accountants, counsel or other representatives.

     13.19   Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     13.20   Specific Performance. The parties agree that irreparable damage would occur and that the parties would not have any adequate remedy at law in the event that (a) any Pre-Closing Specific Performance Covenants are not performed in accordance with their specific terms prior to the Closing or (b) any Post-Closing Specific Performance Covenants are not performed in accordance with their specific terms subsequent to the Closing. It is accordingly agreed that (i) prior to the Closing, the parties shall be entitled to an injunction or injunctions to prevent breaches of the Pre-Closing Specific Performance Covenants and to enforce specifically the terms and provisions thereof and (ii) subsequent to the Closing, the parties shall be entitled to an injunction or injunctions to prevent breaches of the Post-Closing Specific Performance Covenants and to enforce specifically the terms and provisions thereof, in each case, in addition to any other remedy to which they are entitled at law or in equity; provided, however, that all monetary liability shall be subject to Article XII.

* * *

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.

ADVANCED FIBRE COMMUNICATIONS, INC.
By:
	Name:	John A. Schofield
	Title:	Chairman, President and Chief Executive Officer
ADVANCED FIBRE COMMUNICATIONS NORTH AMERICA, INC.
By:
	Name:	John A. Schofield
	Title:	President and Chief Executive Officer
MARCONI COMMUNICATIONS, INC.
By:
	Name:	Richard v. McPhail
	Title:	Vice President
MARCONI INTELLECTUAL PROPERTY (RINGFENCE) INC.
By:
	Name:	Richard v. McPhail
	Title:	Vice President
MARCONI CORPORATION PLC
By:
	Name:	Richard v. McPhail
	Title:	Executive Vice President

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Amendment Number One to Asset Purchase and Sale Agreement

     The undersigned, being all of the parties to that certain Asset Purchase and Sale Agreement dated January 5, 2004 (the “Agreement”), hereby agree as follows:

     1.   The definitions of “Exchange Act,” “Request” and “SEC’s Staff” set forth in Section 1.1 of the Agreement are hereby deleted.

     2.   The following definitions set forth in Section 1.1 of the Agreement are hereby amended to read in their entirety as follows:

     “Interim Audit” shall have the meaning set forth in Section 6.17(e).

     “Interim Financial Statements” shall have the meaning set forth in Section 6.17(e).

     3.   Section 3.2(a) of the Agreement is hereby amended to read in its entirety as follows: “(a) The Purchaser shall, as soon as practicable, and in any event no later than ninety (90) days after the Closing Date, (i) prepare the initial draft of a statement (the “Statement of Working Capital”) setting forth, as of 5:00 p.m. (central standard time) on the Closing Date, the amount equal to (y) the aggregate of the Net Inventory, the Net Accounts Receivable and the Prepaids less (z) the aggregate of the Net Accounts Payable, the Accrued Compensation and Benefits, the Other Current Liabilities and the Special Warranty Reserve (such net amount being the “Closing Working Capital”) and (ii) deliver the same to the Seller, together with a certificate from the Purchaser’s independent auditors to the effect that the initial draft Statement of Working Capital has been prepared in accordance with Section 3.2(g).

     4.   The first sentence of Section 6.9(a) of the Agreement is hereby amended to read in its entirety as follows: “The parties have previously entered into several confidentiality agreements covering specific purposes (collectively, the “Other Confidentiality Agreements”), and a confidentiality agreement dated December 6, 2002 (as amended, the “December CA”) specifically addressing the purchase transaction contemplated by this Agreement.”

     5.   Section 6.17 of the Agreement is hereby amended to read in its entirety as follows:

(a)   Without limiting the parties’ other obligations under this Article VI, the Seller agrees to prepare a statement of Assets to be acquired by the Purchaser and Assumed Obligations as of December 31, 2003, and the related statements of operations and of cash flows for the year then ended (the “2003 Financial Statements”), including related footnotes, otherwise (except for the omission of assets not acquired and liabilities not assumed) in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), and agrees to engage the Seller’s independent public accountants, Deloitte & Touche LLP (“Deloitte”), to commence an audit of the 2003 Financial Statements under auditing standards generally accepted in the United States (the “Audit”). Promptly after execution of this Agreement, the Seller shall use its reasonable best efforts to prepare the 2003 Financial Statements on the basis provided in this paragraph (a), and cause Deloitte to commence and complete the Audit of such financial statements as soon as reasonably practicable after the execution of the engagement letter. The Seller agrees to cause such

	engagement letter to be prepared, and the Seller will be prepared to execute such letter on its own behalf, promptly after the date hereof. The Seller and the Purchaser will both be signatories to Deloitte’s engagement letter for the Audit. The Seller represents that the 2003 Financial Statements will fairly present the financial condition, results of operations and cash flows of the Access Business as of and for the applicable period, and will be consistent with the books and records of the Seller.
(b)	Prior to the Closing, the Seller and the Parent shall, and shall cause their Affiliates to, cooperate fully with Deloitte in connection with the Audit, including providing Deloitte with reasonable access to personnel, books and records as is requested by Deloitte to complete the Audit. Subsequent to the Closing, each of the Seller and the Parent shall, and shall cause their respective Affiliates to, use reasonable best efforts to cooperate fully with the Purchaser, Deloitte and any other auditors of the Purchaser in connection with the Audit and the financial statements that are the subject of the Audit, including (i) providing reasonable access to personnel, books and records (including reasonable access to personnel, books and records of the Other Businesses to the extent necessary) as may be requested by Deloitte to complete the Audit, (ii) cooperating with the reasonable requests of the Purchaser and its independent accountants in order to permit the Purchaser and its Affiliates to prepare and submit the Request and to respond to inquiries or other demands of any Governmental Entity (including the Securities Exchange Commission) related to such financial statements of the Access Business or to confirm the information upon which such financial statements are based (including for purposes of any “comfort letter” requested by the Purchaser), and (iii) facilitating discussions between the Purchaser and Deloitte with respect to the completed Audit to the extent reasonably requested by the Purchaser. The Seller and the Parent acknowledge and agree that the foregoing cooperation could involve the provision of information concerning non-Access Business units (such as the Other Businesses) to the extent relevant to the preparation and audit of such financial statements of the Access Business, provided, that, such information will be provided only to the auditors (and not to the Purchaser except to the extent reasonably necessary for the purposes set forth in clause (ii) above), subject to customary confidentiality restrictions. It is acknowledged and agreed that it is the intention of the parties to facilitate the completion of the Audit as soon as reasonably practicable after the date hereof.
(c)	As soon as reasonably practicable after issuance of Deloitte’s report on the Audit of the 2003 Financial Statements, the Seller shall provide a copy of the 2003 Financial Statements and an Audit report to the Purchaser. After the delivery of the 2003 Financial Statements and Audit report by the Seller to the Purchaser, the Purchaser shall reimburse the Seller for all fees and reasonably documented expenses billed by Deloitte (consistent with their engagement letter) and paid by the Seller in connection with the Audit, within five (5) Business Days of the presentation to the Purchaser of reasonably detailed documentation of such fees and expenses. Notwithstanding the foregoing, (i) if the Purchaser terminates this Agreement pursuant to Section 10.1(c)(i), then the Seller shall be responsible for all fees and expenses of Deloitte in connection with the Audit and shall promptly reimburse the Purchaser for any and all fees and expenses paid by the Purchaser to Deloitte directly or to the Seller pursuant to the reimbursement provisions of the immediately preceding sentence and (ii) if this Agreement is terminated other than (A) by

2

	the Purchaser pursuant to Section 10.1(c)(i) or (B) by the Seller pursuant to Section 10.1(d)(i), then the Purchaser and the Seller shall share equally all fees and expenses of Deloitte in connection with the Audit and the Seller shall promptly reimburse the Purchaser for one-half of any and all fees and expenses paid by the Purchaser to Deloitte directly or to the Seller pursuant to the reimbursement provisions of the immediately preceding sentence.
(d)	Until the Audit report has been delivered to the Purchaser, the Seller shall use its reasonable best efforts to arrange a weekly conference call with the Purchaser at a mutually agreeable time at which representatives of the Seller will inform the Purchaser of the timing and general status of the Audit. The Seller represents that such information will accurately summarize the timing and status of the Audit in all material respects.
(e)	With respect to each quarterly financial reporting period ending prior to the Closing Date, commencing with the calendar quarter ending March 31, 2004, the Seller will prepare financial statements on a basis consistent with the 2003 Financial Statements per Section 6.17(a) as of and for the applicable quarterly period ended (the “Interim Financial Statements”). The Seller agrees to engage Deloitte to perform an audit of the Interim Financial Statements under auditing standards generally accepted in the United States (the “Interim Audit”). The Seller shall use its reasonable best efforts to prepare the Interim Financial Statements and cause Deloitte to commence and complete the Interim Audit as soon as reasonably practicable after the end of the applicable quarter. The Seller represents such Interim Financial Statements will fairly present the financial condition, results of operations and cash flows of the Access Business as of and for the applicable period, and will be consistent with the books and records of the Seller, subject only to the absence of footnotes. The provisions of paragraphs (b), (c) and (d) of this Section 6.17 will apply to the parties’ obligations replacing “the Audit” with “the Interim Audit” as applicable and replacing “the 2003 Financial Statements” with “the Interim Financial Statements” as applicable.

     6.   The second sentence of Section 9.1 of the Agreement is hereby amended to read in its entirety as follows: “The Closing, and all transactions to occur at the Closing, shall be deemed to have taken place at, and shall be effective as of, 3:00 p.m. (central standard time) on the Closing Date.”

     The provisions of the Agreement that have not been amended hereby shall remain in full force and effect. The provisions of the Agreement, as amended hereby, shall remain in full force and effect.

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3

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment Number One to Asset Purchase and Sale Agreement to be executed and delivered as of the 18th day of February, 2004

ADVANCED FIBRE COMMUNICATIONS, INC.
By:
	Name:	John A. Schofield
	Title:	Chairman, President and Chief Executive Officer
ADVANCED FIBRE COMMUNICATIONS NORTH AMERICA, INC.
By:
	Name:	John A. Schofield
	Title:	President and Chief Executive Officer
MARCONI COMMUNICATIONS, INC.
By:
	Name:	Patricia A. Hoffman
	Title:	Director and Secretary
MARCONI INTELLECTUAL PROPERTY (RINGFENCE) INC.
By:
	Name:	Patricia A. Hoffman
	Title:	Director, President and Secretary
MARCONI CORPORATION PLC
By:
	Name:	Cynthia S. Jacovetty
	Title:	Authorized Signatory

EX-3.2

Exhibit 3.2

AMENDED AND RESTATED BY-LAWS

OF

TELLABS, INC.

(As Amended and Restated December 1, 2004)

ARTICLE I

OFFICES OF REGISTERED AGENT

     Section 1.1 Registered Office and Agent. The Corporation shall have and maintain a registered office in Delaware and a registered agent having a business office identical with such registered office.

     Section 1.2 Other Offices. The Corporation may also have such other office or offices in Delaware or elsewhere as the Board of Directors may determine or as the business of the Corporation may require.

ARTICLE II

STOCKHOLDERS

     Section 2.1 Annual Meeting. An annual meeting of the stockholders shall be held on the third Wednesday in April in each year beginning with the year 1993, at the hour of 10:30 A.M., or in the event the annual meeting is not held on such date and at such time, then on the date and at the time designated by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. If the directors shall not be elected at the annual meeting, or at any adjournment thereof, the Board of Directors shall cause the election to be held as soon thereafter as may be convenient.

     Section 2.2 Special Meetings. Special meetings of the stockholders may be called at any time by the Chairman of the Board of Directors or the President or by resolution of the Board of Directors and shall be called by the Chairman of the Board of Directors or President at the request in writing of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting.

     Section 2.3 Place of Meeting. Meetings of stockholders, whether annual or special, shall be held at such time and place as may be determined by the Board of Directors and designated in the call and notice or waiver of notice of such meeting; provided, that a waiver of notice signed by all stockholders may designate any time or place as the time and place for the

holding of such meeting. If no designation is made, the place of meeting shall be at the Corporation’s principal place of business.

     Section 2.4 Notice of Meeting. Written notice stating the place, date and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting, or, in the case of a merger, consolidation or sale, lease or exchange of all or substantially all of the Corporation’s property and assets, at least twenty days before the date of the meeting, either personally or by mail, by or at the direction of the President or the Secretary to each stockholder of record entitled to vote at such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation.

     Section 2.5 Fixing Record Date for Determination of Stockholders. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders, such date to be not more than sixty days prior to the date of a meeting of stockholders, the date of payment of a dividend or the date on which other action requiring determination of stockholders is to be taken, as the case may be. In addition, the record date for a meeting of stockholders shall not be less than ten days, or in the case of a merger, consolidation or sale, lease or exchange of all or substantially all of the Corporation’s property and assets, not less than twenty days immediately preceding such meeting. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section, such determination shall apply to any adjournment thereof; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

     Section 2.6 List of Stockholders Entitled to Vote. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of the stockholders, the corporate books, or to vote at any meeting of the stockholders.

     Section 2.7 Quorum and Manner of Acting. Unless otherwise provided by the Certificate of Incorporation, as may be amended or restated from time to time (hereinafter the

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“Certificate of Incorporation”), or these By-laws, a majority of the outstanding shares of the Corporation entitled to vote on a matter present in person or represented by proxy shall constitute a quorum for consideration of such matter at any meeting of stockholders; provided, that if less than a majority of the outstanding shares entitled to vote on a matter are present in person or represented by proxy at said meeting, a majority of the shares so present in person or represented by proxy may adjourn the meeting from time to time without further notice other than announcement at the meeting at which the adjournment is taken of the time and place of the adjourned meeting. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If a quorum is present, the affirmative vote of the majority of the shares present in person or represented by proxy at the meeting and entitled to vote shall be the act of the stockholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law of the State of Delaware, the Certificate of Incorporation, as may be amended or restated from time to time, or these By-laws.

     Section 2.8 Voting Shares and Proxies. Each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder, except as otherwise provided in the Certificate of Incorporation. Each stockholder entitled to vote shall be entitled to vote in person, or may authorize another person or persons to act for him by proxy executed in writing by such stockholder or by his duly authorized attorney-in-fact, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

     Section 2.9 Inspectors. At any meeting of stockholders, the chairman of the meeting may, or upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting, based upon the list of stockholders produced at the meeting in accordance with Section 2.6 hereof and upon their determination of the validity and effect of proxies, and they shall count all votes, report the results and do such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each such report shall be in writing and signed by at least a majority of the inspectors, the report of a majority being the report of the inspectors, and such reports shall be prima facie evidence of the number of shares represented at the meeting and the result of a vote of the stockholders.

     Section 2.10 Voting of Shares by Certain Holders. Shares of its own stock belonging to the Corporation, unless held by it in a fiduciary capacity, shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, unless in the

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transfer by the pledgor on the books of the Corporation he or she expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon.

ARTICLE III

DIRECTORS

     Section 3.1 General Powers. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, except as may be otherwise provided by statute or the Certificate of Incorporation, as may be amended or restated from time to time.

     Section 3.2 Number, Tenure and Qualifications. The number of directors shall be ten, which number of directors may be changed from time to time by amendment of this Section, except as otherwise provided for in the Certificate of Incorporation. The directors shall be divided into three classes as provided in Article SIXTH of the Certificate of Incorporation, and shall be elected as therein specified. Class I directors shall hold office initially for a term expiring at the 1993 annual meeting of stockholders. Class II directors shall hold office initially for a term expiring at the 1994 annual meeting of stockholders. Class III directors shall hold office initially for a term expiring at the 1995 annual meeting of stockholders. At each annual meeting of stockholders, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors have been duly elected and qualified, unless sooner removed as provided in Article SIXTH of the Certificate of Incorporation. Directors need not be stockholders or residents of Delaware.

     Section 3.3 Regular Meetings. A regular meeting of the Board of Directors shall be held, without other notice than this Section, immediately after and at the same place as the annual meeting of stockholders. The Board of Directors may provide, by resolution, the time and place, either within or without Delaware, for the holding of additional regular meetings without other notice than such resolution.

     Section 3.4 Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board of Directors, President or upon the written request of at least two directors. The person or persons who call a special meeting of the Board of Directors may designate any place, either within or without Delaware, as the place for holding such special meeting. In the absence of such a designation the place of meeting shall be the Corporation’s principal place of business.

     Section 3.5 Notice of Special Meetings. Notice stating the place, date and hour of a special meeting shall be mailed not less than five days before the date of the meeting, or shall be sent by telegram or be delivered personally or by telephone not less than two days before the

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date of the meeting, to each director, by or at the direction of the person or persons calling the meeting. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting except where a director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting,

     Section 3.6 Quorum, Organization of Meeting and Manner of Acting . A majority of the number of directors as fixed in Section 3.2 hereof shall constitute a quorum for the transaction of business at any meeting of the Board of Directors; provided, that if less than a majority of such number of directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless otherwise provided in the General Corporation Law of the State of Delaware, the Certificate of Incorporation or these By-laws.

     (a) The Board of Directors shall elect one of its members to be the Chairman of the Board of Directors. The Chairman of the Board of Directors shall lead the Board of Directors in fulfilling its responsibilities as set forth in these By-laws, including its responsibility to oversee the performance of the Company, and shall determine the agenda and perform all other duties and exercise all other powers which are or from time to time may be delegated to him or her by the Board of Directors.

     (b) Meetings of the Board of Directors shall be presided over by the Chairman of the Board of Directors, or in his absence, by the President, or in the absence of the Chairman of the Board of Directors and President by such other person or persons as the Board of Directors may designate or the members present may select.

     Section 3.7 Informal Action by Directors. Any action which is required by law or by these By-laws to be taken at a meeting of the Board of Directors, or any other action which may be taken at a meeting of the Board of Directors or any committee thereof, may be taken without a meeting if a consent in writing, setting forth the action to be taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof, or by all the members of such committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote of all of the directors or all of the members of such committee, as the case may be, at a duly called meeting thereof, and shall be filed with the minutes of proceedings of the Board or committee.

     Section 3.8 Telephonic Meetings. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, members of the Board of Directors or of any committee designated by such Board, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons

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participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence at such meeting.

     Section 3.9 Resignations. Any director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board of Directors, the President, or the Secretary. Such resignation shall take effect at the time specified therein; and, unless tendered to take effect upon acceptance thereof, the acceptance of such resignation shall not be necessary to make it effective.

     Section 3.10 Vacancies.

          (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class shall be filled as provided by the Certificate of Incorporation.

          (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected, and the directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be elected and qualified or until their earlier resignation or removal.

     Section 3.11 Removal. Any director or the entire Board of Directors may be removed, but only for cause, and only by the affirmative vote of (i) the holders of at least 75% of the voting power of the shares then entitled to vote at an election of directors, voting together as a single class, or (ii) a majority of the Board of Directors.

     Whenever the holders of any class or series of capital stock are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, the provisions of this Section shall apply, in respect to the removal for cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole.

     Section 3.12 Compensation. The Board of Directors, by the affirmative vote of a majority of the directors then in office and irrespective of any personal interest of any of its members, shall have the authority to establish reasonable compensation of directors for services to the Corporation as directors, officers or otherwise. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors or a committee thereof.

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     Section 3.13 Presumption of Assent. A director who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

     Section 3.14 Interested Directors.

          (a) No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if:

               (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

               (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or

               (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders.

          (b) Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

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ARTICLE IV

STOCKHOLDER NOMINATION OF DIRECTOR CANDIDATES

     Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally or, if applicable, by any holder of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder’s intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of stockholders, one hundred twenty days in advance of the date of the proxy statement released to stockholders in connection with the previous year’s annual meeting of stockholders, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, a reasonable time in advance of the meeting. For purposes of this Section, a “reasonable time in advance of the meeting” is at least fifteen days before the date that the proxy statement in connection with such meeting is to be mailed to the stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person and persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer at the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure.

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ARTICLE V

COMMITTEES

     Section 5.1 Appointment and Powers. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation which, to the extent provided in said resolution or in these By-laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that any such committee may, to the extent authorized in the resolution or resolutions providing for the issuance of such shares of stock adopted by the Board of Directors, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation’s property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation thereof, or amending the By-laws; and, unless the resolution, By-laws or Certificate of Incorporation, expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of the State of Delaware.

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     Section 5.2 Absence or Disqualification of Committee Member. In the absence or disqualification of any member of such committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

     Section 5.3 Record of Proceedings. The committees shall keep regular minutes of their proceedings and when required by the Board of Directors shall report the same to the Board of Directors.

ARTICLE VI

OFFICERS

     Section 6.1 Number and Titles. The officers of the Corporation shall be a Chairman of the Board of Directors, a President and a Secretary. There shall be one or more Vice Presidents (the number thereof to be determined by the Board of Directors), a Treasurer and such other officers and assistant officers as the Board of Directors may from time to time deem necessary. Any two or more offices may be held by the same person.

     Section 6.2 Election, Term of Office and Qualifications. The officers shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after the annual meeting of stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as may be convenient. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall be elected to hold office until his successor shall have been elected and qualified, or until his earlier death, resignation or removal. Election of an officer shall not of itself create contract rights.

     Section 6.3 Removal. Any officer may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.

     Section 6.4 Resignation. Any officer may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board of Directors, the President or the Secretary. Such resignation shall take effect at the time specified therein; and, unless tendered to take effect upon acceptance thereof, the acceptance of such resignation shall not be necessary to make it effective.

     Section 6.5 Duties. In addition to and to the extent not inconsistent with the provisions in these By-laws, the officers shall have such authority, be subject to such restrictions and perform such duties in the management of the business, property and affairs of the Corporation as may be determined from time to time by the Board of Directors.

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     Section 6.6 President. The President shall be the chief executive officer of the Corporation. Subject to the control of the Board of Directors, the President shall, in general, supervise and manage the business and affairs of the Corporation and he shall see that the resolutions and directions of the Board of Directors are carried into effect. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the Corporation, or a different mode of execution is expressly prescribed by the Board of Directors or these By-laws, or where otherwise required by law, the President may execute for the Corporation any contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, or may execute, or may authorize any officer or agent to execute, for the Corporation any contracts, deeds, mortgages, bonds or other instruments or the execution of which is in the ordinary course of the Corporation’s business, and such execution may be accomplished either under or without the seal of the Corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors or these By-laws. In addition, he shall perform all duties incident to the office of President and such other duties as from time to time shall be prescribed by the Board of Directors.

     Section 6.7 Vice Presidents. In the absence of the President or in the event of his inability or refusal to act, the Vice President, if one shall have been elected (or in the event there is more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or in the absence of such designation, in the order of their election), shall perform the duties of the President, and when so acting, shall have all the authority of and be subject to all the restrictions upon the President. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the Corporation or a different mode of execution is expressly prescribed by the Board of Directors or these By-laws or where otherwise required by law, the Vice President (or each of them if there are more than one) may execute for the Corporation any contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, and he may accomplish such execution either under or without the seal of the Corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors or these By-laws. The Vice Presidents shall perform such other duties as from time to time may be prescribed by the President or the Board of Directors.

     Section 6.8 Treasurer. The Treasurer, if one shall have been elected, shall be the principal financial officer of the Corporation, and shall (a) have charge and custody of, and be responsible for, all funds and securities of the Corporation; (b) keep or cause to be kept correct and complete books and records of account including a record of all receipts and disbursements; (c) deposit all funds and securities of the Corporation in such banks, trust companies or other depositaries as shall be selected in accordance with these By-laws; (d) from time to time prepare or cause to be prepared and render financial statements of the Corporation at the request of the President or the Board of Directors; and (e) in general, perform all duties incident to the office of Treasurer and such other duties as from time to time may be prescribed by the President or the

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Board of Directors. If required by the Board of Directors, the Treasurers shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine.

     Section 6.9 Secretary. The Secretary shall (a) keep the minutes of the proceedings of the stockholders and of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-laws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all stock certificates prior to the issue thereof and to all documents the execution of which on behalf of the Corporation under its seal is necessary or appropriate; (d) keep or cause to be kept a register of the name and address of each stockholder, which shall be furnished to the Corporation by each such stockholder, and the number and class of shares held by each stockholder; (e) have general charge of the stock transfer books; and (f) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be prescribed by the President or the Board of Directors.

     Section 6.10 Assistant Treasurers and Assistant Secretaries. In the absence of the Treasurer or Secretary or in the event of the inability or refusal of the Treasurer or Secretary to act, the Assistant Treasurer and the Assistant Secretary (or in the event there is more than one of either, in the order designated by the Board of Directors or in the absence of such designation, in the order of their election) shall perform the duties of the Treasurer and Secretary, respectively, and when so acting, shall have all the authority of and be subject to all the restrictions upon such office. The Assistant Treasurers and Assistant Secretaries shall also perform such duties as from time to time may be prescribed by the Treasurer or the Secretary, respectively, or by the President or the Board of Directors. If required by the Board of Directors, an Assistant Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine.

     Section 6.11 Salaries. The salaries and additional compensation, if any, of the officers shall be determined from time to time by the Board of Directors; provided, that with respect to any officer who is also a director, such determination shall be made by a majority of the other directors then in office.

ARTICLE VII

CERTIFICATES OF STOCK AND THEIR TRANSFER

     Section 7.1 Stock Certificates. Stock certificates shall be in such form as determined by the Board of Directors and shall be signed by, or in the name of the Corporation by the Chairman of the Board of Directors, President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Any of or all the signatures on the certificates may be a facsimile. All certificates of stock shall bear the seal of the Corporation, which seal may be a facsimile, engraved or printed.

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     Section 7.2 Transfer of Shares. The shares of the Corporation shall be transferable. The Corporation shall have a duty to register any such transfer provided there is presented to the Corporation or its transfer agents (a) (i) the stock certificate endorsed by the appropriate person or persons; and (ii) reasonable assurance that such endorsement is genuine and effective; and, provided that (b)(i) the Corporation has no duty to inquire into adverse claims or has discharged any such duty; (ii) any applicable law relating to the collection of taxes has been complied with; and (iii) the transfer is in fact rightful or is to a bona fide purchaser. Upon registration of such transfer upon the stock transfer books of the Corporation the certificates representing the shares transferred shall be canceled and the new record holder, upon request, shall be entitled to a new certificate or certificates. The terms and conditions described in the foregoing provisions of this Section shall be construed in accordance with the provisions of the Delaware Uniform Commercial Code, except as otherwise provided by the General Corporation Law of the State of Delaware. No new certificate shall be issued until the former certificate or certificates for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, wrongfully taken or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors or the President may prescribe consistent with applicable law.

ARTICLE VIII

DIVIDENDS

     Section 8.1 Dividends. Subject to the provisions of the General Corporation Law of the State of Delaware and the Certificate of Incorporation, as may be amended or restated from time to time, the Board of Directors may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the Corporation’s capital stock.

ARTICLE IX

FISCAL YEAR

     Section 9.1 Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors.

ARTICLE X

SEAL

     Section 10.1 Seal. The corporate seal shall have inscribed thereon the name of the Corporation and the words “Corporate Seal” and “Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced.

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ARTICLE XI

WAIVER OF NOTICE

     Section 11.1 Waiver of Notice. Whenever any notice is required to be given under these By-laws, the Certificate of Incorporation, as may be amended or restated from time to time, or the General Corporation Law of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice.

ARTICLE XII

INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS

     Section 12.1 Nature of Indemnity. Each Person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the Corporation as provided in this Article and to the fullest extent which it is empowered to do so by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys’ fees) actually and reasonably incurred by such person in connection with such proceeding), and such indemnification shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 12.2 hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article shall be a contract right and, subject to Sections 12.2 and 12.5 hereof, shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. Notwithstanding any other provision of this Article, to the extent that any director or officer, or employee or agent at the discretion of the Board of Directors of the Corporation pursuant to Section 12.6 of this Article, is by reason of such person’s position with the Corporation a witness in any proceeding, such person shall be indemnified against all costs and expenses actually and reasonably incurred by him on his behalf in connection therewith.

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     Section 12.2 Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the Corporation under Section 12.1 of this Article or advance of expenses under Section 12.5 of this Article shall be made promptly, and in any event within 30 days, upon the written request of the director or officer. If a determination is made by the Corporation that the director or officer is entitled to indemnification pursuant to this Article is required, and the Corporation fails to respond within 60 days to a written request for indemnity, the Corporation shall be deemed to have approved the request. If the Corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within 30 days, the right to indemnification or advances as granted by this Article shall be enforceable by the director or officer in any court of competent jurisdiction. Such person’s costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

     Section 12.3 Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-law, agreement, vote of stockholders or disinterested directors or otherwise.

     Section 12.4 Survival of Rights. No amendment, alteration or repeal of this Article 12 or of any provision hereof shall be effective as to any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, with respect to any action taken or omitted by such person in such position prior to such amendment, alteration or repeal. The provisions of the Article 12 shall continue as to any such person after his or her service in such position has ceased and shall inure to the benefit of his or her heirs, executors and administrators.

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     Section 12.5 Insurance. The Corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the Corporation or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, whether or not the Corporation would have the power to indemnify such person against such liability under this Article or under the General Corporation Law of the State of Delaware. The Corporation shall not be liable under this Article to make any payments of amounts otherwise indemnifiable hereunder if and to the extent that such indemnified person hereunder has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

     Section 12.6 Expenses. Expenses (including attorneys’ fees) incurred by any person described in Section 12.1 of this Article in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or Officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate.

     Section 12.7 Employees and Agents. Persons who are not covered by the foregoing provisions of this Article and who are or were employees or agents of the Corporation, or who are or were serving at the request of the Corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the Board of Directors.

     Section 12.8 Contract Rights. The provisions of this Article shall be deemed to be a contract right between the Corporation and each director or officer who serves in any such capacity at any time while this Article and the relevant provisions of the General Corporation Law of the State of Delaware or other applicable law are in effect, and any repeal or modification of this Article or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing.

     Section 12.9 Merger or Consolidation. For Purposes of this Article, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, or fiduciary or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this

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Article with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.

     Section 12.10 Severability. If any provision or provisions of this Article shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Article (including without limitation, each portion of any Section of this Article containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Article (including, without limitation, each portion of any Section of this Article containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

     Section 12.11 Certain Persons Not Entitled to Indemnification or Advancement of Expenses. Notwithstanding any other provision of this Article, no person shall be entitled to indemnification or advancement of any costs, expenses or the like under this Article with respect to any proceeding, or any claim therein, brought or made by such person against the Corporation.

     Section 12.12 Notices. Any notice, request or other communication required or permitted to be given to the Corporation under this Article shall be in writing and either delivered in person or sent by facsimile or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation and shall be effective only upon receipt by the Secretary.

ARTICLE XIII

MISCELLANEOUS PROVISIONS

     Section 13.1 Contracts. The Board of Directors may authorize any officer or agent to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and the President may so authorize any officer or agent with respect to contracts or instruments in the usual and regular course of its business. Such authority may be general or confined to specific instances.

     Section 13.2 Loans. No loan shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the Board of Directors. Such authority may be general or confined to specific instances.

     Section 13.3 Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, or notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent as shall from time to time be authorized by the Board of Directors.

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     Section 13.4 Deposits. The Board of Directors may select, or may authorize the President, Treasurer or other officers to select, banks, trust companies or other depositaries for the funds of the Corporation.

     Section 13.5 Stock in Other Corporations. Shares of any other corporation which may from time to time be held by the Corporation may be represented and voted by the President, or by any proxy appointed in writing by the President, or by any other person or persons thereunto authorized by the Board of Directors, at any meeting of stockholders of such corporation or by executing written consents with respect to such shares where stockholder action may be taken by written consent. Shares represented by certificates standing in the name of the Corporation may be endorsed for sale or transfer in the name of the corporation by the President or by any other officer thereunto authorized by the Board of Directors. Shares belonging to the Corporation need not stand in the name of the Corporation, but may be held for the benefit of the Corporation in the name of any nominee designated for such purpose by the Board of Directors.

     Section 13.6 Gender. Use of masculine pronoun shall be deemed to include usage of the feminine and neuter pronoun where appropriate.

ARTICLE XIV

AMENDMENT

     Section 14.1 Procedure. These By-laws may be altered, amended or repealed and new by-laws may be adopted by the Board of Directors. Subject to the provisions of the Certificate of Incorporation, these By-laws may also be altered, amended or repealed by the stockholders of the Corporation.

EX-10.38

Exhibit 10.38

TELLABS ADVANTAGE PROGRAM

AS AMENDED AND RESTATED EFFECTIVE DECEMBER 31, 2004

     Pursuant to resolutions made by the Board of Directors of Tellabs Operations, Inc. on December 3, 2004 and December 31, 2004, the attached amendment to the Tellabs Advantage Program, is hereby adopted in accordance with the authorizations and directions of such resolutions.

TELLABS OPERATIONS, INC.

By:

Victoria L. Perrault

Its: Executive VP, Human Resources

2004 AMENDMENT
TO THE
TELLABS ADVANTAGE PROGRAM

     Effective as set forth below, this Amendment is made on December 31, 2004 by Tellabs Operations, Inc. (the “Company”), a Delaware corporation;

     WHEREAS, the Board of Directors of the Company executed the Tellabs Operations, Inc. Written Consent of Directors dated December 3, 2004, in order to merge the Advanced Fibre Communications 401(k) Savings Plan (“AFC Plan”) into the Tellabs Advantage Program (“Program”) effective January 1, 2005;

     WHEREAS, the Board of Directors of the Company executed the Tellabs Operations, Inc. Written Consent of Directors dated December 31, 2004, in order to merge the Vinci Systems, Inc. 401(k) Profit Sharing Plan (“Vinci Plan”) into the Program effective February 28, 2005;

     WHEREAS, the Vinci Plan does not contain optional forms of distribution of benefits different from the forms of distribution allowed under the Program;

     WHEREAS, the Company executed the Special Amendment to the AFC Plan dated December 3, 2005 to eliminate all optional forms of distribution of benefits under the AFC Plan effective March 3, 2005;

     WHEREAS, the Company desires to amend the Program to comply with Section 411(d)(6) of the Internal Revenue Code of 1986, as amended, by allowing former AFC Participants in the AFC Plan to choose among the optional forms of benefits currently available to them until March 2, 2005; and

     WHEREAS, the Company desires to amend the Program pursuant to Article Eleven thereof.

     NOW, THEREFORE, the sections of the Plan set forth below are amended as follows, with the changes indicated by double underline.

     1. Section 1.4 (Definitions) is hereby amended to add the following terms:

     “AFC Accounts” means the AFC Participants’ funds which were transferred from the AFC Plan to the Trust Fund as a result of the merger of the AFC Plan into the Plan effective January 1, 2005.

     “AFC Acquisition Date” means November 30, 2004, the date of the acquisition of Advanced Fibre Communications, Inc. by Tellabs, Inc.,.

     “AFC Participant” means employees of Advanced Fibre Communications, Inc. or any subsidiary thereof who were participants in the AFC Plan on November 29, 2004

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and whose AFC Accounts were subsequently transferred from the AFC Plan trust fund to the Trust Fund as a result of the merger of the AFC Plan into the Plan effective February 4, 2005.

     “AFC Plan” means the Advanced Fibre Communications 401(k) Savings Plan as in effect on the AFC Acquisition Date, and as amended from time to time thereafter up to and including its merger into the Plan.

     “Vinci Accounts” means the Vinci Participant’s funds which were transferred from the Vinci Plan to the Trust Fund as a result of the merger of the Vinci Plan into the Plan effective February 28, 2005.

     “Vinci Acquisition Date” means December 30, 2004, the date of the acquisition of Vinci Systems, Inc. by Tellabs, Inc.,.

     “Vinci Participant” means employees of Vinci Systems, Inc. or any subsidiary thereof who were participants in the Vinci Plan on December 30, 2004 and whose Vinci Accounts were subsequently transferred from the Vinci Plan to the Trust Fund as a result of the merger of the Vinci Plan into the Plan effective February 28, 2005.

     “Vinci Plan” means the Vinci Systems, Inc. 401(k) Profit Sharing Plan as in effect on the Vinci Acquisition Date, and as amended from time to time thereafter up to and including its merger.

     2. Section 1.4 (Definitions) the definition of “Eligible Employee” is hereby deleted and replaced with the following:

     “Eligible Employee” means any employee of the Employer but excluding any employee who is (1) a Member of a Collective Bargaining Unit; (2) an individual providing services to the Employer in the capacity of, or who is or was designated by the Employer as, a Leased Employee, an independent contractor, intern or a Limited Term Employee; or (3) are non-resident aliens who receive no earned income from the Employer which constitutes income from services within the United States. Notwithstanding the foregoing, any employee of Salix Technologies, Inc. or any subsidiary thereof who was eligible to participate in the Salix Plan as of May 19, 2000 will be considered an Eligible Employee as of May 19, 2000. Notwithstanding the foregoing, any individual employed by Coherent Communications Systems Corporation or any subsidiary thereof as of the Coherent Acquisition Date, or thereafter until December 31, 1998, shall not become an Eligible Employee until January 1, 1999. Notwithstanding the foregoing, any individual employed by Ocular Networks, Inc. or any subsidiary thereof who was eligible to participate in the Ocular Plan as of the Ocular Acquisition Date shall not become an Eligible Employee until April 1, 2002. Notwithstanding the foregoing, any individual employed by Vivace Networks, Inc. or any subsidiary thereof who was eligible to participate in the Vivace Plan as of the Vivace Acquisition Date shall not become an Eligible Employee until November 1, 2003. Notwithstanding the foregoing, any individual employed by Advanced Fibre Communications, Inc. or any subsidiary thereof who was eligible to participate in the AFC Plan as of the AFC Acquisition Date shall not become an Eligible Employee until January 1, 2005. Notwithstanding the foregoing, any individual employed by Vinci Systems, Inc. or any

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subsidiary thereof who was eligible to participate in the Vinci Plan as of the Vinci Acquisition Date shall not become an Eligible Employee until January 1, 2005.

     3. Section 1.4 (Definitions) subsection (e) of the definition of “Service” is hereby deleted and replaced with the following:

     (e) Recognition of Services under plans of Acquired Companies. Solely with respect to former Salix Participants, Coherent Participants, Ocular Participants Vivace Participants, AFC Participants and Vinci Participants, each such Participant’s period of service shall include such period or periods of employment previously credited to that Participant under the Salix Plan, Coherent Plan, Ocular Plan, Vivace Plan, AFC Plan or Vinci Plan, as applicable; provided, however, that in no event shall any service prior to January 6, 1975 be deemed Service hereunder.

     4. Section 2.1 (Eligibility Requirements) is hereby amended to add subsections (k) and (l) as follows:

     (k) Notwithstanding the foregoing provisions of this Section 2.1 (Eligibility Requirements) an AFC Participant who is an Eligible Employee on January 1, 2005 shall become a Participant as of that date.

     (l) Notwithstanding the foregoing provisions of this Section 2.1 (Eligibility Requirements) a Vinci Participant who is an Eligible Employee on January 1, 2005 shall become a Participant as of that date.

     5. Section 5.1 (Participant’s Accounts), subsection (a) is hereby deleted and replaced with the following:

     (a) For each Participant there shall be maintained as appropriate a separate Retirement Account, a separate Profit Sharing Account (which shall, if applicable, consist of separate pre-1993 and post-1992 sub-accounts as prescribed by the Administrative Committee), a separate Matching Account, a separate After-Tax Account (which shall, if applicable, consist of a separate pre-1987 After-Tax sub-account and a separate post-1986 After-Tax sub-account as prescribed by the Administrative Committee), a separate Before-Tax Account (which shall, if applicable, consist of separate basic and supplemental sub-accounts as prescribed by the Administrative Committee), and a separate Rollover Account. Effective April 1, 1999, for each Coherent Participant, there shall also be maintained as appropriate a separate Coherent Before-Tax Account (which shall consist of a balance of the Coherent Participant’s pre-tax contribution account under the Coherent Plan), a separate Coherent Employer Account (which shall consist of the balance of the Coherent Participant’s matching and profit sharing accounts under the Coherent Plan) and a separate Coherent Rollover Account. Effective May 19, 2000, for each Salix Participant, there shall also be maintained as appropriate a separate Salix Before-Tax Account (which shall consist of a balance of the Salix Participant’s pre-tax contribution account under the Salix Plan), a separate Salix Employer Account (which shall consist of the balance of the Salix Participant’s matching and profit sharing accounts under the Salix Plan) and a separate Salix Rollover Account. Effective June 28, 2002, for each Ocular Participant, there shall also be maintained as appropriate a separate Ocular Account (which shall consist of the balance of an

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Ocular Participant’s funds which were transferred from the Ocular Plan to the Trust Fund as a result of the merger of the Ocular Plan into the Plan). Effective November 1, 2003, for each Vivace Participant, there shall also be maintained as appropriate a separate Vivace Account (which shall consist of the balance of a Vivace Participant’s funds which were transferred from the Vivace Plan to the Trust Fund as a result of the merger of the Vivace Plan into the Plan). Effective February 4, 2005, for each AFC Participant, there shall also be maintained as appropriate a separate AFC Account (which shall consist of the balance of an AFC Participant’s funds which were transferred from the AFC Plan to the Trust Fund as a result of the merger of the AFC Plan into the Plan). Effective February 28, 2005, for each Vinci Participant, there shall also be maintained as appropriate a separate Vinci Account (which shall consist of the balance of a Vinci Participant’s funds which were transferred from the Vinci Plan to the Trust Fund as a result of the merger of the Vinci Plan into the Plan). Effective July 1, 2003, for each Active Participant there shall also be established a Company Contribution Account. Each Account (including any sub-accounts) shall be credited with the amount of contributions, interest and earnings of the Trust Fund allocated to such Account and shall be charged with all distributions, withdrawals and losses of the Trust Fund allocated to such Account.

     6. Section 5.2 (Participant Accounts), subsection (c)(i) is hereby deleted and replaced with the following:

     (i) Subject to subsection (iii) below, the Investment Committee shall direct the Trustee to invest each Participant’s Accounts from time to time among the Funds as the Participant may elect. A Participant may elect to have a uniform percentage of his Company Contribution Account, Retirement Account, Profit Sharing Account, After-Tax Account, Matching Account, Before-Tax Account, Rollover Account, effective as of April 1, 1999, each of his Coherent Accounts (excluding the value of any loan credited to any such Account), effective as of May 19, 2000, each of his Salix Accounts (excluding the value of any loan credited to any such Account), effective as of June 28, 2002, his Ocular Account (excluding the value of any loan credited to such Account), effective as of November 1, 2003, his Vivace Account (excluding the value of any loan credited to such Account), effective as of February 4, 2005, his AFC Account (excluding the value of any loan credited to such Account) and effective as of February 28, 2005, his Vinci Account (excluding the value of any loan credited to such Account) credited in increments of 1% to one or more of the Funds. All contributions to his Company Contribution Account, Retirement Account, Profit Sharing Account, After-Tax Account, Matching Account, Before-Tax Account, and Rollover Account shall be credited to such Funds in accord with such election.

     7. Section 5.2 (Participant Accounts), subsection (c)(ii) is hereby deleted and replaced with the following:

     (ii) Subject to subsection (iii) and (vi) below and to any restriction on transfer which result from the investment medium chosen for a Fund, a Participant may elect to transfer in multiples of 1% a uniform percentage of his Company Contribution Account, Retirement Account, Profit Sharing Account, Matching Account, After-Tax Account, Before-Tax Account, Rollover Account, effective as of April 1, 1999, each of his Coherent Accounts (excluding the value of any loan credited to any such Account), effective as of May 19, 2000, each of his Salix Accounts (excluding the value of any loan credited to any such Account), effective as of June 28,

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2002, his Ocular Account (excluding the value of any loan credited to any such Account) effective as of November 1, 2003, his Vivace Account (excluding the value of any loan credited to any such Account) effective as of_February 4, 2005, his AFC Account (excluding the value of any loan credited to any such Account), and effective as of February 28, 2005, his Vinci Account (excluding the value of any loan credited to any such Account) held in any Fund to one or more different Funds. Any such election shall not affect any prior election under subsection (i) above. Loans made pursuant to Section 7.11 (Loans) shall be treated as segregated investments from the Participant’s applicable Accounts, transferred to and from various Funds in accord with uniform rules established by the Administrative Committee.

     8. Section 6.1 (General Rule) subsection (a) is hereby deleted and replaced with the following:

     (a) an amount equal to the value of the Units credited to the Participant’s Profit Sharing Account attributable to pre-1993 contributions, Before-Tax Account, Matching Account, Company Contribution Account, After-Tax Account, Rollover Account, Coherent Before-Tax Account, Coherent Rollover Account, Salix Before-Tax Account, Salix Employer Account, Salix Rollover Account, Ocular Account, Vivace Account, AFC Account and Vinci Account plus any of the Participant’s Before-Tax Contributions and After-Tax Contributions made to the Trust Fund but not included in the Participant’s Units as of such Valuation Date; and

     9. Section 7.1 (Commencement and Form of Distributions) subsection (d) is hereby amended by adding the following new paragraph (v) immediately following the last paragraph in subsection (d):

     (v) Notwithstanding the above provisions, all Tellabs Plan Participants who had been AFC Participants immediately prior to the merger of such AFC Plan into the Tellabs Plan on January 1, 2005 and their Beneficiaries shall be allowed to choose an alternate distribution option for their AFC Account in accordance with the terms of the AFC Plan until March 2, 2005. After close of business on March 2, 2005, all AFC Participants will no longer be entitled to choose optional forms of distributions in accordance with the AFC Plan and will be entitled to choose either a rollover or lump sum distribution as provided for in (i) above.

     10. Section 7.1(Commencement and Form of Distributions) subsection (g) is hereby deleted and replaced with the following:

     (g) Notwithstanding anything in this Section 7.1 to the contrary, if the present value of the nonforfeitable portion of the Participant’s Retirement Account, or if the vested balance of the Participant’s remaining Accounts does not exceed $1,000 at the time a distribution is to be made from the Plan (or at the time of any prior distributions did not exceed $1,000) and distribution pursuant to this Section 7.1 has not otherwise commenced, the Administrative Committee shall direct the Trustee to distribute such amount in a single sum payment to the individual so entitled and the payment thereof shall be in full satisfaction of any liability of the Trust to such individual. Effective for distributions made after December 31, 2001, the present value of a Participant’s nonforfeitable accrued benefit may be determined without regard to the portion of the benefit that is attributable to Rollover Contributions (and any earnings allocable to the

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rollover contributions). Rollover Contributions are defined as any rollover contribution under Code Sections 402(c), 403(a)(4), 403(b)(8), 438(d)(3)(A)(ii) and 457(e)(16).

     11. Section 7.4 (Distributions to Beneficiaries) subsection (a) is hereby deleted and replaced with the following:

     (a) Except as otherwise provided in this Section 7.4, the balance of a deceased Participant’s Accounts other than the Retirement Account; prior to February 1, 2002, his Salix Accounts and Coherent Accounts; prior to September 5, 2002 his Ocular Account; prior to February 1, 2004 his Vivace Account; and prior to March 3, 2005 his AFC Account which are distributable to a beneficiary shall be distributed in one or more of the forms described in subsection 7.1(d)(i) or 7.1(d)(ii) above, in accordance with an effective designation filed by the Participant with the Administrative Committee or, if no such designation has been filed, in one of such forms as the beneficiaries shall request.

     12. Section 7.10 (Distribution of Participant’s After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover Account and Ocular Account Prior to Termination of Employment.) the Section heading is hereby deleted and replaced with the following:

     (Distribution of Participant’s After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account and Vinci Account Prior to Termination of Employment).

     13. Section 7.10 (Distribution of Participant’s After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account and Vinci Account Prior to Termination of Employment) subsection (c) is hereby deleted and replaced with the following:

     (c) An amount not to exceed the balance in the Participant’s Rollover Contribution Account, Salix Rollover Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account and Vinci Account provided that no such distribution shall reduce the Participant’s Accounts to an amount equal to the amount of any unpaid loan made pursuant to Section 7.11 (Loans).

     14. Section 7.10 (Distribution of Participant’s After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account and Vinci Account Prior to Termination of Employment) subsection (h) is hereby deleted and replaced with the following:

     (h) Any distribution from a Participant’s Rollover Account, Salix Rollover Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account or Vinci Account shall be deemed to be made first from the Rollover Account and then from the Salix Rollover Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account or Vinci Account.

     15. Section 7.11 (Loans) subsection (a) is hereby deleted and replaced with the following:

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     (a) Upon the submission by the Participant of a written loan application form as prescribed by the Administrative Committee, or any other process approved by the Administrative Committee, a Participant shall be able to apply for a loan. The funds for such loan may only come from a Participant’s After-Tax Account, Before-Tax Account, Rollover Account, Coherent Before-Tax Account, Coherent Employer Account, Coherent Rollover Account, Salix Before-Tax Account, Salix Employer Account, Salix Rollover Account, Profit Sharing Account attributable to pre-1992 Profit Sharing Contributions, Ocular Account, Vivace Account, AFC Account and Vinci Account. Participants shall not be allowed to obtain a loan from the Accounts comprised of Company contributions, with the exception of the pre-1992 Profit Sharing Contributions. If the Administrative Committee reasonably believes that the Participant either does not intend to repay the loan or lacks proper financial ability to repay the loan, it shall not grant such a loan. A Participant shall have no more than three loans outstanding at any time

     16. Section 7.11 (Loans) subsection (c) is hereby deleted and replaced with the following:

          (c) The amount of any loan shall not be less than $1,000 unless, in the event that a Participant demonstrates financial hardship, the Administrative Committee, in its sole discretion, approves a loan in an amount less than $1,000. The maximum amount of a Participant’s loan shall not exceed the lesser of: (1) 50%of the Participant’s Before-Tax Account plus 100% of the funds available in a Participant’s After-Tax Account, Rollover Account, Coherent Before-Tax Account, Coherent Employer Account, Coherent Rollover Account, Salix Before-Tax Account, Salix Employer Account, Salix Rollover Account, Profit Sharing Account attributable to pre-1992 Profit Sharing Contributions, Ocular Account, Vivace Account, AFC Account and Vinci Account; or (2) $50,000 reduced by the greater of:

               (i) the highest outstanding balance of loans to the Participant from the Trust Fund during the one-year period ending on the day before the date on which such loan is made or modified; or

               (ii) the outstanding balance of loans to the Participant from the Trust Fund on the date on which such loan is made or modified.

     17. Section 7.12 (Withdrawals Prior to Termination of Employment and After Age 59-1/2) is hereby deleted and replaced with the following:

     (a) A Participant who has attained age 59-1/2 may elect to withdraw amounts from his Before-Tax Account, After-Tax Account, Rollover Account, Matching Account, Salix Before-Tax Account, Salix Rollover Account, Coherent Before-Tax Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account and Vinci Account as of the Valuation Date coinciding with or immediately preceding the date of such withdrawal; provided, however, that during a Plan Year not more than one withdrawal shall be made pursuant to this Section 7.12; provided, further, for Plan Years starting before December 31, 2001, that during a Plan Year, not more than an aggregate of two withdrawals shall be made by a Coherent Participant from his Coherent Accounts under this Section 7.12, Section 7.10 (Distribution of Participant’s After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover

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Account, Ocular Account, Vivace Account, AFC Account and Vinci Account Prior to Termination of Employment) and Section 7.13 (Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals).

     (b) Withdrawals made pursuant to this Section 7.12 shall be charged against the Participant’s Accounts in the following order:

     (i) Pre-1987 After-Tax Account;

     (ii) Post-1986 After-Tax Account;

     (iii) Rollover Account, Ocular Account, Vivace Account, AFC Account, or Vinci Account;

     (iv) Matching Account;

     (v) Before-Tax Account;

     (vi) Salix Before-Tax Account or Coherent Before-Tax Account;

     (vii) Salix Rollover Account or Coherent Rollover Account.

     and made from the separate Funds in which such Accounts are invested pursuant to procedures established by the Administrative Committee, subject to the limitations or restrictions thereon imposed by the sponsor(s) of the respective Funds or by Section 5.2 (Common Fund).

     18. Section 7.13 (Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals) subsection (a) is hereby deleted and replaced with the following:

     (a) Withdrawals Prior to Age 59 1/2. Effective for Plan Years starting on or after December 31, 2001, no withdrawals will be allowed for Participants prior to the age of 59 1/2, except as provided in subsection (b) below. For Plan Years prior to January 1, 2002, a Coherent Participant who has completed at least five (5) Years of Service may elect to withdraw all or a portion of his Coherent Employer Account and Coherent Rollover Account. Withdrawals made pursuant to this subsection 7.13(a) shall be charged against the Coherent Participant’s Coherent Accounts in the following order; provided, however, that during a Plan Year not more than two withdrawals from a Coherent Participant’s Coherent Accounts shall be made pursuant to this Section 7.13, Section 7.10 (Distribution of Participant’s After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account and Vinci Account Prior to Termination of Employment) and Section 7.12 (Withdrawals Prior to Termination of Employment and After Age 59-1/2).

     19. Section 7.13 (Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals) subsection (b) is hereby deleted and replaced with the following:

     (b) Hardship. A Participant who has not attained age 59 1/2 may, upon the determination by the Administrative Committee that he has incurred a financial hardship, make a hardship withdrawal from his Before-Tax Contributions and Matching Contributions (together with any

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income allocated to his Before-Tax Account and Matching Account as of December 31, 1988), After-Tax Account, Rollover Account, Salix Before-Tax Account, Salix Rollover Account, Coherent Before-Tax Account, Coherent Rollover Account, Ocular Account, Vivace Account, AFC Account and Vinci Account (but only to the extent of the pre-tax contributions made and pre-1989 earnings allocated thereto); provided, however, that after December 31, 2003, Matching Contributions and funds in the Matching Account will not be available for hardship withdrawal.

     20. In all other respects, said Program is ratified and approved. If there is a conflict between the terms as stated in the Program and the terms as stated in this Amendment, the terms stated in this Amendment shall prevail.

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EX-10.39

Exhibit 10.39

Stock Award Agreement

Type(s) of Award:	Stock options, including without limitation, global stock options and key contributor stock options; and/or restricted stock units (“RSUs”).
	When vested, each stock option entitles the holder to purchase one share of Tellabs common stock at the applicable option exercise price as set forth in the Award Statement. When vested, each RSU entitles the holder to receive one share of Tellabs common stock for each vested RSU.
Vesting:	The date(s) upon which the stock options become exercisable are set forth on the Award Statement, together with the expiration date of the option. The date(s) upon which the RSUs vest are set forth on the Award Statement. In the event of termination of employment due to death or disability, or upon a Change in Control, the options and RSUs will become fully vested.
Payment:	The option may be exercised by delivering a written notice, including an electronic notice, to the Company providing the number of option shares to be exercised and accompanied by full payment for the option shares, including any tax withholding due. The option price may be paid to the Company in full in cash or check made payable to the Company, by wire transfer, or by tendering previously-acquired shares which have been held for a period of not less than six months. No payment is required with respect to RSUs.
Effect of Termination of Employment	Except for termination due to death or disability, no further vesting will occur after termination of employment, and all unvested options and RSUs will be forfeited and/or cancelled.
	Vested stock options may be exercised for a period of three months following termination of employment, seven months if termination occurs after a Change in Control, or one year if termination is due to death or disability. However, in no event may an option be exercised after the expiration date set forth on the Award Statement.
U.S. Federal Income Tax Considerations:	The following discussion is a summary of certain current U.S. federal income tax consequences relating to stock options and RSUs.
	Stock Options. No income is recognized upon the grant of a nonqualified stock option. Upon exercise, ordinary income is

	recognized in an amount equal to the excess of the fair market value of a share of common stock on the date of exercise over the exercise price multiplied by the number of options exercised. A subsequent sale or exchange of such shares will result in gain or loss measured by the difference between (a) the exercise price, increased by any compensation reported upon the participant’s exercise of the option, and (b) the amount realized on such sale or exchange. Any gain or loss will be capital in nature if the shares were held as a capital asset and will be long-term if such shares were held for more than one year.
	Restricted Stock Units. No income is recognized upon receipt of an award of RSUs. Upon vesting, income equal to the fair market value of common stock issued is recognized. The capital gain or loss holding period for any common stock distributed under an award will begin when ordinary income is recognized, and any subsequent capital gain or loss will be measured by the difference between the ordinary income recognized and the amount received upon sale or exchange of the shares.
Transferability:	No option or RSU 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. All options granted under the Plan are exercisable only by you during your lifetime and by your designated beneficiary in the event of your death.
Voting Rights/Dividends:	Since stock options and RSUs do not represent actual shares, no voting rights arise upon receipt of stock options or RSUs. Dividends, if any, that would have been paid on the underlying shares will be paid when the stock option is exercised or when the RSUs vest and such shares are distributed.
Tax Withholding:	The holder will make appropriate arrangements with the Company for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise. The Company may deduct or withhold from shares issuable upon exercise of options or the vesting of RSUs, a number of shares having a fair market value equal to the amount sufficient to satisfy the minimum statutory Federal, state and local tax (including the FICA and Medicare tax obligation) withholding required by law with respect to the exercise or distribution of shares made under or as a result of the Plan.
Scope of Terms:	This discussion does not purport to be complete, and does not cover, among other things, foreign, state and local tax treatment. For employees outside the United States the Company may modify the provisions of these terms to comply with applicable law, regulation or accounting rules.

Stock Award Statement

Notice is hereby given of the following stock option grant (the “Option”) to purchase shares of the Common Stock of Tellabs, Inc. (the “Company”):

Holder:	Grant Date:
Number of Option Shares:	Exercise Price:
Vesting Commencement Date:	Expiration Date:
Type of Option:	Grant Number:
SAP ID:	Band:
Location:	Hire Date:

Exercise Schedule: The Option shall become exercisable with respect to twenty percent (20%) of the Option Shares upon Holder’s completion of one (1) year of Service measured from the Vesting Commencement Date, twenty percent (20%) of the Options Shares upon Holder’s completion of two (2) years of Service measured from the Vesting Commencement Date and sixty percent (60%) of the Option Shares upon Holder’s completion of three (3) years of Service measured from the Vesting Commencement Date.

This Option was issued from the Tellabs, Inc. 2004 Incentive Compensation Plan (the “Plan”). If you accept the terms of this Option, you shall be deemed to have consented to be bound by all of the terms and conditions of this Stock Award Statement, which includes the accompanying Stock Award Agreement and the Plan. You can access the Plan and the Summary Plan Description (SPD) via HROnline at http://hronline.hq.tellabs.com. If any differences should arise between this Stock Award Statement and the Plan, then the Plan will govern.

No Employment or Service Contract. Nothing in this Statement or in the attached Stock Award Agreement or in the Plan shall confer upon Holder any right to continue in Service in any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Holder) or of Holder, which rights are hereby expressly reserved by each, to terminate Holder’s Service at any time for any reason, with or without cause.

Dated:	TELLABS, INC.
	By:
	Title:	Executive Vice President, Human Resources
	OPTIONEE:
	Address:
ATTACHMENTS:
Stock Award Agreement

This Stock Award Statement, including the accompanying Stock Award Agreement, constitutes part of a prospectus covering securities registered under the Securities Act of 1933, as amended.

Stock Award Statement

Notice is hereby given of the following stock option grant (the “Option”) to purchase shares of the Common Stock of Tellabs, Inc. (the “Company”):

Holder:	Grant Date:
Number of Option Shares:	Exercise Price:
Vesting Commencement Date:	Expiration Date:
Type of Option:	Grant Number:
SAP ID:	Band:
Location:	Hire Date:

Exercise Schedule: The Option shall become exercisable with respect to thirty-three (33%) of the Option Shares upon Holder’s first anniversary of the Vesting Commencement Date and shall become exercisable for the balance of the Option shares in twenty-four (24) successive equal monthly installments upon Optionee’s completion of each additional month of service over the twenty-four (24) month period measured from the first anniversary of the Vesting Commencement Date.

This Option was issued from the Tellabs, Inc. 2004 Incentive Compensation Plan (the “Plan”). If you accept the terms of this Option, you shall be deemed to have consented to be bound by all of the terms and conditions of this Stock Award Statement, which includes the accompanying Stock Award Agreement and the Plan. You can access the Plan and the Summary Plan Description (SPD) via HROnline at http://hronline.hq.tellabs.com. If any differences should arise between this Stock Award Statement and the Plan, then the Plan will govern.

No Employment or Service Contract. Nothing in this Statement or in the attached Stock Award Agreement or in the Plan shall confer upon Holder any right to continue in Service in any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Holder) or of Holder, which rights are hereby expressly reserved by each, to terminate Holder’s Service at any time for any reason, with or without cause.

Dated:	TELLABS, INC.
	By:
	Title:	Executive Vice President, Human Resources
	OPTIONEE:
	Address:
ATTACHMENTS:
Stock Award Agreement

This Stock Award Statement, including the accompanying Stock Award Agreement, constitutes part of a prospectus covering securities registered under the Securities Act of 1933, as amended.

EX-10.40

EXHIBIT 10.40

ADVANCED FIBRE COMMUNICATIONS

1993 STOCK OPTION/STOCK ISSUANCE PLAN
(AS AMENDED THROUGH SEPTEMBER 15, 1994)

ARTICLE I

GENERAL PROVISIONS

1.   PURPOSE

     A. This 1993 Stock Option/Stock Issuance Plan, as amended (“Plan”) is intended to promote the interests of Advanced Fibre Communications, a California corporation (the “Corporation”), by providing eligible individuals who are responsible for the management, growth and financial success of the Corporation or who otherwise render valuable services to the Corporation with the opportunity to acquire a proprietary interest, or increase their proprietary interest, in the Corporation and thereby provide them with an incentive to remain in the service of the Corporation (or any parent or subsidiary corporation).

     B. For purposes of the Plan, the following provisions shall be applicable in determining the parent and subsidiary corporations of the
Corporation:

          (i) Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a PARENT corporation of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

          (ii) Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a SUBSIDIARY of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

2.   STRUCTURE OF THE PLAN

     A. The Plan shall be divided into two (2) separate components: the Option Grant Program specified in Article II and the Stock Issuance Program specified in Article III. Under the Option Grant Program, eligible individuals may, at the discretion of the Plan Administrator, be granted options to purchase shares of the Common Stock (as defined below) at a discount of up to fifteen percent (15%) of the Fair Market Value of such shares on the grant date. Such securities may be fully vested when issued or may vest

over time. Under the Stock Issuance Program, eligible individuals may effect immediate purchases of the Common Stock (as defined below) at discounts from the Fair Market Value of such shares of up to fifteen percent (15%). Such shares may be fully vested when issued or may vest over time.

     B. The provisions of Articles I and IV of the Plan shall apply to both the Option Grant Program and the Stock Issuance Program and shall
accordingly govern the interests of all individuals under the Plan.

3.   ADMINISTRATION OF THE PLAN

     A. The Plan shall be administered by the Corporation’s Board of Directors (the “Board”). The Board, however, may at any time appoint a committee (“Committee”) of two (2) or more Board members and delegate to such Committee one or more of the administrative powers allocated to the Board pursuant to the provisions of the Plan. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee.

     B. The Plan Administrator (either the Board or the Committee, to the extent the Committee is at the time responsible for the administration of the Plan) shall have full power and authority (subject to the express provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper plan administration and to make such determinations under, and issue such interpretations of, the Plan and any outstanding option grants or share issuances as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest under the Plan or any outstanding option or share issuance.

4.   OPTION GRANTS AND SHARE ISSUANCES

     A. The persons eligible to receive option grants pursuant to the Option Grant Program (“Optionee”) and/or share issuances under the Stock
Issuance Program (“Participant”) are limited to the following:

          (i) employees (including officers and directors) of the Corporation (or its parent or subsidiary corporations) who are responsible for the management, growth and financial success of the Corporation (or its parent or subsidiary corporations);

          (ii) non-employee members of the Board or the non-employee members of the board of directors of any parent or subsidiary corporations; and

          (iii) consultants who provide valuable services to the Corporation (or its parent or subsidiary corporations).

2.

     B. The Plan Administrator shall have full authority to determine, (I) with respect to the option grants made under the Plan, which eligible individuals are to receive option grants, the number of shares to be covered by each such grant, the status of the granted option as either an incentive stock option (“Incentive Option”) which satisfies the requirements of Section 422 of the Internal Revenue Code or a non-statutory option not intended to meet such requirements, the time or times at which each granted option is to become exercisable and the maximum term for which the option may remain outstanding, and (II) with respect to share issuances under the Stock Issuance Program, the number of shares to be issued to each Participant, the vesting schedule (if any) to be applicable to the issued shares, and the consideration to be paid by the individual for such shares.

     C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with Article II of the Plan or to effect share issuances in accordance with Article III of the Plan.

5.   STOCK SUBJECT TO THE PLAN

     A. The stock issuable under the Plan shall be shares of the Corporation’s authorized but unissued or reacquired common stock (“Common Stock”). The maximum number of shares which may be issued over the term of the Plan shall not exceed 850,000 shares. The total number of shares issuable under the Plan shall be subject to adjustment from time to time in accordance with the provisions of Section 5.C of this Article I.

     B. Shares subject to the unexercised portion of any outstanding options under the Plan which expire or terminate prior to exercise in full or which are otherwise cancelled in accordance with the cancellation-regrant provisions of Section 4 of Article II will be available for subsequent option grants or stock issuances under the Plan. Shares issued under either the Option Grant Program or the Stock Issuance Program (whether as vested or unvested shares) and repurchased by the Corporation shall NOT be available for subsequent option grants or stock issuances under the Plan.

     C. In the event any change is made to the Common Stock issuable under the Plan by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the aggregate number and/or class of shares issuable under the Plan and (ii) the aggregate number and/or class of shares and the option price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.

     D. Common Stock issuable under the Plan, whether under the Option Grant Program or the Stock Issuance Program, may be subject to such restrictions on transfer, repurchase rights or other restrictions as may be determined by the Plan Administrator.

3.

ARTICLE II

OPTION GRANT PROGRAM

1.   TERMS AND CONDITIONS OF OPTIONS

     Options granted pursuant to the Plan shall be authorized by action of the Plan Administrator and may, at the Plan Administrator’s discretion, be either Incentive Options or nonstatutory options. Individuals who are not Employees (as defined in subsection (c) below) may only be granted non-statutory options. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; PROVIDED, however, that each such instrument shall comply with the terms and conditions specified in Sections 1 and 3 of this Article II. Each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section 2 of this Article II.

     A. OPTION PRICE.

          (1) The option price per share shall be fixed by the Plan Administrator. In no event, however, shall the option price per share be less than eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the date of the option grant.

          (2) If the individual to whom the option is granted is the owner of stock (as determined under Section 424(d) of the Internal Revenue Code) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation or any parent or subsidiary corporation (such individual to be designated a “10% Shareholder”), then the option price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of one share of Common Stock on the date of the option grant.

          (3) The option price shall become immediately due upon exercise of the option and shall, subject to the provisions of Article IV, Section 1, be payable in cash or check drawn to the Corporation’s order.

     Should the Corporation’s outstanding Common Stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “1934 Act”) at the time the option is exercised, then the option price may also be paid as follows:

            a. in shares of Common Stock held by Optionee for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the exercise date; or

            b. through a special sale and remittance procedure pursuant to which Optionee is to concurrently provide irrevocable written
instructions (I) to

4.

a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, an amount sufficient to cover the aggregate option price payable for the purchased shares plus all applicable Federal, state, and local income and employment taxes required to be withheld by the Corporation by reason of such purchase and (II) concurrently to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction.

          Except to the extent such sale and remittance procedure is utilized, payment of the option price must occur at the time the option is
exercised.

          (4) The Fair Market Value of a share of Common Stock on any relevant date under the Plan shall be determined in accordance with the
following provisions:

            a. If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded on the Nasdaq National Market, the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers through its Nasdaq system or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

            b. If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

            c. If the Common Stock is at the time neither listed nor admitted to trading on any stock exchange nor traded on the Nasdaq National Market, then such Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate.

     B. TERM AND EXERCISE OF OPTIONS. Each option granted under the Plan shall be exercisable at such time or times, during such period, and for such number of shares as shall be determined by the Plan Administrator and set forth in the stock option agreement evidencing such option. However, no option granted under the Plan shall have a term in excess of ten (10) years from the grant date, and no option granted to a 10% Shareholder shall have a term in excess of five (5) years from the grant date. During the

5.

lifetime of Optionee, the option shall be exercisable only by Optionee and shall not be assignable or transferable by Optionee otherwise than by will or by the laws of descent and distribution following Optionee’s death.

     C. TERMINATION OF SERVICE.

          (1) Except to the extent otherwise provided pursuant to this subsection, the following provisions shall govern the exercise period applicable to any options held by Optionee at the time of cessation of Service or death:

            a. Should Optionee cease to remain in Service for any reason other than death or Disability, then the period during which each outstanding option held by such Optionee is to remain exercisable shall be limited to the three (3)-month period following the date of such cessation of Service.

            b. Should such Service terminate by reason of Disability, then the period during which each outstanding option held by the optionee is to remain exercisable shall be limited to the six (6)-month period following the date of such cessation of Service. However, should such Disability be deemed to constitute Permanent Disability, then the period during which each outstanding option held by the optionee is to remain exercisable shall be extended by an additional six (6) months so that the exercise period shall be limited to the twelve (12)-month period following the date of the optionee’s cessation of Service by reason of such Permanent Disability.

            c. Should Optionee die while holding one or more outstanding options, then the period during which each such option is to remain exercisable shall be limited to the twelve (12)-month period following the date of Optionee’s death. During such limited period, the option may be exercised by the personal representative of Optionee’s estate or by the person or persons to whom the option is transferred pursuant to Optionee’s will or in accordance with the laws of descent and distribution.

            d. Under no circumstances, however, shall any such option be exercisable after the specified expiration date of the option term.

            e. During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be exercisable for any vested shares for which the option has not been exercised. However, the option shall, immediately upon Optionee’s cessation of Service, terminate and cease to be outstanding with respect to any option shares for which the option is not at that time exercisable or in which Optionee is not otherwise at that time vested.

6.

          (2) The Plan Administrator shall have full power and authority to extend the period of time for which the option is to remain exercisable following Optionee’s cessation of Service or death from the limited period in effect under this Article II to such greater period of time as the Plan Administrator shall deem appropriate; PROVIDED, that in no event shall such option be exercisable after the specified expiration date of the option term.

     For purposes of the Plan, SERVICE shall mean the provision of services to the Corporation (or one or more of its parent or subsidiary corporations) by an individual in the capacity of an Employee, a non-employee member of the board of directors, or a consultant. Optionee shall be considered to be an EMPLOYEE for so long as such individual remains in the employ of the Corporation (or one or more of its parent or subsidiary corporations).

     For purposes of the Plan, DISABILITY shall mean the inability of an individual to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of not less than twelve (12) months.

     D. SHAREHOLDER RIGHTS. An Optionee shall have none of the rights of a shareholder with respect to any shares covered by the option until such Optionee shall have exercised the option and paid the option price.

     E. REPURCHASE RIGHTS. The shares of Common Stock issued under the Plan shall be subject to certain repurchase rights of the Corporation in accordance with the following provisions:

          (1) UNVESTED SHARES. The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock under the Plan. Should Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the option price paid per share, all or (at the discretion of the Corporation and with the consent of Optionee) any of those unvested shares. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the instrument evidencing such repurchase right. In no event, however, may the Plan Administrator impose a vesting schedule upon any option granted under the Plan or any shares of Common Stock issued under the Plan which is more restrictive than twenty percent (20%) per year annual vesting, beginning one year after the grant date of the option.

     All outstanding repurchase rights under the Plan shall terminate automatically upon the occurrence of any Corporate Transaction under Section 3 of this Article II, except

7.

to the extent the repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction.

          (2) FIRST REFUSAL RIGHTS. Until such time as the Corporation’s outstanding shares of Common Stock are first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed sale or other disposition by Optionee (or any successor in interest by reason of purchase, gift or other mode of transfer) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable by the Corporation (or its assignees) in accordance with the terms and conditions established by the Plan Administrator and set forth in the instrument evidencing such right.

2.   INCENTIVE OPTIONS

     The terms and conditions specified below shall be applicable to all Incentive Options granted under the Plan. Incentive Options may only be granted to individuals who are Employees. Options which are specifically designated as “nonstatutory” options when issued under the Plan shall NOT be subject to such terms and conditions.

     A. OPTION PRICE. The option price per share of the Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the grant date.

     B. DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Corporation or any parent or subsidiary corporation) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options under the Federal tax laws shall be applied on the basis of the order in which such options are granted.

     Except as modified by the preceding provisions of this Section 2, all the provisions of the Plan shall be applicable to the Incentive Options granted hereunder.

3.   CORPORATE TRANSACTION

     A. In the event of one or more of the following shareholder-approved transactions (“Corporate Transaction”):

   (i) a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to
change the State of the Corporation’s incorporation;

8.

   (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of
the Corporation; or

   (iii) any reverse merger in which the Corporation is the surviving entity but in which all of the Corporation’s outstanding voting stock is
transferred to the acquiring entity or its wholly-owned subsidiary,

then each option outstanding under the Plan shall terminate upon the consummation of such Corporate Transaction and cease to be exercisable, unless assumed by the successor corporation or parent thereof.

     B. Each outstanding option which is assumed in connection with the Corporate Transaction or is otherwise to continue in effect shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would be issuable, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Common Stock as are subject to such option immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the option price payable per share, provided the aggregate option price payable for such securities shall remain the same. Appropriate adjustments shall also be made to the class and number of securities available for issuance under the Plan following the consummation of such Corporate Transaction.

     C. The grant of options under this Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

4.   CANCELLATION AND NEW GRANT OF OPTIONS

     The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected Optionees, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options under the Plan covering the same or different numbers of shares of Common Stock but having an option price per share not less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the new grant date (or one hundred percent (100%) of such Fair Market Value in the case of an Incentive Option or, in the case of an option grant to a 10% Shareholder, not less than one hundred and ten percent (110%) of such Fair Market Value).

5.   EXTENSION OF EXERCISE PERIOD

     The Plan Administrator shall have full power and authority to extend (either at the time the option is granted or at any time while the option remains outstanding) the period of time for which the option is to remain exercisable following Optionee’s cessation of Service, from the limited period otherwise applicable under subsection 1(c) of Article II, to such greater period of time as the Plan Administrator may deem appropriate under the

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circumstances. In no event, however, shall such option be exercisable after the specified expiration date of the option term.

6.   CASH-OUT OF OPTIONS

     A. One or more Optionees may, in the Plan Administrator’s sole discretion, be granted limited cash-out rights to operate in tandem with their outstanding options under the Plan; such limited cash-out rights shall be exercisable only if the Corporation’s outstanding Common Stock is registered under Section 12(g) of the 1934 Act and Optionee is subject to the short-swing profit restrictions of the Federal securities laws. Any option with such a limited right in effect for at least six (6) months shall automatically be cancelled upon the acquisition of fifty percent (50%) or more of the Corporation’s outstanding Common Stock (excluding for purposes of calculating such percent the Common Stock holdings of officers and directors of the Corporation who are subject to the short-swing profit restrictions of the Federal securities laws) pursuant to a tender or exchange offer made by a person or group of related persons (other than the Corporation or a person that directly or indirectly controls, is controlled by or is under common control with the Corporation) which the Board does not recommend the Corporation’s shareholders to accept. In return for the cancelled option, Optionee shall be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Cash-Out Price of the shares of Common Stock in which Optionee is vested under the cancelled option over (ii) the aggregate option price payable for such vested shares. The cash distribution payable upon such cancellation shall be made within five (5) days following the completion of such tender or exchange offer, and neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such cancellation and distribution.

     B. For purposes of calculating the cash distribution, the Cash-Out Price per share of the vested Common Stock subject to the cancelled option shall be deemed to be equal to the GREATER of (i) the value per share on the date of surrender, as determined in accordance with the valuation provisions of subsection 1(a)(4) of Article II, or (ii) the highest reported price per share paid in effecting the tender or exchange offer. However, if the cancelled option is an Incentive Option, then the Cash-Out Price shall not exceed the value per share determined under clause (i) above.

     C. The shares of Common Stock subject to any option cancelled for an appreciation distribution in accordance with this Section 6 shall NOT be available for subsequent option grants or share issuances under the Plan.

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ARTICLE III

STOCK ISSUANCE PROGRAM

1.   TERMS AND CONDITIONS OF STOCK ISSUANCES

     Shares of Common Stock shall be issuable under the Stock Issuance Program through direct and immediate issuances without any intervening stock option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement (“Issuance Agreement”) which complies with each of the terms and conditions of this Article III.

     A. ISSUE PRICE.

          (1) The purchase price per share shall be fixed by the Plan Administrator, but in no event shall it be less than eighty-five percent (85%) of the Fair Market Value of a share of Common Stock at the time of issuance. However, if any individual to whom a share issuance is made hereunder is a 10% Shareholder (as defined in subsection 1(a)(2) of Article II), then the purchase price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of a share of Common Stock at the time of issuance. Fair Market Value shall be determined in accordance with Article II, Section 1(A)(4).

          (2) Shares shall be issued under the Plan for such consideration as the Plan Administrator shall from time to time determine, provided that, except as set forth in Article IV, Section 1, in no event shall shares be issued for consideration other than

               (A) cash or check payable to the Corporation, or

               (B) past services rendered to the Corporation (or any parent or subsidiary corporation).

     B. VESTING SCHEDULE.

          (1) The interest of a Participant in the shares of Common Stock issued to him/her under the Plan may, in the absolute discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments in accordance with the vesting provisions of subsection (B)(4). Except as otherwise provided in subsection (B)(2), the Participant may not transfer any purchased shares in which he/she does not have a vested interest. Accordingly, all unvested shares issued under the Plan shall bear the restrictive legend specified in subsection (C)(1), until such legend is removed in accordance with subsection (C)(2). The Participant, however, shall have all the rights of a shareholder with respect to the shares of Common Stock issued to him/her hereunder, whether or not his/her interest in such shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any cash dividends or other distributions paid or made with respect to such shares. Any new, additional or different shares of stock

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or other property (including money paid other than as a regular cash dividend) which the holder of unvested Common Stock may have the right to receive by reason of a stock dividend, stock split, reclassification or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements under subsection (B)(4) applicable to the unvested Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

          (2) As used in this Article III, the term “transfer” shall include (without limitation) any sale, pledge, encumbrance, gift or other disposition of such shares. However, the Participant shall have the right to make a gift of unvested shares acquired under the Stock Issuance Program to his/her spouse, parents or issue or to a trust established for such spouse, parents or issue, provided the transferee of such shares delivers to the Corporation a written agreement to be bound by all the provisions of the Plan and the Issuance Agreement executed by the Participant at the time of his/her acquisition of the gifted shares.

          (3) Should the Participant cease Service for any reason while his/her interest in the Common Stock remains unvested, then the Corporation shall have the right to repurchase, at the original purchase price paid by the Participant, all or (at the discretion of the Corporation and with the consent of the Participant) any shares in which the Participant is not at the time vested, and the Participant shall thereafter cease to have any further shareholder rights with respect to the repurchased shares.

          (4) Any shares of Common Stock issued under the Stock Issuance Program which are not vested at the time of such issuance shall vest in one or more installments thereafter. The elements of the vesting schedule, namely the performance or service objectives to be completed or achieved, the number of installments in which the shares are to vest, the interval or intervals (if any) which are to lapse between installments and the effect which death, Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and specified in the Issuance Agreement. In no event, however, may the Plan Administrator impose a vesting schedule upon any stock issuance effected under the Stock Issuance Program which is more restrictive than twenty percent (20%) per year annual vesting, beginning one year after the issue date of the Common Stock.

          (5) The Plan Administrator may in its discretion elect not to exercise, in whole or in part, its repurchase rights with respect to any unvested Common Stock or other assets which would otherwise at the time be subject to repurchase pursuant to the provisions of subsection (B)(3).

          (6) No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until, in the opinion of counsel for the Corporation (or its successor in the event of any Corporate Transaction), there shall have been compliance with all applicable requirements of the Federal and state securities laws and all other applicable legal and regulatory requirements.

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     C. STOCK LEGENDS.

          (1) Each certificate representing unvested shares of Common Stock (or other securities) issued under the Stock Issuance Program shall bear a restrictive legend substantially as follows:

     “The securities represented by this certificate are unvested and are accordingly subject to repurchase by the Corporation pursuant to the provisions of the Issuance Agreement between the Corporation and the registered holder of the securities (or his/her predecessor in interest). Such agreement imposes restrictions on the transferability of the securities represented by this certificate and grants certain repurchase rights to the Corporation in the event the registered holder (or predecessor in interest) terminates his/her employment or service with the Corporation. A copy of such agreement is on file at the principal office of the Corporation.”

          (2) As the interest of the Participant vests with respect to any stock certificate representing shares acquired under the Stock Issuance Program, the Corporation shall, upon the Participant’s delivery of such certificate during the period or periods designated each year by the Plan Administrator, issue a new certificate for the vested shares without the restrictive legend of subsection (c)(1) and a second certificate for the balance of the shares with such legend. If the Corporation repurchases any unvested shares of the Participant pursuant to the provisions of subsection (b)(3), the Corporation shall at the time the repurchase is effected deliver a new certificate, without the restrictive legend of subsection (c)(1), representing the number of shares (if any) in which the Participant is vested and which are accordingly no longer subject to repurchase by the Corporation.

     D. RIGHT OF FIRST REFUSAL. Until such time as the Corporation’s outstanding shares of Common Stock are first registered under Section 12(g) of the 1934 Act, the Corporation shall have a right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest by reason of purchase, gift or other mode of transfer) of one or more shares of such Common Stock. Such right of first refusal shall be exercisable by the Corporation (or its assignees) in accordance with the terms and conditions specified in the instrument evidencing such right.

2.   CORPORATE TRANSACTION

     All of the Corporation’s outstanding repurchase rights under this Article III shall automatically terminate upon the occurrence of a Corporate Transaction (as defined in Section 3 of Article II), except to the extent the Corporation’s outstanding repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction.

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ARTICLE IV

MISCELLANEOUS

1.   LOANS

     A. The Plan Administrator may assist any Optionee or Participant (including an Optionee or Participant who is an officer or director of the Corporation) in the exercise of one or more options granted to such Optionee under Article II or the purchase of one or more shares issued to such Participant under Article III, including the satisfaction of any Federal, state and local income and employment tax obligations arising therefrom, by:

          (i) authorizing the extension of a loan from the Corporation to such Optionee or Participant, or

          (ii) permitting Optionee or Participant to pay the option price or purchase price for the purchased Common Stock in installments over a period of years.

     B. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) shall be established by the Plan Administrator in its sole discretion. Loans or installment payments may be granted with or without security or collateral. However, any loan made to a consultant or other non-employee advisor must be secured by property other than the purchased shares of Common Stock. In all events the maximum credit available to each Optionee or Participant may not exceed the SUM of (i) the aggregate option price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by Optionee or Participant in connection with such exercise or purchase.

     C. The Plan Administrator may, in its absolute discretion, determine that one or more loans extended under the financial assistance program shall be subject to forgiveness by the Corporation in whole or in part upon such terms and conditions as the Board in its discretion deems appropriate.

2.   NO EMPLOYMENT OR SERVICE RIGHTS

     Nothing under the Plan shall confer upon Optionee or the Participant any right to continue in the service or employ of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining such Optionee or Participant) for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining such Optionee or Participant) or of Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate the Service of Optionee or Participant at any time for any reason whatsoever, with or without cause.

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3.   AMENDMENT OF THE PLAN AND AWARDS

     A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects whatsoever. However, no such amendment or modification shall adversely affect the rights and obligations of an Optionee with respect to options at the time outstanding under the Plan, nor adversely affect the rights of any Participant with respect to Common Stock issued under the Plan prior to such action, unless Optionee or Participant consents to such amendment. In addition, the Board shall not, without the approval of the Corporation’s shareholders, amend the Plan to (i) materially increase the maximum number of shares issuable under the Plan (except for permissible adjustments under Article I, Section 5(C), (ii) materially increase the benefits accruing to individuals who participate under the Plan, or (iii) materially modify the eligibility requirements for participation under the Plan.

     B. (i) Options to purchase shares of Common Stock may be granted under the Option Grant Program and (ii) shares of Common Stock may be issued under the Stock Issuance Program, which are in both instances in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Option Grant Program or the Stock Issuance Program are held in escrow until there is obtained shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such shareholder approval is not obtained within twelve (12) months after the date the initial excess issuances are made, whether as stock option grants or direct stock issuances, then (I) any unexercised options representing such excess shall terminate and cease to be exercisable and (II) the Corporation shall promptly refund to Optionees and Participants the option or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.

4.   EFFECTIVE DATE AND TERM OF PLAN

     A. The Plan was initially adopted by the Board on February 9, 1993 and was approved by the Corporation’s shareholders on April 12, 1993. On September 14, 1993 the Board approved an amendment to the Plan (“the 1993 Amendment”) to authorize an increase in the aggregate number of shares of Common Stock available for issuance under the Plan from 450,000 to 650,000 shares. The increase was approved by the Corporation’s shareholders on September 27, 1993. The Board further amended the Plan, effective September 15, 1994 (“the 1994 Amendment”), to increase the aggregate number of shares authorized for issuance thereunder by an additional 200,000 shares to 850,000 shares. The increase was approved by the Corporation’s shareholders on October 14, 1994. In connection with both the 1993 and 1994 Amendments, minor technical revisions were made to the Plan to bring it into compliance with the current requirements of the California Corporations Commissioner.

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     B. The provisions of the 1993 and 1994 Amendments shall apply only to options granted under the Plan from and after the date such Amendments were adopted by the Board. Each option issued and outstanding under the Plan immediately prior to adoption of each such Amendment shall continue to be governed by the terms and conditions of the Plan (and the instrument evidencing such grant) as in effect on the date each such option was previously granted, and nothing in the 1993 or 1994 Amendments shall be deemed to affect or otherwise modify the rights or obligations of the holders of such prior options with respect to the acquisition of shares of Common Stock thereunder.

     C. The Plan shall terminate upon the EARLIER of (i) February 8, 2003 or (ii) the date on which all shares available for issuance under the Plan have been issued pursuant to the exercise of options granted under Article II or the issuance of shares under Article III. If the date of termination is determined under clause (i) above, then no options outstanding on such date under Article II and no shares issued and outstanding on such date under Article III shall be affected by the termination of the Plan, and such securities shall thereafter continue to have force and effect in accordance with the provisions of the stock option agreements evidencing such options and the stock issuance agreements evidencing the issuance of such shares.

5.   USE OF PROCEEDS

     Any cash proceeds received by the Corporation from the issuance of shares of Common Stock under the Plan shall be used for general corporate purposes.

6.   WITHHOLDING

     The Corporation’s obligation to deliver shares upon the exercise of any options granted under Article II or upon the purchase of any shares issued shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.

7.   REGULATORY APPROVALS

     The implementation of the Plan, the granting of any options under the Option Grant Program, the issuance of any shares under the Stock Issuance Program, and the issuance of Common Stock upon the exercise of the option grants made hereunder shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it.

8.   FINANCIAL REPORTS

     The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under and each participant in the Plan, unless such Optionee or participant is a key employee whose duties in connection with the Corporation assure such individual access to equivalent information.

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EX-10.41

EXHIBIT 10.41

ADVANCED FIBRE COMMUNICATIONS

STOCK OPTION AGREEMENT

WITNESSETH:

RECITALS

     A. The Board of Directors of the Corporation has adopted the Advanced Fibre Communications 1993 Stock Option/Stock Issuance Plan, as amended (the “Plan”) for the purpose of attracting and retaining the services of selected key employees (including officers and directors), non-employee members of the Board of Directors and consultants who contribute to the financial success of the Corporation or its parent or subsidiary corporations.

     B. Optionee is an individual who is to render valuable services to the Corporation or its parent or subsidiary corporations, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation’s grant of a stock option to Optionee.

     NOW, THEREFORE, it is hereby agreed as follows:

     1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement, the Corporation hereby grants to Optionee, as of the grant date (the “Grant Date”) specified in the accompanying Notice of Grant of Stock Option (the “Grant Notice”), a stock option to purchase up to that number of shares of the Corporation’s Common Stock (the “Option Shares”) as is specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term at the option price per share (the “Option Price”) specified in the Grant Notice.

     2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall expire at the close of business on the expiration date (the “Expiration Date”) specified in the Grant Notice, unless sooner terminated in accordance with Paragraph 5, 6 or 18.

     3. LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee’s death and may be exercised, during Optionee’s lifetime, only by Optionee.

     4. DATES OF EXERCISE. This option shall become exercisable for the Option Shares in one or more installments as is specified in the Grant Notice. As the option

becomes exercisable in one or more installments, the installments shall accumulate and the option shall remain exercisable for such installments until the Expiration Date or the sooner termination of the option term under Paragraphs 5, 6 or 18 of this Agreement.

     5. TERMINATION OF OPTION TERM. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be exercisable) prior to the Expiration Date should any of the following provisions become applicable:

          (i) Should Optionee cease to remain in Service for any reason (other than death or Disability) while this option is outstanding, then the period for exercising this option shall be reduced to a three (3)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date. Upon the expiration of such three (3)-month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding.

          (ii) Should Optionee die while this option is outstanding, then the personal representative of Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s will or in accordance with the laws of descent and distribution shall have the right to exercise this option. Such right shall lapse and this option shall cease to be exercisable upon the EARLIER of (a) the expiration of the twelve (12)-month period measured from the date of Optionee’s death or (b) the Expiration Date. Upon the expiration of such twelve (12)-month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding.

          (iii) Should Optionee cease Service by reason of Disability while this option is outstanding, then Optionee shall have a period of six (6) months (commencing with the date of such cessation of Service) during which to exercise this option. However, should such Disability be deemed to constitute Permanent Disability, then the period during which this option is to remain exercisable shall be extended by an additional six (6) months so that the exercise period shall be limited to the twelve (12)-month period following the date of Optionee’s cessation of Service by reason of such Permanent Disability. In no event shall this option be exercisable at any time after the Expiration Date. Upon the expiration of the applicable six (6) or twelve (12)-month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding.

NOTE: Exercise of this option on a date later than three (3) months following cessation of Service due to Disability will result in loss of favorable incentive stock option treatment, UNLESS such Disability constitutes Permanent Disability. In the event that incentive stock option treatment is not available, this option will be taxed as a non-statutory option upon exercise.

2.

          (iv) During the limited period of post-Service exercisability applicable under subparagraph (i), (ii) or (iii) above, this option may not be exercised in the aggregate for more than the number of Option Shares in which Optionee is, at the time of his/her cessation of Service, vested in accordance with the vesting schedule specified in the Grant Notice. To the extent Optionee is not vested in the Option Shares at the time of his/her cessation of Service, this option shall immediately terminate and cease to be outstanding with respect to those shares.

          (v) For purposes of this Paragraph 5 and for all other purposes under this Agreement:

     A. DISABILITY shall mean the inability of an individual to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. PERMANENT DISABILITY shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months.

     B. Optionee shall be deemed to remain in SERVICE for so long as Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an Employee, a non-employee member of the board of directors, or a consultant.

     C. Optionee shall be deemed to be an EMPLOYEE of the Corporation and to continue in the Corporation’s employ for so long as Optionee remains in the employ of the Corporation or one or more of its parent or subsidiary corporations, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

     D. A corporation shall be considered to be a SUBSIDIARY corporation of the Corporation if it is a member of an unbroken chain of corporations beginning with the Corporation, provided each such corporation in the chain (other than the last corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

     E. A corporation shall be considered to be a PARENT corporation of the Corporation if it is a member of an unbroken chain ending with the Corporation, provided each such corporation in the chain (other than the Corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

3.

     6. SPECIAL TERMINATION OF OPTION.

     A. In the event of one or more of the following stockholder-approved transactions (a “Corporate Transaction”):

     (i) a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the principal purpose of
which is to change the State of the Corporation’s incorporation; or

     (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation; or

     (iii) any reverse merger in which the Corporation is the surviving entity but in which all of the Corporation’s outstanding voting stock is
transferred to the acquiring entity or its wholly-owned subsidiary,

then this option, to the extent not previously exercised, shall terminate upon the consummation of the Corporate Transaction and cease to be exercisable, unless it is expressly assumed by the successor corporation or parent thereof.

     B. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

     7. ADJUSTMENT IN OPTION SHARES.

     A. In the event any change is made to the Corporation’s outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the total number of Option Shares subject to this option, (ii) the number of Option Shares for which this option is to be exercisable from and after each installment date specified in the Grant Notice and (iii) the Option Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

     B. If this option is to be assumed in connection with a Corporate Transaction described in Paragraph 6 or is otherwise to remain outstanding, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable to Optionee in the consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be

4.

made to the Option Price payable per share, PROVIDED the aggregate Option Price payable hereunder shall remain the same.

     8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have any of the rights of a shareholder with respect to the Option Shares until such individual shall have exercised the option and paid the Option Price.

     9. MANNER OF EXERCISING OPTION.

     A. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or in the case of exercise after Optionee’s death, Optionee’s executor, administrator, heir or legatee, as the case may be) must take the following actions:

     (i) Execute and deliver to the Secretary of the Corporation a stock purchase agreement (the “Purchase Agreement”) in substantially the form of Exhibit B to the Grant Notice.

     (ii) Pay the aggregate Option Price for the purchased shares in one or more of the following alternative forms:

          1. full payment in cash or check; or

          2. any other form which the Plan Administrator may, in its discretion, approve at the time of exercise in accordance with the provisions of paragraph 15 of this Agreement.(1)

     Should the Corporation’s outstanding Common Stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “1934 Act”) at the time the option is exercised, then the Option Price may also be paid as follows:

          3. in shares of Common Stock held by Optionee for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value (as defined below) on the Exercise Date; or

          4. to the extent exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which

(1) Authorization of a loan or installment payment method under such provisions may, under currently proposed Treasury Regulations, result in the loss of incentive stock option treatment under the Federal tax laws.

5.

Optionee is to provide irrevocable written instructions (a) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Option Price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such purchase and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction.

     (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option, if other than Optionee, have
the right to exercise this option.

       Except to the extent the sale and remittance procedure is utilized in connection with the exercise of the option, payment of the Option Price must accompany the Purchase Agreement delivered to the Corporation.

             B. For purposes of this Agreement, the Exercise Date shall be the date on which the executed Purchase Agreement shall have been delivered to the Corporation, and the Fair Market Value of a share of Common Stock on any relevant date shall be determined in accordance with subparagraphs (i) through (iii) below:

      (i) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded on the Nasdaq National Market System, the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers through the Nasdaq National Market System or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

     (ii) If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

     (iii) If the Common Stock is at the time neither listed nor admitted to trading on any stock exchange nor traded on the Nasdaq National
Market System,

6.

then such Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate.

     C. As soon after the Exercise Date as practical, the Corporation shall mail or deliver to Optionee or to the other person or persons exercising this option a certificate or certificates representing the shares so purchased and paid for, with the appropriate legends affixed thereto.

     D. In no event may this option be exercised for any fractional shares.

     10. REPURCHASE RIGHTS. THE OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE SUCH SHARES IN ACCORDANCE WITH THE TERMS AND CONDITIONS SPECIFIED IN THE PURCHASE AGREEMENT.

     11. COMPLIANCE WITH LAWS AND REGULATIONS.

     A. The exercise of this option and the issuance of Option Shares upon such exercise shall be subject to compliance by the Corporation and the Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Corporation’s Common Stock may be listed at the time of such exercise and issuance.

     B. In connection with the exercise of this option, Optionee shall execute and deliver to the Corporation such representations in writing as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and state securities laws.

     12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of Optionee and the successors and assigns of the Corporation.

     13. LIABILITY OF CORPORATION.

     A. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without shareholder approval be issued under the Plan, then this option shall be void with respect to such excess shares, unless shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of Article IV, Section 3 of the Plan.

7.

     B. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals.

     14. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation in care of the Corporate Secretary at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice. All notices shall be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

     15. LOANS. The Plan Administrator may, in its absolute discretion and without any obligation to do so, assist the Optionee in the exercise of this option by (i) authorizing the extension of a loan to the Optionee from the Corporation or (ii) permitting the Optionee to pay the exercise price for the purchased Common Stock in installments over a period of years. The terms of any such loan or installment method of payment (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion.

     16. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option.

     17. GOVERNING LAW. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State’s conflict-of-laws rules.

     18. SHAREHOLDER APPROVAL.

          If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without shareholder approval be issued under the Plan, then this option shall be void with respect to such excess shares, unless shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan.

8.

     19. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the event this option is designated an incentive stock option in the Grant Notice, the following terms and conditions shall also apply to the grant:

     A. This option shall cease to qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability (as defined in Paragraph 5) or (ii) more than one (1) year after the date Optionee ceases to be an Employee by reason of Permanent Disability.

     B. Should this option be designated as immediately exercisable in the Grant Notice, then this option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Corporation’s Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Corporation’s Common Stock for which this option or one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or its parent or subsidiary corporations) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion will first become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 19.B would not be contravened, but such deferral shall in all events end immediately prior to the effective date of a Corporate Transaction in which this option is not to be assumed, whereupon the option shall become exercisable as a non-statutory option for the balance of the Option Shares.

     C. Should this option be designated as exercisable in installments in the Grant Notice, then no installment under this option (whether annual or monthly) shall qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Corporation’s Common Stock for which such installment first becomes exercisable hereunder will, when added to the aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Corporation’s Common Stock for which one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any parent or subsidiary corporation) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should such One Hundred Thousand Dollar ($100,000) limitation be exceeded in any calendar year, this option shall nevertheless become exercisable for the excess shares in such calendar year as a non-statutory option.

9.

     20. WITHHOLDING. Optionee hereby agrees to make appropriate arrangements with the Corporation or parent or subsidiary corporation employing Optionee for the satisfaction of all Federal, state or local income tax withholding requirements and Federal social security employee tax requirements applicable to the exercise of this option.

10.

EX-10.42

EXHIBIT 10.42

ADVANCED FIBRE COMMUNICATIONS

NOTICE OF GRANT OF STOCK OPTION

     Notice is hereby given of the following stock option grant (the “Option”) to purchase shares of the Common Stock of ADVANCED FIBRE COMMUNICATIONS (the “Corporation”):

     OPTIONEE:                                                                                                     

     GRANT DATE:                                                                                                     

     GRANT NUMBER:                      OPTION PRICE: $                                          per share

     VESTING COMMENCEMENT DATE:                                                                                 

     NUMBER OF OPTION SHARES:                                                                         shares

     EXPIRATION DATE:                                                                                                     

     TYPE OF OPTION:                        Incentive Stock Option

                     Non-Statutory Stock Option

     DATE EXERCISABLE: Immediately Exercisable

VESTING SCHEDULE: The Option Shares shall be unvested and subject to repurchase by the Corporation at the Option Price paid per share. As Optionee remains in Service (as defined in the attached Stock Purchase Agreement), the Optionee shall acquire a vested interest in, and the Corporation’s Repurchase Right will accordingly lapse with respect to, (i) 25% of the Option Shares one (1) year after the Vesting Commencement Date and (ii) the balance of the Option Shares in equal successive monthly installments over each of the next thirty-six (36) months of Service thereafter. In no event will any additional Option Shares vest after the Optionee’s cessation of Service.

     Optionee understands that the Option is granted pursuant to the Corporation’s 1993 Stock Option/Stock Issuance Plan, as amended (the “Plan”). By signing below, optionee agrees to be bound by the terms and conditions of the Plan and the terms and conditions of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A. Optionee understands that any Option Shares purchased under the Option will

be subject to the terms and conditions set forth in the Stock Purchase Agreement
attached hereto as Exhibit B.

     Optionee hereby acknowledges receipt of a copy of the Plan in the form attached hereto as Exhibit C.

     REPURCHASE RIGHTS. THE OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS UPON ANY PROPOSED SALE, ASSIGNMENT, TRANSFER, ENCUMBRANCE OR OTHER DISPOSITION OF THE OPTION SHARES OR UPON TERMINATION OF SERVICE WITH THE CORPORATION. THE TERMS AND CONDITIONS OF SUCH RIGHTS ARE SPECIFIED IN THE ATTACHED STOCK PURCHASE AGREEMENT.

     NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Corporation for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation or the Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason whatsoever, with or without cause.

                                        , 199                    
  Date

ADVANCED FIBRE COMMUNICATIONS

By: ________________________________________

Title: _____________________________________

____________________________________________
Optionee

Address: ____________________________________________

____________________________________________

Exhibit A: Stock Option Agreement
Exhibit B: Stock Purchase Agreement
Exhibit C: 1993 Stock Option/Stock Issuance Plan

EXHIBIT A

STOCK OPTION AGREEMENT

EXHIBIT B

STOCK PURCHASE AGREEMENT

EXHIBIT C

1993 STOCK OPTION/STOCK ISSUANCE PLAN

EX-10.43

EXHIBIT 10.43

REPURCHASE RIGHT
RIGHT OF FIRST REFUSAL

ADVANCED FIBRE COMMUNICATIONS
STOCK PURCHASE AGREEMENT

     AGREEMENT made as of this ___day of _______, 19___, by and among Advanced Fibre Communications, a California corporation (the “Corporation”), __________________, the holder of a stock option (the “Optionee”) under the Corporation’s 1993 Stock Option/Stock Issuance Plan and ___________, the Optionee’s spouse.

I. EXERCISE OF OPTION

     1.1 EXERCISE. Optionee hereby purchases __________shares (“Purchased Shares”) of the Corporation’s common stock (“Common Stock”) pursuant to that certain option (“Option”) granted Optionee on __________, 19___ (“Grant Date”) to purchase up to __________shares of the Common Stock (“Total Purchasable Shares”) under the Corporation’s 1993 Stock Option/Stock Issuance Plan, as amended (the “Plan”) at an exercise price of $__________per share (“Option Price”).

     1.2 PAYMENT. Concurrently with the delivery of this Agreement to the Corporate Secretary of the Corporation, Optionee shall pay the Option Price for the Purchased Shares in accordance with the provisions of the agreement between the Corporation and Optionee evidencing the Option (the “Option Agreement”) and shall deliver whatever additional documents may be required by the Option Agreement as a condition for exercise, together with a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares.

     1.3 DELIVERY OF CERTIFICATES. The certificates representing the Purchased Shares hereunder shall be held in escrow by the Corporate Secretary of the Corporation in accordance with the provisions of Article VII.

     1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation actually exercises its repurchase right, rights of first refusal or special purchase right under this Agreement, Optionee (or any successor in interest) shall have all the rights of a shareholder (including voting and dividend rights) with respect to the Purchased Shares, including the Purchased Shares held in escrow under Article VII, subject, however, to the transfer restrictions of Article IV.

II. SECURITIES LAW COMPLIANCE

     2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not been registered under the Securities Act of 1933, as amended (the “1933 Act”), and are accordingly being issued to Optionee in reliance upon the exemption from such registration provided by Rule 701 of the Securities and Exchange Commission (the “SEC”) for stock issuances under compensatory benefit plans such as the Plan. Optionee hereby acknowledges previous receipt of a copy of the documentation for such Plan in the form of Exhibit C to the Notice of Grant of Stock Option (the “Grant Notice”) accompanying the Option Agreement.

     2.2 RESTRICTED SECURITIES.

     A. Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the Purchased Shares for an indefinite period and that Optionee is aware that Rule 144 of the SEC issued under the 1933 Act is not presently available to exempt the sale of the Purchased Shares from the registration requirements of the 1933 Act.

     B. Upon the expiration of the ninety (90)-day period immediately following the date on which the Corporation first becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Purchased Shares, to the extent vested under Article V, may be sold (without registration) pursuant to the applicable requirements of Rule 144. If Optionee is at the time of such sale an affiliate of the Corporation for purposes of Rule 144 or was such an affiliate during the preceding three (3) months, then the sale must comply with all the requirements of Rule 144 (including the volume limitation on the number of shares sold, the broker/market-maker sale requirement and the requisite notice to the SEC); however, the two (2)-year holding period requirement of the Rule will not be applicable. If Optionee is not at the time of the sale an affiliate of the Corporation nor was such an affiliate during the preceding three (3) months, then none of the requirements of Rule 144 (other than the broker/market-maker sale requirement for Purchased Shares held for less than three (3) years following payment in cash of the Option Price therefor) will be applicable to the sale.

     C. Should the Corporation not become subject to the reporting requirements of the Exchange Act, then Optionee may, provided he/she is not at the time an affiliate of the Corporation (nor was such an affiliate during the preceding three (3) months), sell the Purchased Shares (without registration) pursuant to paragraph (k) of Rule 144 after the Purchased Shares have been held for a period of three (3) years following the payment in cash of the Option Price for such shares.

2.

     2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee shall make no disposition of the Purchased Shares (other than a permitted transfer under paragraph 4.1) unless and until there is compliance with all of the following requirements:

     (a) Optionee shall have notified the Corporation of the proposed disposition and provided a written summary of the terms and conditions of the proposed disposition.

     (b) Optionee shall have complied with all requirements of this Agreement applicable to the disposition of the Purchased Shares.

     (c) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that (i) the proposed disposition does not require registration of the Purchased Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act (including Rule 144) has been taken.

     (d) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Purchased Shares pursuant to the provisions of the Commissioner Rules identified in paragraph 2.5.

     The Corporation shall NOT be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Article II NOR (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting or dividend rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement.

     2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on disposition of the Purchased Shares, the stock certificates for the Purchased Shares will be endorsed with restrictive legends, including one or more of the following legends:

     (i) “The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a ‘no action’ letter of the SEC with respect to such sale or offer, or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer.”

3.

     (ii) “It is unlawful to consummate a sale or transfer of this security, or any interest therein, or to receive any consideration therefor, without the prior written consent of the Commissioner of Corporations of the State of California, except as permitted in the Commissioner’s Rules.”

     (iii) “The shares represented by this certificate are unvested and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated _________, 19____between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). Such agreement grants certain repurchase rights and rights of first refusal to the Corporation (or its assignees) upon the sale, assignment, transfer, encumbrance or other disposition of the Corporation’s shares or upon termination of service with the Corporation. The Corporation will upon written request furnish a copy of such agreement to the holder hereof without charge.”

     2.5 RECEIPT OF COMMISSIONER RULES. Optionee hereby acknowledges receipt of a copy of Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached as Exhibit II to this Agreement.

III. SPECIAL TAX ELECTION

     3.1 SECTION 83(B) ELECTION APPLICABLE TO THE EXERCISE OF A NON- STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant to the exercise of a NON-STATUTORY STOCK OPTION, as specified in the Grant Notice, then the Optionee understands that under Section 83 of the Internal Revenue Code of 1986, as amended (the “Code”), the excess of the fair market value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Option Price paid for such shares will be reportable as ordinary income on such lapse date. For this purpose, the term “forfeiture restrictions” includes the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right provided under Article V of this Agreement. Optionee understands that he/she may elect under Section 83(b) of the Code to be taxed at the time the Purchased Shares are acquired hereunder, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of this Agreement. Even if the fair market value of the Purchased Shares at the date of this Agreement equals the Option Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT III HERETO. OPTIONEE UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.

     3.2 CONDITIONAL SECTION 83(B) ELECTION APPLICABLE TO THE EXERCISE OF AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant to the

4.

exercise of an INCENTIVE STOCK OPTION under the Federal tax laws, as specified in the Grant Notice, then the following tax principles shall be applicable to the Purchased Shares:

     A. For regular tax purposes, no taxable income will be recognized at the time the Option is exercised.

     B. The excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (ii) the Option Price paid for the Purchased Shares will be includible in the Optionee’s taxable income for alternative minimum tax purposes.

     C. If the Optionee makes a disqualifying disposition of the Purchased Shares, then the Optionee will recognize ordinary income in the year of such disposition equal in amount to the excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (ii) the Option Price paid for the Purchased Shares. Any additional gain recognized upon the disqualifying disposition will be either short-term or long-term capital gain depending upon the period for which the Purchased Shares are held prior to the disposition.

     D. For purposes of the foregoing, the term “forfeiture restrictions” will include the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right provided under Article V of this Agreement. The term “disqualifying disposition” means any sale or other disposition(1) of the Purchased Shares within two (2) years after the Grant Date or within one (1) year after the execution date of this Agreement.

     E. In the absence of final Treasury Regulations relating to incentive stock options, it is not certain whether the Optionee may, in connection with the exercise of the Option for any Purchased Shares at the time subject to forfeiture restrictions, file a protective election under Section 83(b) of the Code which would limit (I) the Optionee’s alternative minimum taxable income upon exercise and (II) the Optionee’s ordinary income upon a disqualifying disposition, to the excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised over (ii) the Option

(1) Generally, a disposition of shares purchased under an incentive stock option includes any transfer of legal title, including a transfer by sale, exchange or gift, but does not include a transfer to the Optionee’s spouse, a transfer into joint ownership with right of survivorship if Optionee remains one of the joint owners, a pledge, a transfer by bequest or inheritance or certain tax free exchanges permitted under the Code.

5.

Price paid for the Purchased Shares. THE APPROPRIATE FORM FOR MAKING SUCH A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT III TO THIS AGREEMENT AND MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY (30) DAYS AFTER THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF PROPERLY FILED WILL ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY REGULATIONS PERMIT SUCH A PROTECTIVE ELECTION.

     3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY, AND NOT THE CORPORATION’S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be made by registered or certified mail, return receipt requested, and Optionee must retain two (2) copies of the completed form for filing with his or her Federal and state tax returns for the current tax year and an additional copy for his or her records.

IV. TRANSFER RESTRICTIONS

     4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Corporation’s Repurchase Right under Article V. In addition, Purchased Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered or otherwise made the subject of disposition in contravention of the Corporation’s First Refusal Right under Article VI. Such restrictions on transfer, however, shall NOT be applicable to (i) a gratuitous transfer of the Purchased Shares, PROVIDED AND ONLY IF the Optionee obtains the Corporation’s prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to the Optionee’s will or the laws of intestate succession or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by the Optionee in connection with the acquisition of the Purchased Shares.

     4.2 TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of one of the permitted transfers specified in paragraph 4.1 must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) both the Corporation’s Repurchase Right and the Corporation’s First Refusal Right granted hereunder and (ii) the market stand- off provisions of paragraph 4.4, to the same extent such shares would be so subject if retained by the Optionee.

     4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and VII of this Agreement, the term “Owner” shall include the Optionee and all subsequent holders of the Purchased Shares who derive their chain of ownership through a permitted transfer from the Optionee in accordance with paragraph 4.1.

6.

     4.4 MARKET STAND-OFF PROVISIONS.

     A. In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation’s initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Corporation or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of such registration statement as may be requested by the Corporation or such underwriters; PROVIDED, however, that in no event shall such period exceed one hundred-eighty (180) days. The limitations of this paragraph 4.4 shall remain in effect for the two-year period immediately following the effective date of the Corporation’s initial public offering and shall thereafter terminate and cease to have any force or effect.

     B. Owner shall be subject to the market stand-off provisions of this paragraph 4.4 PROVIDED AND ONLY IF the officers and directors of the Corporation are also subject to similar arrangements.

     C. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation’s outstanding Common Stock effected as a class without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Purchased Shares shall be immediately subject to the provisions of this paragraph 4.4, to the same extent the Purchased Shares are at such time covered by such provisions.

     D. In order to enforce the limitations of this paragraph 4.4, the Corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period.

V. REPURCHASE RIGHT

     5.1 GRANT. The Corporation is hereby granted the right (the “Repurchase Right”), exercisable at any time during the sixty (60)-day period following the date the Optionee ceases for any reason to remain in Service or (if later) during the sixty (60)-day period following the execution date of this Agreement, to repurchase at the Option Price all or (at the discretion of the Corporation and with the consent of the Optionee) any portion of the Purchased Shares in which the Optionee has not acquired a vested interest in accordance with the vesting provisions of paragraph 5.3 (such shares to be hereinafter called the “Unvested Shares”). For purposes of this Agreement, the Optionee shall be deemed to remain in Service for so long as the Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an employee, a non-employee member of the board of directors, or a consultant.

7.

     5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to the Owner of the Unvested Shares prior to the expiration of the applicable sixty (60)-day period specified in paragraph 5.1. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of notice. To the extent one or more certificates representing Unvested Shares may have been previously delivered out of escrow to the Owner, then Owner shall, prior to the close of business on the date specified for the repurchase, deliver to the Secretary of the Corporation the certificates representing the Unvested Shares to be repurchased, each certificate to be properly endorsed for transfer. The Corporation shall, concurrently with the receipt of such stock certificates (either from escrow in accordance with paragraph 7.3 or from Owner as herein provided), pay to Owner in cash or cash equivalents (including the cancellation of any purchase-money indebtedness), an amount equal to the Option Price previously paid for the Unvested Shares which are to be repurchased.

     5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under paragraph 5.2. In addition, the Repurchase Right shall terminate, and cease to be exercisable, with respect to any and all Purchased Shares in which the Optionee vests in accordance with the vesting schedule specified in the Grant Notice. All Purchased Shares as to which the Repurchase Right lapses shall, however, continue to be subject to (i) the First Refusal Right of the Corporation and its assignees under Article VI, (ii) the market stand-off provisions of paragraph 4.4 and (iii) the Special Purchase Right under Article VIII.

     5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in more than one increment so that the Optionee is a party to one or more other Stock Purchase Agreements (“Prior Purchase Agreements”) which are executed prior to the date of this Agreement, then the total number of Purchased Shares as to which the Optionee shall be deemed to have a fully-vested interest under this Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of Purchased Shares in which the Optionee would otherwise at the time be vested, in accordance with the vesting provisions of paragraph 5.3, had all the Purchased Shares been acquired exclusively under this Agreement.

     5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased by the Corporation. Accordingly, should the Repurchase Right extend to a fractional share (in accordance with the vesting provisions of paragraph 5.3) at the time the Optionee ceases Service, then such fractional share shall be added to any fractional share in which the Optionee is at such time vested in order to make one whole vested share no longer subject to the Repurchase Right.

     5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation’s outstanding Common Stock as a class effected without receipt of consideration, then any new,

8.

substituted or additional securities or other property (including money paid other than as a regular cash dividend) which is by reason of any such transaction distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number of Purchased Shares and Total Purchasable Shares hereunder and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such transaction upon the Corporation’s capital structure; PROVIDED, however, that the aggregate purchase price shall remain the same.

     5.7 CORPORATE TRANSACTION.

     A. Immediately prior to the consummation of any of the following shareholder-approved transactions (a “Corporate Transaction”):

     (i) a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the principal purpose of
which is to change the State of the Corporation’s incorporation, or

     (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation; or

     (iii) any reverse merger in which the Corporation is the surviving entity but in which all of the Corporation’s outstanding voting stock is
transferred to the acquiring entity or its wholly-owned subsidiary,

the Repurchase Right shall automatically lapse in its entirety except to the extent the Repurchase Right is to be assigned to the successor corporation (or its parent company) in connection with such Corporate Transaction.

     B. To the extent the Repurchase Right remains in effect following such Corporate Transaction, such right shall apply to the new capital stock or other property (including cash) received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation’s capital structure; PROVIDED, however, that the aggregate purchase price shall remain the same.

VI. RIGHT OF FIRST REFUSAL

     6.1 GRANT. The Corporation is hereby granted the right of first refusal (the “First Refusal Right”), exercisable in connection with any proposed transfer of the Purchased

9.

Shares in which the Optionee has vested in accordance with the vesting provisions of Article V. For purposes of this Article VI, the term “transfer” shall include any sale, assignment, pledge, encumbrance or other disposition for value of the Purchased Shares intended to be made by the Owner, but shall not include any of the permitted transfers under paragraph 4.1.

     6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner desires to accept a bona fide third-party offer for the transfer of any or all of the Purchased Shares (the shares subject to such offer to be hereinafter called the “Target Shares”), Owner shall promptly (i) deliver to the Corporate Secretary of the Corporation written notice (the “Disposition Notice”) of the terms and conditions of the offer, including the purchase price and the identity of the third-party offeror, and (ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in contravention of the provisions set forth in Articles II and IV of this Agreement.

     6.3 EXERCISE OF RIGHT. The Corporation (or its assignees) shall, for a period of twenty-five (25) days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon the same terms and conditions specified therein or upon terms and conditions which do not materially vary from those specified therein. Such right shall be exercisable by delivery of written notice (the “Exercise Notice”) to Owner prior to the expiration of the twenty-five (25)-day exercise period. If such right is exercised with respect to all the Target Shares specified in the Disposition Notice, then the Corporation (or its assignees) shall effect the repurchase of the Target Shares, including payment of the purchase price, not more than five (5) business days after delivery of the Exercise Notice; and at such time Owner shall deliver to the Corporation the certificates representing the Target Shares to be repurchased, each certificate to be properly endorsed for transfer. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and delivered to the Corporation for purchase.

     Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Corporation (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If the Owner and the Corporation (or its assignees) cannot agree on such cash value within ten (10) days after the Corporation’s receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Owner and the Corporation (or its assignees) or, if they cannot agree on an appraiser within twenty (20) days after the Corporation’s receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Owner and the Corporation. The closing shall then be held on the LATER of (i) the fifth business day following delivery of the Exercise Notice or (ii) the fifth business day after such cash valuation shall have been made.

10.

     6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not given to Owner within twenty-five (25) days following the date of the Corporation’s receipt of the Disposition Notice, Owner shall have a period of thirty (30) days thereafter in which to sell or otherwise dispose of the Target Shares to the third-party offeror identified in the Disposition Notice upon terms and conditions (including the purchase price) no more favorable to such third-party offeror than those specified in the Disposition Notice; PROVIDED, however, that any such sale or disposition must not be effected in contravention of the provisions of Article II of this Agreement. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and surrendered to the Owner. The third-party offeror shall acquire the Target Shares free and clear of the Corporation’s Repurchase Right under Article V and the Corporation’s First Refusal Right hereunder, but the acquired shares shall remain subject to (i) the securities law restrictions of paragraph 2.2(a) and (ii) the market stand-off provisions of paragraph 4.4. In the event Owner does not effect such sale or disposition of the Target Shares within the specified thirty (30)-day period, the Corporation’s First Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by Owner until such right lapses in accordance with paragraph 6.7.

     6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or its assignees) makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Corporation delivered within thirty (30) days after the date of the Disposition Notice, to effect the sale of the Target Shares pursuant to one of the following alternatives:

     (i) sale or other disposition of all the Target Shares to the third-party offeror identified in the Disposition Notice, but in full compliance with the requirements of paragraph 6.4, as if the Corporation did not exercise the First Refusal Right hereunder; or

     (ii) sale to the Corporation (or its assignees) of the portion of the Target Shares which the Corporation (or its assignees) has elected to purchase, such sale to be effected in substantial conformity with the provisions of paragraph 6.3.

     Failure of Owner to deliver timely notification to the Corporation under this paragraph 6.5 shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (i) above.

     6.6 RECAPITALIZATION/MERGER

     (a) In the event of any stock dividend, stock split, recapitalization or other transaction affecting the Corporation’s outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other

11.

property which is by reason of such transaction distributed with respect to the Purchased Shares shall be immediately subject to the Corporation’s First Refusal Right hereunder, but only to the extent the Purchased Shares are at the time covered by such right.

     (b) In the event of either of the following shareholder-approved transactions:

     (i) a merger or consolidation in which the Corporation is not the surviving entity, or

     (ii) any reverse merger in which the Corporation is the surviving entity but in which all of the Corporation’s outstanding voting stock is transferred to the acquiring entity or its wholly-owned subsidiary,

     the Corporation’s First Refusal Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Shares in consummation of the transaction, but only to the extent the Purchased Shares are at the time covered by such right.

     6.7 LAPSE. The First Refusal Right under this Article VI shall lapse and cease to have effect upon the EARLIEST to occur of (i) the first date on which shares of the Corporation’s Common Stock are held of record by more than five hundred (500) persons, (ii) a determination is made by the Corporation’s Board of Directors that a public market exists for the outstanding shares of the Corporation’s Common Stock or (iii) a firm commitment underwritten public offering, pursuant to an effective registration statement under the 1933 Act, covering the offer and sale of the Corporation’s Common Stock in the aggregate amount of at least $5,000,000. However, the market stand-off provisions of paragraph 4.4 shall continue to remain in full force and effect following the lapse of the First Refusal Right hereunder.

VII. ESCROW

     7.1 DEPOSIT. Upon issuance, the certificates for any Unvested Shares purchased hereunder shall be deposited in escrow with the Corporate Secretary of the Corporation to be held in accordance with the provisions of this Article VII. Each deposited certificate shall be accompanied by a duly-executed Assignment Separate from Certificate in the form of Exhibit I. The deposited certificates, together with any other assets or securities from time to time deposited with the Corporate Secretary pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with paragraph 7.3. Upon delivery of the certificates (or other assets and securities) to the Corporate Secretary of the Corporation, the Owner shall be issued an instrument of deposit acknowledging the number of Unvested Shares (or other assets and securities) delivered in escrow.

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     7.2 RECAPITALIZATION. All regular cash dividends on the Unvested Shares (or other securities at the time held in escrow) shall be paid directly to the Owner and shall not be held in escrow. However, in the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation’s outstanding Common Stock as a class effected without receipt of consideration or in the event of a Corporate Transaction, any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Unvested Shares shall be immediately delivered to the Corporate Secretary to be held in escrow under this Article VII, but only to the extent the Unvested Shares are at the time subject to the escrow requirements of paragraph 7.1.

     7.3 RELEASE/SURRENDER. The Unvested Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms and conditions relating to their release from escrow or their surrender to the Corporation for repurchase and cancellation:

     (i) Should the Corporation (or its assignees) elect to exercise the Repurchase Right under Article V with respect to any Unvested Shares, then the escrowed certificates for such Unvested Shares (together with any other assets or securities issued with respect thereto) shall be delivered to the Corporation concurrently with the payment to the Owner, in cash or cash equivalent (including the cancellation of any purchase-money indebtedness), of an amount equal to the aggregate Option Price for such Unvested Shares, and the Owner shall cease to have any further rights or claims with respect to such Unvested Shares (or other assets or securities attributable to such Unvested Shares).

     (ii) Should the Corporation (or its assignees) elect to exercise its First Refusal Right under Article VI with respect to any vested Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall, concurrently with the payment of the paragraph 6.3 purchase price for such Target Shares to the Owner, be surrendered to the Corporation, and the Owner shall cease to have any further rights or claims with respect to such Target Shares (or other assets or securities).

     (iii) Should the Corporation (or its assignees) elect NOT to exercise its First Refusal Right under Article VI with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Owner for disposition in accordance with provisions of paragraph 6.4.

13.

     (iv) As the interest of the Optionee in the Unvested Shares (or any other assets or securities attributable thereto) vests in accordance with the provisions of Article V, the certificates for such vested shares (as well as all other vested assets and securities) shall be released from escrow and delivered to the Owner in accordance with the following schedule:

     a. The initial release of vested shares (or other vested assets and securities) from escrow shall be effected within thirty (30) days following the expiration of the initial twelve (12)-month period measured from the Grant Date.

     b. Subsequent releases of vested shares (or other vested assets and securities) from escrow shall be effected at semi-annual intervals thereafter, with the first such semi-annual release to occur eighteen (18) months after the Grant Date.

     c. Upon the Optionee’s cessation of Service, any escrowed Purchased Shares (or other assets or securities) in which the Optionee is at the time vested shall be promptly released from escrow.

     d. Upon any earlier termination of the Corporation’s Repurchase Right in accordance with the applicable provisions of Article V, any Purchased Shares (or other assets or securities) at the time held in escrow hereunder shall promptly be released to the Owner as fully-vested shares or other property.

     (v) All Purchased Shares (or other assets or securities) released from escrow in accordance with the provisions of subparagraph (iv) above shall nevertheless remain subject to (I) the Corporation’s First Refusal Right under Article VI until such right lapses pursuant to paragraph 6.7, (II) the market stand-off provisions of paragraph 4.4 until such provisions terminate in accordance therewith and (III) the Special Purchase Right under Article VIII.

VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION

     8.1 GRANT. In connection with the dissolution of the Optionee’s marriage or the legal separation of the Optionee and the Optionee’s spouse, the Corporation shall have the right (the “Special Purchase Right”), exercisable at any time during the thirty (30)-day period following the Corporation’s receipt of the required Dissolution Notice under paragraph 8.2, to purchase from the Optionee’s spouse, in accordance with the provisions

14.

of paragraph 8.3, all or any portion of the Purchased Shares which would otherwise be awarded to such spouse in settlement of any community property or other marital property rights such spouse may have in such shares.

     8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly provide the Secretary of the Corporation with written notice (the “Dissolution Notice”) of (i) the entry of any judicial decree or order resolving the property rights of the Optionee and the Optionee’s spouse in connection with their marital dissolution or legal separation or (ii) the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Optionee and the Optionee’s spouse which provides for the award to the spouse of one or more Purchased Shares in settlement of any community property or other marital property rights such spouse may have in such shares.

     8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of written notice (the “Purchase Notice”) to the Optionee and the Optionee’s spouse within thirty (30) days after the Corporation’s receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of shares to be purchased by the Corporation, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice), and the fair market value to be paid for such Purchased Shares. The Optionee (or the Optionee’s spouse, to the extent such spouse has physical possession of the Purchased Shares) shall, prior to the close of business on the date specified for the purchase, deliver to the Corporate Secretary of the Corporation the certificates representing the shares to be purchased, each certificate to be properly endorsed for transfer. To the extent any of the shares to be purchased by the Corporation are at the time held in escrow under Article VII, the certificates for such shares shall be promptly delivered out of escrow to the Corporation. The Corporation shall, concurrently with the receipt of the stock certificates, pay to the Optionee’s spouse (in cash or cash equivalents) an amount equal to the fair market value specified for such shares in the Purchase Notice.

     If the Optionee’s spouse does not agree with the fair market value specified for the shares in the Purchase Notice, then the spouse shall promptly notify the Corporation in writing of such disagreement and the fair market value of such shares shall thereupon be determined by an appraiser of recognized standing selected by the Corporation and the spouse. If they cannot agree on an appraiser within twenty (20) days after the date of the Purchase Notice, each shall select an appraiser of recognized standing, and the two appraisers shall designate a third appraiser of recognized standing whose appraisal shall be determinative of such value. The cost of the appraisal shall be shared equally by the Corporation and the Optionee’s spouse. The closing shall then be held on the fifth business day following the completion of such appraisal; PROVIDED, however, that if the appraised value is more than fifteen percent (15%) greater than the fair market value specified for the shares in the Purchase Notice, the Corporation shall have the right, exercisable prior to the

15.

expiration of such five (5)-business-day period, to rescind the exercise of the Special Purchase Right and thereby revoke its election to purchase the shares awarded to the spouse.

     8.4 LAPSE. The Special Purchase Right under this Article VIII shall lapse and cease to have effect upon the EARLIER to occur of (i) the first date on which the First Refusal Right under Article VI lapses or (ii) the expiration of the thirty (30)-day exercise period specified in paragraph 8.3, to the extent the Special Purchase Right is not timely exercised in accordance with such paragraph.

IX. GENERAL PROVISIONS

     9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right under Article V, its First Refusal Right under Article VI and/or its Special Purchase Right under Article VIII to any person or entity selected by the Corporation’s Board of Directors, including (without limitation) one or more shareholders of the Corporation.

     If the assignee of the Repurchase Right is other than a one hundred percent (100%) owned subsidiary corporation of the Corporation or the parent corporation owning one hundred percent (100%) of the Corporation, then such assignee must make a cash payment to the Corporation, upon the assignment of the Repurchase Right, in an amount equal to the excess (if any) of (i) the fair market value of the Unvested Shares at the time subject to the assigned Repurchase Right over (ii) the aggregate repurchase price payable for the Unvested Shares thereunder.

     9.2 DEFINITIONS. For purposes of this Agreement, the following provisions shall be applicable in determining the parent and subsidiary
corporations of the Corporation:

     (i) Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent corporation of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

     (ii) Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

16.

     9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Optionee) for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Optionee) or the Optionee, which rights are hereby expressly reserved by each, to terminate the Optionee’s Service at any time for any reason whatsoever, with or without cause.

     9.4 NOTICES. Any notice required in connection with (i) the Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii) the disposition of any Purchased Shares covered thereby shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party’s signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph 9.4 to all other parties to this Agreement.

     9.5 NO WAIVER. The failure of the Corporation (or its assignees) in any instance to exercise the Repurchase Right granted under Article V, or the failure of the Corporation (or its assignees) in any instance to exercise the First Refusal Right granted under Article VI, or the failure of the Corporation (or its assignees) in any instance to exercise the Special Purchase Right granted under Article VIII shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and the Optionee or the Optionee’s spouse. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature.

     9.6 CANCELLATION OF SHARES. If the Corporation (or its assignees) shall make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement), and such shares shall be deemed purchased in accordance with the applicable provisions hereof and the Corporation (or its assignees) shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement.

17.

X. MISCELLANEOUS PROVISIONS

     10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may in its judgment deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Optionee or the Purchased Shares pursuant to the express provisions of this Agreement.

     10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the express terms and provisions of the Plan.

     10.3 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State without resort to that State’s conflict-of-laws rules.

     10.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

     10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and the Optionee and the Optionee’s legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof.

     10.6 POWER OF ATTORNEY. Optionee’s spouse hereby appoints Optionee his or her true and lawful attorney in fact, for him or her and in his or her name, place and stead, and for his or her use and benefit, to agree to any amendment or modification of this Agreement and to execute such further instruments and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. Optionee’s spouse further gives and grants unto Optionee as his or her attorney in fact full power and authority to do and perform every act necessary and proper to be done in the exercise of any of the foregoing powers as fully as he or she might or could do if personally present, with full power of substitution and revocation, hereby ratifying and confirming all that Optionee shall lawfully do and cause to be done by virtue of this power of attorney.

18.

     IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above.

	ADVANCED FIBRE COMMUNICATIONS
	By:
	Title:
Address:
		Optionee(*/)
Address:

     The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase Agreement. In consideration of the Corporation’s granting the Optionee the right to acquire the Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms and provisions of such Agreement, including (specifically) the right of the Corporation (or its assignees) to purchase any and all interest or right the undersigned may otherwise have in such shares pursuant to community property laws or other marital property rights.

	Optionee’s Spouse
Address:

(*/) I have executed the Section 83(b) election that was attached hereto as an Exhibit. As set forth in Article III, I understand that I, and NOT the Corporation, will be responsible for completing the form and filing the election with the appropriate office of the Federal and State tax authorities and that if such filing is not completed within thirty (30) days after the date of this Agreement, I will not be entitled to the tax benefits provided by Section 83(b).

19.

EXHIBIT I

ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED                                          hereby sell(s), assign(s) and transfer(s) unto Advanced Fibre Communications (the “Corporation”),                      (                    ) shares of the Common Stock of the Corporation standing in his\her name on the books of the Corporation represented by Certificate No.                      herewith and do hereby irrevocably constitute and appoint                                          Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises.

Dated:                                         

Signature                                        

INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Corporation to exercise its Repurchase Right set forth in the Agreement without requiring additional signatures on the part of the Optionee.

EXHIBIT II

SECTION 260.141.11
TITLE 10, CALIFORNIA ADMINISTRATIVE CODE

     260.141.11 Restriction on Transfer. (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee.

     (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except:

     (1) to the issuer;

     (2) pursuant to the order or process of any court;

     (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules;

     (4) to the transferor’s ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor’s ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee’s ancestors, descendants or spouse;

     (5) to holders of securities of the same class of the same issuer;

     (6) by way of gift or donation inter vivos or on death;

     (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker- dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned;

     (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or
selling group;

     (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the
Commissioner’s written consent is obtained or under this rule not required;

     (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification;

     (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such
corporation;

     (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification;

     (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state;

     (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or

     (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser;

     (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities;

     (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section.

     (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows:

“IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER’S RULES.”

2.

REPURCHASE RIGHTS

EXHIBIT III

SECTION 83(B) TAX ELECTION

This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.

(1)   The taxpayer who performed the services is:

     Name:                                                            

     Address:                                                            

     Taxpayer Ident. No.:                                                            

(2)	The property with respect to which the election is being made is                                  shares of the common stock of Advanced Fibre Communications
(3)	The property was issued on                                         , 19                    .
(4)	The taxable year in which the election is being made is the calendar year 19                    .
(5)	The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer’s employment with the issuer is terminated. The issuer’s repurchase right lapses in a series of annual and monthly installments over a four year period ending on                                         , 19                    .
(6)	The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $                     per share.
(7)	The amount paid for such property is $                     per share.
(8)	A copy of this statement was furnished to Advanced Fibre Communications for whom taxpayer rendered the services underlying the transfer of property.
(9)	This statement is executed as of:                                         , 199                    .

Spouse (if any) Taxpayer

THIS FORM MUST BE FILED WITH THE INTERNAL REVENUE SERVICE CENTER WITH WHICH TAXPAYER FILES HIS/HER FEDERAL INCOME TAX RETURNS. THE FILING MUST BE MADE WITHIN 30 DAYS AFTER THE EXECUTION DATE OF THE STOCK PURCHASE AGREEMENT.

SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY ACQUIRED UPON EXERCISE OF AN INCENTIVE STOCK OPTION

The property described in the above Section 83(b) election is comprised of shares of common stock acquired pursuant to the exercise of an incentive stock option under Section 422 of the Code. Accordingly, it is the intent of the Taxpayer to utilize this election to achieve the following tax results:

     1. The purpose of this election is to have the alternative minimum taxable income attributable to the purchased shares measured by the amount by which the fair market value of such shares at the time of their transfer to the Taxpayer exceeds the purchase price paid for the shares. In the absence of this election, such alternative minimum taxable income would be measured by the spread between the fair market value of the purchased shares and the purchase price which exists on the various lapse dates in effect for the forfeiture restrictions applicable to such shares. The election is to be effective to the full extent permitted under the Internal Revenue Code.

     2. Section 421(a)(1) of the Code expressly excludes from income any excess of the fair market value of the purchased shares over the amount paid for such shares. Accordingly, this election is also intended to be effective in the event there is a “disqualifying disposition” of the shares, within the meaning of Section 421(b) of the Code, which would otherwise render the provisions of Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer hereby elects to have the amount of disqualifying disposition income measured by the excess of the fair market value of the purchased shares on the date of transfer to the Taxpayer over the amount paid for such shares. Since Section 421(a) presently applies to the shares which are the subject of this Section 83(b) election, no taxable income is actually recognized for regular tax purposes at this time, and no income taxes are payable, by the Taxpayer as a result of this election.

This form should be filed with the Internal Revenue Service Center with which taxpayer files his/her Federal income tax returns. The filing must be made within 30 days after the execution date of the Stock Purchase Agreement.

NOTE: THIS PAGE SHOULD BE ATTACHED ONLY IF YOU ARE EXERCISING AN INCENTIVE
STOCK OPTION.

EX-10.44

EXHIBIT 10.44

ADVANCED FIBRE COMMUNICATIONS, INC.
1996 STOCK INCENTIVE PLAN

(all share numbers have been adjusted to reflect a two-for-one stock split effected in August 1996)

ARTICLE ONE

GENERAL PROVISIONS

     I. PURPOSE OF THE PLAN

          This 1996 Stock Incentive Plan is intended to promote the interests of Advanced Fibre Communications, Inc., a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation.

          Capitalized terms shall have the meanings assigned to such terms in the attached Appendix.

     II. STRUCTURE OF THE PLAN

          A. The Plan shall be divided into five separate equity programs:

                -  the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock,

                -  the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special below-market option grants,

                -  the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary),

                -  the Automatic Option Grant Program under which eligible non-employee Board members shall automatically receive option grants at periodic intervals to purchase shares of Common Stock, and

                -  the Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special below-market option grant.

          B. The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan.

     III. ADMINISTRATION OF THE PLAN

          A. Prior to the Section 12 Registration Date, the Discretionary Option Grant and Stock Issuance Programs shall be administered by the Board. Beginning with the Section 12 Registration Date, the Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and shall have sole and exclusive authority to administer the Salary Investment Option Grant Program with respect to all eligible individuals.

          B. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board’s discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. The members of the Secondary Committee may be Board members who are Employees eligible to receive discretionary option grants or direct stock issuances under the Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary).

          C. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee.

          D. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs under its jurisdiction or any option or stock issuance thereunder.

2.

          E. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan.

          F. Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of that program, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under those programs.

     IV. ELIGIBILITY

          A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows:

               (i) Employees,

               (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and

               (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).

          B. Only Section 16 Insiders and other highly compensated Employees shall be eligible to participate in the Salary Investment Option Grant Program.

          C. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine, (i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration for such shares.

          D. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program.

3.

          E. The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individuals who first become non-employee Board members after June 30, 1996, whether through appointment by the Board or election by the Corporation’s stockholders, and (ii) those individuals who continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the Underwriting Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under the Automatic Option Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic option grants under the Automatic Option Grant Program while he or she continues to serve as a non-employee Board member.

          F. All non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program.

     V. STOCK SUBJECT TO THE PLAN

          A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 7,175,676 shares. Such authorized share reserve is comprised of (i) the number of shares which remain available for issuance, as of the Plan Effective Date, under the Predecessor Plan as last approved by the Corporation’s stockholders, including the shares subject to the outstanding options to be incorporated into the Plan and the additional shares which would otherwise be available for future grant,(1) plus (ii) an additional increase of 1,000,000 shares authorized by the Board but subject to stockholder approval prior to the Section 12 Registration Date.

          B. The number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first trading day of each calendar year during the term of the Plan, beginning with the 1997 calendar year, by an amount equal to three percent (3.0%) of the shares of Common Stock outstanding on the last trading day of the immediately preceding calendar year. No Incentive Options may be granted on the basis of the additional shares of Common Stock resulting from such annual increases.

          C. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 400,000 shares of Common Stock in the aggregate per calendar year, beginning with the 1996 calendar year.

          D. Shares of Common Stock subject to outstanding options (including options incorporated into this Plan from the Predecessor Plan) shall be available for

(1) Estimated to be 6,175,676 shares of Common Stock as of June 30, 1996

4.

subsequent issuance under the Plan to the extent those options expire or terminate for any reason prior to exercise in full. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation, at the original issue price paid per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. Shares of Common Stock underlying one or more stock appreciation rights exercised under the Discretionary Option Grant Program shall not be available for subsequent issuance under the Plan.

          E. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under this Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan and (v) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.

5.

ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM

     I. OPTION TERMS

          Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; PROVIDED, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options.

          A. EXERCISE PRICE.

               1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.

               2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Six and the documents evidencing the option, be payable in one or more of the forms specified below:

                    (i) cash or check made payable to the Corporation,

                    (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or

                    (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

               Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

6.

          B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date.

          C. EFFECT OF TERMINATION OF SERVICE.

               1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death:

                    (i) Any option outstanding at the time of the Optionee’s cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term.

                    (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution.

                    (iii) Should the Optionee’s Service be terminated for Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.

                    (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares.

               2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to:

                    (i) extend the period of time for which the option is to remain exercisable following the Optionee’s cessation of Service from the limited exercise period otherwise in effect for that option to such greater

7.

period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or

                    (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee’s cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service.

          D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares.

          E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right.

          F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee’s death. However, a Non-Statutory Option may, in connection with the Optionee’s estate plan, be assigned in whole or in part during the Optionee’s lifetime to one or more members of the Optionee’s immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate.

     II. INCENTIVE OPTIONS

          The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall NOT be subject to the terms of this Section II.

          A. ELIGIBILITY. Incentive Options may only be granted to Employees.

8.

          B. EXERCISE PRICE. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

          C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

          D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date.

     III. CORPORATE TRANSACTION/CHANGE IN CONTROL

          A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive.

          B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such

9.

Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.

          C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).

          D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, PROVIDED the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year.

          E. The Plan Administrator shall have full power and authority to grant options under the Discretionary Option Grant Program which will automatically accelerate in the event the Optionee’s Service subsequently terminates by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed or replaced and do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully-vested shares until the EARLIER of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation’s outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full.

          F. The Plan Administrator shall have full power and authority to grant options under the Discretionary Option Grant Program which will automatically accelerate in the event the Optionee’s Service subsequently terminates by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control. Each option so accelerated shall remain exercisable for fully-vested shares until the EARLIER of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation’s outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full.

10.

          G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws.

          H. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

     IV. CANCELLATION AND REGRANT OF OPTIONS

          The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plan) and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date.

     V. STOCK APPRECIATION RIGHTS

          A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights.

          B. The following terms shall govern the grant and exercise of tandem stock appreciation rights:

                    (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares.

                    (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option

11.

surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate.

                    (iii) If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the LATER of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date.

          C. The following terms shall govern the grant and exercise of limited stock appreciation rights:

                    (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding
options.

                    (ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation, to the extent the option is at the time exercisable for vested shares of Common Stock. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock which are at the time vested under each surrendered option (or surrendered portion thereof) over (B) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the option surrender date.

                    (iii) Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such
option surrender and cash distribution.

                    (iv) The balance of the option (if any) shall remaining outstanding and exercisable in accordance with the documents
evidencing such option.

          D. The shares of Common Stock underlying any stock appreciation rights exercised under this Section V shall NOT be available for subsequent issuance under the Plan.

12.

ARTICLE THREE

SALARY INVESTMENT OPTION GRANT PROGRAM

     I. OPTION GRANTS

          The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for those calendar year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete discretion to determine whether or not to approve the filed authorization in whole or in part. To the extent the Primary Committee approves the authorization, the individual who filed that authorization shall be granted an option under the Salary Investment Grant Program on or before the last trading day in January of the calendar year for which the salary reduction is to be in effect. All grants under the Salary Investment Option Grant Program shall be at the sole discretion of the Primary Committee.

     II. OPTION TERMS

          Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; PROVIDED, however, that each such document shall comply with the terms specified below.

          A. EXERCISE PRICE.

               1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date.

               2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

13.

          B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number):

               X = A DIVIDED BY (B x 66-2/3%), where

               X is the number of option shares,

               A is the dollar amount of the approved reduction in the Optionee’s base salary for the calendar year, and

               B is the Fair Market Value per share of Common Stock on the option grant date.

          C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee’s completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date.

          D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease Service for any reason while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee’s cessation of Service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee’s cessation of Service. However, the option shall, immediately upon the Optionee’s cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable.

     III. CORPORATE TRANSACTION/CHANGE IN CONTROL

          A. In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully

14.

exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate Transaction and shall remain exercisable for the fully-vested shares until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee’s cessation of Service.

          B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the EARLIER or (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee’s cessation of Service.

          C. The grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

     III. REMAINING TERMS

          The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program.

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ARTICLE FOUR

STOCK ISSUANCE PROGRAM

     I. STOCK ISSUANCE TERMS

          Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below.

          A. PURCHASE PRICE.

               1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date.

               2. Subject to the provisions of Section I of Article Seven, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance:

                    (i) cash or check made payable to the Corporation, or

                    (ii) past services rendered to the Corporation (or any Parent or Subsidiary).

          B. VESTING PROVISIONS.

               1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely:

                    (i) the Service period to be completed by the Participant or the performance objectives to be attained,

                    (ii) the number of installments in which the shares are to vest,

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                    (iii) the interval or intervals (if any) which are to lapse between installments, and

                    (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the
vesting schedule,

shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement.

          2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

          3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.

          4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares.

          5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the cessation of the Participant’s Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate

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vesting of the Participant’s interest in the shares as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives.

     II. CORPORATE TRANSACTION/CHANGE IN CONTROL

          A. All of the Corporation’s outstanding repurchase/cancellation rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase/cancellation rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement.

          B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation’s repurchase/cancellation rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase/cancellation rights are assigned to the successor corporation (or parent thereof).

          C. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation’s repurchase/cancellation rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control.

     III. SHARE ESCROW/LEGENDS

          Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.

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ARTICLE FIVE

AUTOMATIC OPTION GRANT PROGRAM

     I. OPTION TERMS

          A. GRANT DATES. Option grants shall be made on the dates specified below:

               1. Each individual who is first elected or appointed as a non-employee Board member at any time after June 30, 1996 shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary.

               2. On the date of each Annual Stockholders Meeting held after the Underwriting Date, each individual who is to continue to serve as an Eligible Director, whether or not that individual is standing for re-election to the Board at that particular Annual Meeting, shall automatically be granted a Non-Statutory Option to purchase 6,000 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 6,000-share option grants any one Eligible Director may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who first joined the Board prior to July 1, 1996 shall be eligible to receive one or more such annual option grants over their period of continued Board service.

          B. EXERCISE PRICE.

               1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

               2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

          C. OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date.

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          D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee’s cessation of Board service prior to vesting in those shares. Each grant shall vest, and the Corporation’s repurchase right shall lapse, as follows: (i) one-third of the option shares shall vest upon the Optionee’s completion of one (1) year of Board service measured from the option grant date and (ii) the balance of the option shares shall vest in a series of twenty-four (24) successive equal monthly installments upon the Optionee’s completion of each additional month of Board service over the twenty-four (24)-month period measured from the first anniversary of such grant date.

          E. TERMINATION OF BOARD SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member:

                    (i) The Optionee (or, in the event of Optionee’s death, the personal representative of the Optionee’s estate or the person or persons to whom the option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option.

                    (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee’s cessation of Board service.

                    (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully-vested shares of Common Stock.

                    (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares.

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     II. SPECIAL CORPORATE EVENTS

          A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).

          B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over.

          C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding automatic option grants. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution.

          D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, PROVIDED the aggregate exercise price payable for such securities shall remain the same.

          E. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

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     III. REMAINING TERMS

          The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program.

22.

ARTICLE SIX

DIRECTOR FEE OPTION GRANT PROGRAM

     I. OPTION GRANTS

          Each non-employee Board member may elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation’s Chief Financial Officer prior to the first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which the annual retainer fee which is the subject of that election would otherwise be payable.

     II. OPTION TERMS

          Each option shall be a Non-Statutory Option governed by the terms and conditions specified below.

          A. EXERCISE PRICE.

          1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date.

          2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

          B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number):

               X = A DIVIDED BY (B x 66-2/3%), where

               X is the number of option shares,

               A is the portion of the annual retainer fee subject to the non-employee Board member’s election, and

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               B is the Fair Market Value per share of Common Stock on the option grant date.

          C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable for fifty percent (50%) of the option shares upon the Optionee’s completion of six (6) months of Board service in the calendar year for which his or her election under this Director Fee Option Grant Program is in effect, and the balance of the option shares shall become exercisable in a series of six (6) successive equal monthly installments upon the Optionee’s completion of each additional month of Board service during that calendar year. Each option shall have a maximum term of ten (10) years measured from the option grant date.

          D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee under this Director Fee Option Grant Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable.

          E. DEATH OR PERMANENT DISABILITY. Should the Optionee’s service as a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully-vested shares until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service.

          Should the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee’s cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee’s cessation of Board service.

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     III. CORPORATE TRANSACTION/CHANGE IN CONTROL

          A. In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate Transaction and shall remain exercisable for the fully-vested shares until the EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee’s cessation of Board service.

          B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the EARLIER or (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee’s cessation of Service.

          C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding automatic option grants. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution.

          D. The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

     IV. REMAINING TERMS

          The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program.

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ARTICLE SEVEN

MISCELLANEOUS

     I. FINANCING

          The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase.

     II. TAX WITHHOLDING

          A. The Corporation’s obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.

          B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant or Director Fee Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats:

               STOCK WITHHOLDING: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder.

               STOCK DELIVERY: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise

26.

or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder.

     III. EFFECTIVE DATE AND TERM OF THE PLAN

          A. The Plan shall become effective immediately upon the Plan Effective Date. However, the Salary Investment Option Grant Program shall not be implemented until such time as the Primary Committee may deem appropriate. Options may be granted under the Discretionary Option Grant or Automatic Option Grant Program at any time on or after the Plan Effective Date. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation’s stockholders. If such stockholder approval is not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan.

          B. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants or direct stock issuances shall be made under the Predecessor Plan after the Section 12(g) Registration Date. All options outstanding under the Predecessor Plan on the Section 12(g) Registration Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock.

          C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control, may, in the Plan Administrator’s discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions.

          D. The Plan shall terminate upon the EARLIEST of (i) June 30, 2006, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such plan termination, all outstanding option grants and unvested stock issuances shall thereafter continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances.

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     IV. AMENDMENT OF THE PLAN

          A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws or regulations.

          B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.

     V. USE OF PROCEEDS

          Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.

     VI. REGULATORY APPROVALS

          A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it.

          B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of

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the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading.

     VII. NO EMPLOYMENT/SERVICE RIGHTS

          Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.

29.

APPENDIX

          The following definitions shall be in effect under the Plan:

     A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program in effect under the Plan.

     B. BOARD shall mean the Corporation’s Board of Directors.

     C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions:

          (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept, or

          (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination.

     D. CODE shall mean the Internal Revenue Code of 1986, as amended.

     E. COMMON STOCK shall mean the Corporation’s common stock.

     F. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party:

          (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

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          (ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation
or dissolution of the Corporation.

     G. CORPORATION shall mean Advanced Fibre Communications, Inc., a Delaware corporation, and its successors.

     H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option grant in effect for non-employee Board members under Article Six of the Plan.

     I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under the Plan.

     J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Article One.

     K. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

     L. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise.

     M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

          (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question, as such price is reported on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

          (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

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          (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement.

          (iv) For purposes of any option grants made prior to the Underwriting Date, the Fair Market Value shall be determined by the Plan Administrator, after taking into account such factors as it deems appropriate.

     N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept.

     O. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422.

     P. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of:

          (i) such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

          (ii) such individual’s voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual’s consent.

     Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the

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dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary).

     R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

     S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422.

     T. OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program.

     U. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

     V. PARTICIPANT shall mean any person who is issued shares of Common Stock under the Stock Issuance Program.

     W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more.

     X. PLAN shall mean the Corporation’s 1996 Stock Incentive Plan, as set forth in this document.

     Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction.

     Z. PLAN EFFECTIVE DATE shall mean July 12, 1996, the date on which the Plan was adopted by the Board.

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     AA. PREDECESSOR PLAN shall mean the Corporation’s pre-existing Stock Option Plan in effect immediately prior to the Plan Effective Date hereunder.

     AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment Option Grant Program with respect to all eligible individuals.

     AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary reduction grant program in effect under the Plan.

     AD. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders.

     AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common Stock is first registered under Section 12(g) of Section 16 of the 1934 Act.

     AF. SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act.

     AG. SERVICE shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance.

     AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange.

     AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program.

     AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under the Plan.

     AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

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     AL. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share.

     AM. TAXES shall mean the Federal, state and local income and employment tax liabilities incurred by the holder of Non-Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares.

     AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).

     AO. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock.

     AP. UNDERWRITING DATE shall mean the date on which the Underwriting Agreement is executed and priced in connection with an initial public offering of the Common Stock.

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EX-10.45

EXHIBIT 10.45

ADVANCED FIBRE COMMUNICATIONS, INC.
STOCK OPTION AGREEMENT

RECITALS

     A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or of the board of directors of any Parent or Subsidiary and consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).

     B. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation’s grant of an option to Optionee.

     C. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix.

          NOW, THEREFORE, it is hereby agreed as follows:

          1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price.

          2. OPTION TERM. This option shall have a term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6.

          3. LIMITED TRANSFERABILITY. If this option is designated an Incentive Option in the Grant Notice, then this option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee’s death and may be exercised, during Optionee’s lifetime, only by Optionee. However, if this option is designated a Non-Statutory Option in the Grant Notice, then this option may, in connection with the Optionee’s estate plan, be assigned in whole or in part during Optionee’s lifetime to one or more members of the Optionee’s immediate family or to a trust established for the exclusive benefit of one or more such family members. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate.

          4. DATES OF EXERCISE. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6.

          5. CESSATION OF SERVICE. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable:

        (i) Should Optionee cease to remain in Service for any reason (other than death, Permanent Disability or Misconduct) while this option is outstanding, then Optionee shall have a period of three (3) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date.

        (ii) Should Optionee die while this option is outstanding, then the personal representative of Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s will or in accordance with the laws of descent and distribution shall have the right to exercise this option. Such right shall lapse, and this option shall cease to be outstanding, upon the EARLIER of (A) the expiration of the twelve (12)- month period measured from the date of Optionee’s death or (B) the Expiration Date.

        (iii) Should Optionee cease Service by reason of Permanent Disability while this option is outstanding, then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option. In no event shall this option be exercisable at any time after the Expiration Date.

        (iv) During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of vested Option Shares for which the option is exercisable at the time of Optionee’s cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. However, this option shall, immediately upon Optionee’s cessation of Service for any reason, terminate and cease to be outstanding with respect to any Option Shares in which Optionee is not otherwise at that time vested or for which this option is not otherwise at that time exercisable.

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        (v) Should Optionee’s Service be terminated for Misconduct, then this option shall terminate immediately and cease to
remain outstanding.

          6. SPECIAL ACCELERATION OF OPTION.

               (a) This option, to the extent outstanding at the time of a Corporate Transaction but not otherwise fully exercisable, shall automatically accelerate so that this option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for any or all of those Option Shares as fully-vested shares of Common Stock. No such acceleration of this option, however, shall occur if and to the extent: (i) this option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof) or (ii) this option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested Option Shares at the time of the Corporate Transaction (the excess of the Fair Market Value of those Option Shares over the aggregate Exercise Price payable for such shares) and provides for subsequent pay-out in accordance with the option exercise/vesting schedule set forth in the Grant Notice. The determination of option comparability under clause (i) shall be made by the Plan Administrator, and such determination shall be final, binding and conclusive.

               (b) Immediately following the Corporate Transaction, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction.

               (c) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, PROVIDED the aggregate Exercise Price shall remain the same.

               (d) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

          7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be

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made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

          8. STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares.

          9. MANNER OF EXERCISING OPTION.

               (a) In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions:

                    (i) Execute and deliver to the Corporation a Notice of Exercise for the Option Shares for which the option is
exercised.

                    (ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms:

                         (A) cash or check made payable to the Corporation;

                         (B) a promissory note payable to the Corporation, but only to the extent authorized by the Plan Administrator in
accordance with Paragraph 13;

                         (C) shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or

                         (D) to the extent the option is exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable written instructions (I) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes

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required to be withheld by the Corporation by reason of such exercise and (II) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction.

               Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice of Exercise delivered to the Corporation in connection with the option exercise.

                    (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if
other than Optionee) have the right to exercise this option.

                    (iv) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise.

               (b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto.

               (c) In no event may this option be exercised for any fractional shares.

          10. COMPLIANCE WITH LAWS AND REGULATIONS.

               (a) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance.

               (b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals.

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          11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.

          12. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

          13. FINANCING. The Plan Administrator may, in its absolute discretion and without any obligation to do so, permit Optionee to pay the Exercise Price for the purchased Option Shares by delivering a full-recourse promissory note payable to the Corporation. The terms of any such promissory note (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion.

          14. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option.

          15. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Delaware without resort to that State’s conflict-of-laws rules.

          16. EXCESS SHARES. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without stockholder approval be issued under the Plan, then this option shall be void with respect to those excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan.

          17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the event this option is designated an Incentive Option in the Grant Notice, the following terms and conditions shall also apply to the grant:

            -     This option shall cease to qualify for favorable tax treatment as an Incentive Option if (and to the extent) this option is exercised for one or more Option Shares: (A) more than three (3) months after the

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date Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (B) more than twelve (12) months after the date Optionee ceases to be an Employee by reason of Permanent Disability.

            -       No installment under this option shall qualify for favorable tax treatment as an Incentive Option if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which such installment first becomes exercisable hereunder would, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or any other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should such One Hundred Thousand Dollar ($100,000) limitation be exceeded in any calendar year, this option shall nevertheless become exercisable for the excess shares in such calendar year as a Non-Statutory Option.

            -       Should the exercisability of this option be accelerated upon a Corporate Transaction, then this option shall qualify for favorable tax treatment as an Incentive Option only to the extent the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option first becomes exercisable in the calendar year in which the Corporate Transaction occurs does not, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should the applicable One Hundred Thousand Dollar ($100,000) limitation be exceeded in the calendar year of such Corporate Transaction, the option may nevertheless be exercised for the excess shares in such calendar year as a Non-Statutory Option.

            -      Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

          18. LEAVE OF ABSENCE. The following provisions shall apply upon the Optionee’s commencement of an authorized leave of absence:

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               (a) The exercise schedule in effect under the Grant Notice shall be frozen as of the first day of the authorized leave, and this option shall not become exercisable for any additional installments of the Option Shares during the period Optionee remains on such leave.

               (b) Should Optionee resume active Employee status within sixty (60) days after the start date of the authorized leave, Optionee shall, for purposes of the exercise schedule set forth in the Grant Notice, receive Service credit for the entire period of such leave. If Optionee does not resume active Employee status within such sixty (60)-day period, then no Service credit shall be given for the period of such leave.

               (c) If the option is designated as an Incentive Option in the Grant Notice, then the following additional provision shall apply:

            -       If the leave of absence continues for more than ninety (90) days, then this option shall automatically convert to a Non-Statutory Option under the Federal tax laws on the ninety-first (91st) day of such leave, unless the Optionee’s reemployment rights are guaranteed by statute or by written agreement. Following any such conversion of the option, all subsequent exercises of such option, whether effected before or after Optionee’s return to active Employee status, shall result in an immediate taxable event, and the Corporation shall be required to collect from Optionee the Federal, state and local income and employment withholding taxes applicable to such exercise.

               (d) In no event shall this option become exercisable for any additional Option Shares or otherwise remain outstanding if Optionee does not resume Employee status prior to the Expiration Date of the option term.

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EXHIBIT I

NOTICE OF EXERCISE

     I hereby notify Advanced Fibre Communications, Inc. (the “Corporation”) that I elect to purchase shares of the Corporation’s Common Stock (the “Purchased Shares”) at the option exercise price of $ per share (the “Exercise Price”) pursuant to that certain option (the “Option”) granted to me under the Corporation’s 1996 Stock Incentive Plan on      , 199 .

     Concurrently with the delivery of this Exercise Notice to the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. Alternatively, I may utilize the special broker-dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price.

___________________, 199__
Date

                                                
Optionee

Address:
                                                

Print name in exact manner
it is to appear on the
stock certificate:                                                 

Address to which certificate
is to be sent, if different
from address above:                                                 

Social Security Number:                                                 

Employee Number:                                                 

APPENDIX

          The following definitions shall be in effect under the Agreement:

     A. AGREEMENT shall mean this Stock Option Agreement.

     B. BOARD shall mean the Corporation’s Board of Directors.

     C. CODE shall mean the Internal Revenue Code of 1986, as amended.

     D. COMMON STOCK shall mean the Corporation’s common stock.

E. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party:

          (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

          (ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation
or dissolution of the Corporation.

     F. CORPORATION shall mean Advanced Fibre Communications, Inc., a Delaware corporation.

     G. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

     H. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement.

     I. EXERCISE PRICE shall mean the exercise price per share as specified in the Grant Notice.

     J. EXPIRATION DATE shall mean the date on which the option expires as specified in the Grant Notice.

     K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

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          (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

          (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

     L. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice.

     M. GRANT NOTICE shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby.

     N. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422.

     O. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of Optionee or any other individual in the Service of the Corporation (or any Parent or Subsidiary).

     P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422.

     Q. NOTICE OF EXERCISE shall mean the notice of exercise in the form attached hereto as Exhibit I.

A-2

     R. OPTION SHARES shall mean the number of shares of Common Stock subject to the option as specified in the Grant Notice.

     S. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice.

     T. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

     U. PERMANENT DISABILITY shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more.

     V. PLAN shall mean the Corporation’s 1996 Stock Incentive Plan.

     W. PLAN ADMINISTRATOR shall mean either the Board or a committee of the Board acting in its administrative capacity under the Plan.

     X. SERVICE shall mean the Optionee’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor.

     Y. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange.

     Z. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

A-3

ADDENDUM
TO
STOCK OPTION AGREEMENT

     The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement dated 2- (the “Option Agreement”) by and between Advanced Fibre Communications, Inc. (the “Corporation”) and 1- (“Optionee”) evidencing the stock option (the “Option”) granted on such date to Optionee under the terms of the Corporation’s 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement.

INVOLUNTARY TERMINATION FOLLOWING
CORPORATE TRANSACTION

     1. To the extent the Option is, in connection with a Corporate Transaction, to be assumed or replaced with a comparable option in accordance with Paragraph 6 of the Option Agreement, the Option shall not accelerate upon the occurrence of that Corporate Transaction, and the Option shall accordingly continue, over Optionee’s period of Service after the Corporate Transaction, to become exercisable for the Option Shares in one or more installments in accordance with the provisions of the Option Agreement. However, immediately upon an Involuntary Termination of Optionee’s Service within twelve (12) months following such Corporate Transaction, the Option (or any replacement grant), to the extent outstanding at the time but not otherwise fully exercisable, shall automatically accelerate so that the Option shall become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares. The Option shall remain so exercisable until the EARLIER of (i) the Expiration Date or (ii) the expiration of the one (1)-year period measured from the date of the Involuntary Termination.

     2. For purposes of this Addendum, an INVOLUNTARY TERMINATION shall mean the termination of Optionee’s Service by reason of:

     (i) Optionee’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

     (ii) Optionee’s voluntary resignation following (A) a change in Optionee’s position with the Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee’s level of responsibility, (B) a reduction in Optionee’s level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or

(C) a relocation of Optionee’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Optionee’s consent.

     3. The provisions of Paragraph 1 of this Addendum shall govern the period for which the Option is to remain exercisable following the Involuntary Termination of Optionee’s Service within twelve (12) months after the Corporate Transaction and shall supersede any provisions to the contrary in Paragraph 5 of the Option Agreement.

     IN WITNESS WHEREOF, Advanced Fibre Communications, Inc. has caused this Addendum to be executed by its duly-authorized officer, and Optionee has executed this Addendum, all as of the Effective Date specified below.

	ADVANCED FIBRE
	COMMUNICATIONS, INC.
	By:
	Title:
	1-, OPTIONEE
EFFECTIVE DATE:        , 199

2.

ADDENDUM
TO
STOCK OPTION AGREEMENT

     The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement dated 2- (the “Option Agreement”) by and between Advanced Fibre Communications, Inc. (the “Corporation”) and 1- (“Optionee”) evidencing the stock option (the “Option”) granted on such date to Optionee under the terms of the Corporation’s 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement.

INVOLUNTARY TERMINATION FOLLOWING
CHANGE IN CONTROL

     1. The Option shall not accelerate upon the occurrence of a Change in Control, and the Option shall, over Optionee’s continued period of Service after the Change in Control, continue to become exercisable for the Option Shares in accordance with the provisions of the Option Agreement. However, immediately upon an Involuntary Termination of Optionee’s Service within twelve (12) months following the Change in Control, the Option, to the extent outstanding at the time but not otherwise fully exercisable, shall automatically accelerate so that the Option shall become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares. The Option shall remain so exercisable until the EARLIER of (i) the Expiration Date or (ii) the expiration of the one (1)-year period measured from the date of the Involuntary Termination.

     2. For purposes of this Addendum, a CHANGE IN CONTROL shall be deemed to occur in the event of a change in ownership or control of the Corporation effected through either of the following transactions:

                    (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept, or

                    (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the

beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board.

     3. For purposes of this Addendum, an INVOLUNTARY TERMINATION shall mean the termination of Optionee’s Service by reason of:

                    (i) Optionee’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

                    (ii) Optionee’s voluntary resignation following (A) a change in Optionee’s position with the Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee’s level of responsibility, (B) a reduction in Optionee’s level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of Optionee’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Optionee’s consent.

     4. The provisions of Paragraph 1 of this Addendum shall govern the period for which the Option is to remain exercisable following the Involuntary Termination of Optionee’s Service within twelve (12) months after the Change in Control and shall supersede any provisions to the contrary in Paragraph 5 of the Option Agreement.

     IN WITNESS WHEREOF, Advanced Fibre Communications, Inc. has caused this Addendum to be executed by its duly-authorized officer, and Optionee has executed this Addendum, all as of the Effective Date specified below.

	ADVANCED FIBRE COMMUNICATIONS, INC.
	By:
	Title:
	1-, OPTIONEE
EFFECTIVE DATE:          , 199

2.

ADDENDUM
TO
STOCK OPTION AGREEMENT

     The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement dated 2- (the “Option Agreement”) by and between Advanced Fibre Communications, Inc. (the “Corporation”) and 1- (“Optionee”) evidencing the stock option (the “Option”) granted on such date to Optionee under the terms of the Corporation’s 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement.

LIMITED STOCK APPRECIATION RIGHT

     1. Optionee is hereby granted a limited stock appreciation right exercisable upon the following terms and conditions:

     - Optionee shall have the unconditional right (exercisable at any time during the thirty (30)-day period immediately following a Hostile Take- Over) to surrender the Option to the Corporation, to the extent the Option is at the time exercisable for vested shares of Common Stock. In return for the surrendered Option, Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock which are at the time vested under the surrendered Option (or surrendered portion) over (B) the aggregate Exercise Price payable for such shares.

     - To exercise this limited stock appreciation right, Optionee must, during the applicable thirty (30)-day exercise period, provide the Corporation with written notice of the option surrender in which there is specified the number of Option Shares as to which the Option is being surrendered. Such notice must be accompanied by the return of Optionee’s copy of the Option Agreement, together with any written amendments to such Agreement. The cash distribution shall be paid to Optionee within five (5) days following such delivery date, and neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. Upon receipt of such cash distribution, the Option shall be cancelled with respect to the Option Shares for which the Option has been surrendered, and Optionee shall cease to have any further right to acquire those Option Shares under the Option Agreement. The Option shall, however, remain outstanding and exercisable for the balance of the Option Shares (if any) in accordance with the terms of the Option Agreement, and the Corporation shall issue a new stock option agreement (substantially in the same form of the surrendered Option Agreement) for those remaining Option Shares.

     - In no event may this limited stock appreciation right be exercised when there is not a positive spread between the Fair Market Value of the Option Shares and the aggregate Exercise Price payable for such shares. This limited stock appreciation right shall in all events terminate upon the expiration or sooner termination of the option term and may not be assigned or transferred by Optionee.

     2. For purposes of this Addendum, the following definitions shall be in effect:

     - A HOSTILE TAKE-OVER shall be deemed to occur in the event any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept.

     - The TAKE-OVER PRICE per share shall be deemed to be equal to the GREATER of (A) the Fair Market Value per Option Share on the option surrender date or (B) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over. However, if the surrendered Option is designated as an Incentive Option in the Grant Notice, then the Take-Over Price shall not exceed the clause (A) price per share.

     IN WITNESS WHEREOF, Advanced Fibre Communications, Inc. has caused this Addendum to be executed by its duly-authorized officer, and Optionee has executed this Addendum, all as of the Effective Date specified below.

	ADVANCED FIBRE COMMUNICATIONS, INC.
	By:
	Title:
	1-, OPTIONEE
EFFECTIVE DATE:           , 199

2.

EX-10.46

EXHIBIT 10.46

ADVANCED FIBRE COMMUNICATIONS, INC.
AUTOMATIC STOCK OPTION AGREEMENT

RECITALS

     A. The Corporation has implemented an automatic option grant program under the Corporation’s 1996 Stock Incentive Plan pursuant to which eligible non-employee members of the Corporation’s Board will automatically receive special option grants at designated intervals over their period of Board service in order to provide such individuals with a meaningful incentive to continue to serve as a member of the Board.

     B. Optionee is an eligible non-employee Board member, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the automatic grant of a stock option to purchase shares of the Corporation’s Common Stock under the Plan.

     C. The granted option is intended to be a non-statutory option which does NOT meet the requirements of Section 422 of the Internal Revenue Code.

     D. All capitalized terms in this Agreement, to the extent not otherwise defined in the Agreement, shall have the meaning assigned to them in the attached Appendix.

          NOW, THEREFORE, it is hereby agreed as follows:

          1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, a Non-Statutory Option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price.

          2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5, 6 or 7.

          3. LIMITED TRANSFERABILITY. This option may, in connection with the Optionee’s estate plan, be assigned in whole or in part during Optionee’s lifetime to one or more members of the Optionee’s immediate family or to a trust established for the exclusive benefit of one or more such family members. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Corporation may deem appropriate. Should the

Optionee die while holding this option, then this option shall be transferred in accordance with Optionee’s will or the laws of descent and distribution.

          4. EXERCISABILITY/VESTING.

            (a) This option shall be immediately exercisable for any or all of the Option Shares, whether or not the Option Shares are vested in accordance with the Vesting Schedule set forth in the Grant Notice, and shall remain so exercisable until the Expiration Date or the sooner termination of the option term under Paragraph 5, 6 or 7.

            (b) Optionee shall, in accordance with the Vesting Schedule set forth in the Grant Notice, vest in the Option Shares in a series of installments over his or her period of Board service. Vesting in the Option Shares may be accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In no event, however, shall any additional Option Shares vest following Optionee’s cessation of service as a Board member.

          5. CESSATION OF BOARD SERVICE. Should Optionee’s service as a Board member cease while this option remains outstanding, then the option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date in accordance with the following provisions:

            (i) Should Optionee cease to serve as a Board member for any reason (other than death or Permanent Disability) while holding this option, then the period for exercising this option shall be reduced to a twelve (12)-month period commencing with the date of such cessation of Board service, but in no event shall this option be exercisable at any time after the Expiration Date. During such limited period of exercisability, this option may not be exercised in the aggregate for more than the number of Option Shares (if any) in which Optionee is vested on the date of his or her cessation of Board service. Upon the EARLIER of (i) the expiration of such twelve (12)-month period or (ii) the specified Expiration Date, the option shall terminate and cease to be exercisable with respect to any vested Option Shares for which the option has not been exercised.

            (ii) Should Optionee die during the twelve (12)-month period following his or her cessation of Board service, then the personal representative of Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s will or in accordance with the laws of descent and distribution shall have the right to exercise this option for any or all of the Option Shares in which Optionee is vested at the time of Optionee’s cessation of Board service (less any Option Shares purchased by Optionee after such cessation of Board service but prior to death). Such right of exercise shall terminate, and this option shall accordingly cease to be exercisable for such vested Option Shares, upon the EARLIER of (i) the expiration of the twelve (12)-month period measured from the date of

2.

Optionee’s cessation of Board service or (ii) the specified Expiration Date of the option term.

            (iii) Should Optionee cease service as a Board member by reason of death or Permanent Disability, then all Option Shares at the time subject to this option but not otherwise vested shall immediately vest in full so that Optionee (or the personal representative of Optionee’s estate or the person or persons to whom the option is transferred upon Optionee’s death) shall have the right to exercise this option for any or all of the Option Shares as fully-vested shares of Common Stock at any time prior to the EARLIER of (i) the expiration of the twelve (12)-month period measured from the date of Optionee’s cessation of Board service or (ii) the specified Expiration Date.

            (iv) Upon Optionee’s cessation of Board service for any reason other than death or Permanent Disability, this option shall immediately terminate and cease to be outstanding with respect to any and all Option Shares in which Optionee is not otherwise at that time vested in accordance with the normal Vesting Schedule set forth in the Grant Notice or the special vesting acceleration provisions of Paragraph 6 or 7 below.

          6. CORPORATE TRANSACTION.

            (a) In the event of a Corporate Transaction, all Option Shares at the time subject to this option but not otherwise vested shall automatically vest so that this option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the Option Shares at the time subject to this option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, this option shall terminate and cease to be outstanding except to the extent assumed by the successor corporation or its parent company.

            (b) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, PROVIDED the aggregate Exercise Price shall remain the same.

          7. CHANGE IN CONTROL/HOSTILE TAKE-OVER.

            (a) All Option Shares subject to this option at the time of a Change in Control but not otherwise vested shall automatically vest so that this option shall, immediately prior to the effective date of such Change in Control, become fully exercisable

3.

for all of the Option Shares at the time subject to this option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. This option shall remain exercisable for such fully-vested Option Shares until the EARLIEST to occur of (i) the specified Expiration Date, (ii) the sooner termination of this option in accordance with Paragraph 5 or 6 or (iii) the surrender of this option under Paragraph 7(b).

            (b) Optionee shall have an unconditional right (exercisable during the thirty (30)-day period immediately following the consummation of a Hostile Take-Over) to surrender this option to the Corporation in exchange for a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the Option Shares at the time subject to the surrendered option (whether or not those Option Shares are otherwise at the time vested) over (ii) the aggregate Exercise Price payable for such shares. This Paragraph 7(b) limited stock appreciation right shall in all events terminate upon the expiration or sooner termination of the option term and may not be assigned or transferred by Optionee.

            (c) To exercise the Paragraph 7(b) limited stock appreciation right, Optionee must, during the applicable thirty (30)-day exercise period, provide the Corporation with written notice of the option surrender in which there is specified the number of Option Shares as to which the option is being surrendered. Such notice must be accompanied by the return of Optionee’s copy of this Agreement, together with any written amendments to such Agreement. The cash distribution shall be paid to Optionee within five (5) days following such delivery date, and neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. Upon receipt of such cash distribution, this option shall be cancelled with respect to the shares subject to the surrendered option (or the surrendered portion), and Optionee shall cease to have any further right to acquire those Option Shares under this Agreement. The option shall, however, remain outstanding for the balance of the Option Shares (if any) in accordance with the terms and provisions of this Agreement, and the Corporation shall accordingly issue a new stock option agreement (substantially in the same form as this Agreement) for those remaining Option Shares.

          8. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder; provided, however, that the aggregate Exercise Price shall remain the same.

          9. STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares.

4.

          10. MANNER OF EXERCISING OPTION.

            (a) In order to exercise this option for all or any part of the Option Shares for which the option is at the time exercisable, Optionee or, in the case of exercise after Optionee’s death, Optionee’s executor, administrator, heir or legatee, as the case may be, must take the following actions:

                (i) To the extent the option is exercised for vested Option Shares, the Secretary of the Corporation shall be provided with written notice of the option exercise (the “Exercise Notice”) in substantially the form of Exhibit I attached hereto, in which there is specified the number of vested Option Shares to be purchased under the exercised option. To the extent that the option is exercised for one or more unvested Option Shares, Optionee (or other person exercising the option) shall deliver to the Secretary of the Corporation a Purchase Agreement for those unvested Option Shares.

                (ii) The Exercise Price for the purchased shares shall be paid in one or more of the following alternative forms:

                - cash or check made payable to the Corporation’s order; or

                - shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or

                - to the extent the option is exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which Optionee shall provide irrevocable written instructions (A) to a Corporation-designated brokerage firm to effect the immediate sale of the vested shares purchased under the option and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for those shares plus the applicable Federal, state and local income taxes required to be withheld by the Corporation by reason of such exercise and (B) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

5.

                (iii) Appropriate documentation evidencing the right to exercise this option shall be furnished the Corporation if the
person or persons exercising the option is other than Optionee.

                (iv) Appropriate arrangement must be made with the Corporation for the satisfaction of all Federal, state and local income tax
withholding requirements applicable to the option exercise.

            (b) Except to the extent the sale and remittance procedure specified above is utilized in connection with the exercise of the option for vested Option Shares, payment of the Exercise Price for the purchased shares must accompany the Exercise Notice or Purchase Agreement delivered to the Corporation in connection with the option exercise.

            (c) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate or certificates representing the purchased Option Shares. To the extent any such Option Shares are unvested, the certificates for those Option Shares shall be endorsed with an appropriate legend evidencing the Corporation’s repurchase rights and may be held in escrow with the Corporation until such shares vest.

            (d) In no event may this option be exercised for fractional shares.

          11. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. Nor shall this Agreement in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Corporation or the stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law.

          12. COMPLIANCE WITH LAWS AND REGULATIONS.

            (a) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance.

            (b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. However, the Corporation shall use its best efforts to obtain all such applicable approvals.

6.

          13. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.

          14. CONSTRUCTION/GOVERNING LAW. This Agreement and the option evidenced hereby are made and granted pursuant to the automatic option grant program in effect under the Plan and are in all respects limited by and subject to the express terms and provisions of that program. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Delaware without resort to that State’s conflict-of-laws rules.

          15. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

7.

EXHIBIT I

NOTICE OF EXERCISE

     I hereby notify Advanced Fibre Communications, Inc. (the “Corporation”) that I elect to purchase            shares of the Corporation’s Common Stock (the “Purchased Shares”) at the option exercise price of $ per share (the “Exercise Price”) pursuant to that certain option (the “Option”) granted to me pursuant to the automatic option grant program under the Corporation’s 1996 Stock Incentive Plan on      , 199 .

     Concurrently with the delivery of this Exercise Notice to the Secretary of the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. Alternatively, I may utilize the special broker/dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price for any Purchased Shares in which I am vested at the time of exercise.

, 199
Date
	Optionee
	Address:
Print name in exact manner
it is to appear on the
stock certificate:
Address to which certificate
is to be sent, if different
from address above:
Social Security Number:

APPENDIX

     The following definitions shall be in effect under the Agreement:

     A. AGREEMENT shall mean this Automatic Stock Option Agreement.

     B. BOARD shall mean the Corporation’s Board of Directors.

     C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions:

     (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept, or

     (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination.

     D. CODE shall mean the Internal Revenue Code of 1986, as amended.

     E. COMMON STOCK shall mean the Corporation’s common stock.

     F. CORPORATE TRANSACTION shall mean either of the following stockholder- approved transactions to which the Corporation is a party:

     (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

A-1.

     (ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation
or dissolution of the Corporation.

     G. CORPORATION shall mean Advanced Fibre Communications, Inc., a Delaware corporation.

     H. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 10 of the Agreement.

     I. EXERCISE PRICE shall mean the exercise price payable per share as specified in the Grant Notice.

     J. EXPIRATION DATE shall mean the date on which the option term expires as specified in the Grant Notice.

     K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

     (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

     (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

     L. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice.

     M. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock Option accompanying this Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby.

A-2.

     N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept.

     O. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

     P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422.

     Q. OPTION SHARES shall mean the number of shares of Common Stock subject to the option.

     R. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice.

     S. PERMANENT DISABILITY shall mean the inability of Optionee to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more.

     T. PLAN shall mean the Corporation’s 1996 Stock Incentive Plan.

     U. PURCHASE AGREEMENT shall mean the stock purchase agreement (in form and substance satisfactory to the Corporation) which must be executed at the time the option is exercised for unvested Option Shares and which will accordingly (i) grant the Corporation the right to repurchase, at the Exercise Price, any and all of those Option Shares in which Optionee is not otherwise vested at the time of his or her cessation of service as a Board member and (ii) preclude the sale, transfer or other disposition of any of the Option Shares purchased under such agreement while those Option Shares remain subject to the repurchase right.

     V. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange.

     W. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over.

A-3.

     X. VESTING SCHEDULE shall mean the vesting schedule specified in the Grant Notice, pursuant to which Optionee will vest in the Option Shares in one or more installments over his or her period of Board service, subject to acceleration in accordance with the provisions of the Agreement.

A-4.

EX-10.47

EXHIBIT 10.47

ADVANCED FIBRE COMMUNICATIONS, INC.
NOTICE OF GRANT OF STOCK OPTION

     Notice is hereby given of the following option grant (the “Option”) to purchase shares of the Common Stock of Advanced Fibre Communications, Inc. (the “Corporation”):

     OPTIONEE:                                                                                                                                            

     GRANT DATE:                                                                                                                                            

     VESTING COMMENCEMENT DATE:                                                                                                    

     EXERCISE PRICE: $                                                                                  per share

     NUMBER OF OPTION SHARES:                                                                                shares

     EXPIRATION DATE:                                                                                                                         

     TYPE OF OPTION:             Incentive Stock Option
                                   Non-Statutory Stock Option

EXERCISE SCHEDULE: The Option shall become exercisable with respect to twenty five percent (25%) of the Option Shares upon Optionee’s completion of one (1) year of Service measured from the Vesting Commencement Date and shall become exercisable for the balance of the Option Shares in thirty-six (36) successive equal monthly installments upon Optionee’s completion of each additional month of Service over the forty-eight (48) month period measured from the first anniversary of the Vesting Commencement Date. In no event shall the Option become exercisable for any additional Option Shares after Optionee’s cessation of Service.

     Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the Advanced Fibre Communications, Inc. 1996 Stock Incentive Plan (the “Plan”). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A.

     Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation’s principal offices.

     NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Notice or in the attached Stock Option Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause.

     DEFINITIONS. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Stock Option
Agreement.

DATED:                                        , 199     

ADVANCED FIBRE

COMMUNICATIONS, INC.

By:

Title:

OPTIONEE

Address:

ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS

2

EXHIBIT A

STOCK OPTION AGREEMENT

EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

EX-10.48

EXHIBIT 10.48

INITIAL GRANT

ADVANCED FIBRE COMMUNICATIONS, INC.
NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR AUTOMATIC STOCK OPTION

     Notice is hereby given of the following option grant (the “Option”) to purchase shares of the Common Stock of Advanced Fibre Communications, Inc. (the “Corporation”):

     OPTIONEE:                                                                                                                                            

     GRANT DATE:                                                                                                                                            

     EXERCISE PRICE: $                                                                                  per share

     NUMBER OF OPTION SHARES: 20,000 shares

     EXPIRATION DATE:                                                                                                                         

     TYPE OF OPTION: Non-Statutory Stock Option

     DATE EXERCISABLE: Immediately Exercisable

VESTING SCHEDULE: The Option Shares shall initially be unvested and subject to repurchase by the Corporation at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Corporation’s repurchase right shall accordingly lapse with respect to, the Option Shares as follows: (i) one third of the Option Shares upon the Optionee’s completion of one year of service as a member of the Corporation’s Board of Directors (the “Board”) period measured from the Grant Date and (ii) the balance of the Option Shares in a series of twenty-four (24) successive equal monthly installments upon the Optionee’s completion of each additional month of Board service over the twenty-four (24)-month period measured from the first anniversary of the Grant Date. In no event shall any additional Option Shares vest after Optionee’s cessation of Board service.

     Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the automatic option grant program under the Advanced Fibre Communications, Inc. 1996 Stock Incentive Plan (the “Plan”). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Automatic Stock Option Agreement attached hereto as Exhibit A.

     Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation’s principal offices.

     REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND SHALL BE SUBJECT TO REPURCHASE BY THE CORPORATION, AT THE EXERCISE PRICE PAID PER SHARE, UPON OPTIONEE’S TERMINATION OF SERVICE AS A MEMBER OF THE CORPORATION’S BOARD OF DIRECTORS. THE TERMS AND CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE.

     NO IMPAIRMENT OF RIGHTS. Nothing in this Notice or in the attached Automatic Stock Option Agreement or the Plan shall interfere with or otherwise restrict in any way the rights of the Corporation or the Corporation’s stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law.

     DEFINITIONS. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Automatic Stock Option Agreement.

DATED:                                        , 199

ADVANCED FIBRE COMMUNICATIONS, INC.

By:

Title:

                    OPTIONEE

Address:

ATTACHMENTS
EXHIBIT A - AUTOMATIC STOCK OPTION AGREEMENT
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS

2.

EXHIBIT A

AUTOMATIC STOCK OPTION AGREEMENT

EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

ANNUAL GRANT

ADVANCED FIBRE COMMUNICATIONS, INC.
NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR
AUTOMATIC STOCK OPTION

     Notice is hereby given of the following option grant (the “Option”) to purchase shares of the Common Stock of Advanced Fibre Communications, Inc. (the “Corporation”):

     OPTIONEE:                                                                                                                                            

     GRANT DATE:                                                                                                                                            

     EXERCISE PRICE: $                                                                                  per share

     NUMBER OF OPTION SHARES: 6,000 shares

     EXPIRATION DATE:                                                                                                                         

     TYPE OF OPTION: Non-Statutory Stock Option

     DATE EXERCISABLE: Immediately Exercisable

VESTING SCHEDULE: The Option Shares shall initially be unvested and subject to repurchase by the Corporation at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Corporation’s repurchase right shall accordingly lapse with respect to, the Option Shares as follows: (i) one third of the Option Shares upon the Optionee’s completion of one year of service as a member of the Corporation’s Board of Directors (the “Board”) period measured from the Grant Date and (ii) the balance of the Option Shares in a series of twenty-four (24) successive equal monthly installments upon the Optionee’s completion of each additional month of Board service over the twenty-four (24)-month period measured from the first anniversary of the Grant Date. In no event shall any additional Option Shares vest after Optionee’s cessation of Board service.

     Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the automatic option grant program under the Advanced Fibre Communications, Inc. 1996 Stock Incentive Plan (the “Plan”). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Automatic Stock Option Agreement attached hereto as Exhibit A.

     Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation’s principal offices.

     REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND SHALL BE SUBJECT TO REPURCHASE BY THE CORPORATION, AT THE EXERCISE PRICE PAID PER SHARE, UPON OPTIONEE’S TERMINATION OF SERVICE AS A MEMBER OF THE CORPORATION’S BOARD OF DIRECTORS. THE TERMS AND CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE.

     NO IMPAIRMENT OF RIGHTS. Nothing in this Notice or in the attached Automatic Stock Option Agreement or the Plan shall interfere with or otherwise restrict in any way the rights of the Corporation or the Corporation’s stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law.

     DEFINITIONS. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Automatic Stock Option Agreement.

DATED:                                        , 199     

ADVANCED FIBRE COMMUNICATIONS, INC.

By:

Title:

                    OPTIONEE

Address:

ATTACHMENTS
EXHIBIT A - AUTOMATIC STOCK OPTION AGREEMENT
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS

2.

EXHIBIT A

AUTOMATIC STOCK OPTION AGREEMENT

EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

EX-10.49

EXHIBIT 10.49

ADVANCED FIBRE COMMUNICATIONS, INC.

STOCK ISSUANCE AGREEMENT

          AGREEMENT made as of this ___day of _______________19 ___, by and between Advanced Fibre Communications, Inc., a Delaware corporation, and _____________________, a Participant in the Corporation’s 1996 Stock Incentive Plan.

          All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement or in the attached Appendix.

     I. PURCHASE OF SHARES

          1. PURCHASE. Participant hereby purchases _________shares of Common Stock (the “Purchased Shares”) pursuant to the provisions of the Stock Issuance Program at the purchase price of $ ________ per share (the “Purchase Price”).

          2. PAYMENT. Concurrently with the delivery of this Agreement to the Corporation, Participant shall pay the Purchase Price for the Purchased Shares in cash or check payable to the Corporation and shall deliver a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares.

          3. STOCKHOLDER RIGHTS. Until such time as the Corporation exercises the Repurchase Right, Participant (or any successor in interest) shall have all the rights of a stockholder (including voting, dividend and liquidation rights) with respect to the Purchased Shares, subject, however, to the transfer restrictions of this Agreement.

          4. COMPLIANCE WITH LAW. Under no circumstances shall shares of Common Stock or other assets be issued or delivered to Participant pursuant to the provisions of this Agreement unless, in the opinion of counsel for the Corporation or its successors, there shall have been compliance with all applicable requirements of Federal and state securities laws, all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is at the time listed for trading and all other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery.

     A. TRANSFER RESTRICTIONS

          1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer, Participant shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Repurchase Right.

          2. RESTRICTIVE LEGEND. The stock certificate for the Purchased Shares shall be endorsed with the following restrictive legend:

     “The shares represented by this certificate are unvested and subject to certain repurchase rights granted to the Corporation and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated _________, 199___between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Corporation’s principal corporate offices.”

          3. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to the Repurchase Right to the same extent such shares would be so subject if retained by Participant.

     B. REPURCHASE RIGHT

          1. GRANT. The Corporation is hereby granted the right (the “Repurchase Right”), exercisable at any time during the ninety (90)-day period following the date Participant ceases for any reason to remain in Service, to repurchase at the Purchase Price all or any portion of the Purchased Shares in which Participant is not, at the time of his or her cessation of Service, vested in accordance with the Vesting Schedule (such shares to be hereinafter referred to as the “Unvested Shares”).

          2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to each Owner of the Unvested Shares prior to the expiration of the ninety (90)-day exercise period. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of such notice. The certificates representing the Unvested Shares to be repurchased shall be delivered to the Corporation prior to the close of business on the date specified for the repurchase. Concurrently with the receipt of such stock certificates, the Corporation shall pay to Owner, in cash or cash

2.

equivalent (including the cancellation of any purchase-money indebtedness), an amount equal to the Purchase Price previously paid for the Unvested Shares to be repurchased from Owner.

          3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under Paragraph C.2. In addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and all Purchased Shares in which Participant vests in accordance with the following Vesting Schedule:

     (i) Upon Participant’s completion of one (1) year of Service measured from _________, 199___, Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, twenty-five percent (25%) of the Purchased Shares.

     (ii) Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, the remaining Purchased Shares in a series of thirty six (36) successive equal monthly installments upon Participant’s completion of each additional month of Service over the thirty-six (36)-month period measured from the initial vesting date under subparagraph (i) above.

          4. RECAPITALIZATION. Any new, substituted or additional securities or other property (including cash paid other than as a regular cash dividend) which is by reason of any Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect such distribution shall be made to the number and/or class of securities subject to this Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such Recapitalization upon the Corporation’s capital structure; PROVIDED, however, that the aggregate purchase price shall remain the same.

     5. CORPORATE TRANSACTION.

               (a) Immediately prior to the consummation of any Corporate Transaction, the Repurchase Right shall automatically lapse in its entirety and the Purchased Shares shall vest in full, except to the extent the Repurchase Right is to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction.

               (b) To the extent the Repurchase Right remains in effect following a Corporate Transaction, such right shall apply to the new capital stock or other property (including any cash payments) received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but only to the extent the Purchased Shares

3.

are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation’s capital structure; PROVIDED, however, that the aggregate purchase price shall remain the same.

     C. SPECIAL TAX ELECTION

          1. SECTION 83(B) ELECTION . Under Code Section 83, the excess of the fair market value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Purchase Price paid for such shares will be reportable as ordinary income on the lapse date. For this purpose, the term “forfeiture restrictions” includes the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. Participant may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of this Agreement. Even if the fair market value of the Purchased Shares on the date of this Agreement equals the Purchase Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO. PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE FORFEITURE RESTRICTIONS LAPSE.

          2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT’S SOLE RESPONSIBILITY, AND NOT THE CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(B), EVEN IF PARTICIPANT REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

     D. GENERAL PROVISIONS

          1. ASSIGNMENT. The Corporation may assign the Repurchase Right to any person or entity selected by the Board, including (without limitation) one or more stockholders of the Corporation.

          2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Participant) or of Participant, which rights are hereby expressly reserved by each, to terminate Participant’s Service at any time for any reason, with or without cause.

4.

          3. NOTICES. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party’s signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph to all other parties to this Agreement.

          4. NO WAIVER. The failure of the Corporation in any instance to exercise the Repurchase Right shall not constitute a waiver of any other repurchase rights that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and Participant. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature.

          5. CANCELLATION OF SHARES. If the Corporation shall make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement.

     E. MISCELLANEOUS PROVISIONS

          1. PARTICIPANT UNDERTAKING. Participant hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Participant or the Purchased Shares pursuant to the provisions of this Agreement.

          2. AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the terms of the Plan.

          3. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without resort to that State’s conflict-of-laws rules.

          4. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

5.

          5. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and upon Participant, Participant’s assigns and the legal representatives, heirs and legatees of Participant’s estate, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms hereof.

          IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above.

ADVANCED FIBRE COMMUNICATIONS, INC.  

By: 

Title:

Address:

PARTICIPANT 

Address:

6.

SPOUSAL ACKNOWLEDGMENT

          The undersigned spouse of the Participant has read and hereby approves the foregoing Stock Issuance Agreement. In consideration of the Corporation’s granting the Participant the right to acquire the Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms of such Agreement, including (without limitation) the right of the Corporation (or its assigns) to purchase any Purchased Shares in which the Participant is not vested at the time of his or her termination of Service.

   PARTICIPANT’S SPOUSE

Address:

7.

EXHIBIT I

ASSIGNMENT SEPARATE FROM CERTIFICATE

          FOR VALUE RECEIVED _____________________hereby sell(s), assign(s) and transfer(s) unto Advanced Fibre Communications, Inc. (the “Corporation”), __________________(_________) shares of the Common Stock of the Corporation standing in his or her name on the books of the Corporation represented by Certificate No. _______________herewith and do(es) hereby irrevocably constitute and appoint __________________ Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises.

Dated: _______________ , 199___.

Signature

INSTRUCTION: Please do not fill in any blanks other than the signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the Corporation to exercise the Repurchase Right without requiring additional signatures on the part of Participant.

EXHIBIT II

SECTION 83(B) TAX ELECTION

This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2.

(1)   The taxpayer who performed the services is:

Name:
Address:
Taxpayer Ident. No.:

(2)	The property with respect to which the election is being made is ____________shares of the common stock of Advanced Fibre Communications, Inc.
(3)	The property was issued on ____________, 199______.
(4)	The taxable year in which the election is being made is the calendar year 199___.
(5)	The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer’s employment with the issuer is terminated. The issuer’s repurchase right lapses in a series of annual and monthly installments over a four (4)-year period ending on _____________________.
(6)	The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $ ___________ per share.
(7)	The amount paid for such property is $ _________ per share.
(8)	A copy of this statement was furnished to Advanced Fibre Communications, Inc. for whom taxpayer rendered the services            underlying the transfer of property.
(9)	This statement is executed on __________________, 199___.

Spouse (if any) Taxpayer

THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE CENTER WITH WHICH TAXPAYER FILES HIS OR HER FEDERAL INCOME TAX RETURNS AND MUST BE MADE WITHIN THIRTY (30) DAYS AFTER THE EXECUTION DATE OF THE STOCK ISSUANCE AGREEMENT. THIS FILING SHOULD BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED. PARTICIPANT MUST RETAIN TWO (2) COPIES OF THE COMPLETED FORM FOR FILING WITH HIS OR HER FEDERAL AND STATE TAX RETURNS FOR THE CURRENT TAX YEAR AND AN ADDITIONAL COPY FOR HIS OR HER RECORDS.

APPENDIX

          The following definitions shall be in effect under the Agreement:

     A. AGREEMENT shall mean this Stock Issuance Agreement.

     B. BOARD shall mean the Corporation’s Board of Directors.

     C. CODE shall mean the Internal Revenue Code of 1986, as amended.

     D. COMMON STOCK shall mean the Corporation’s common stock.

     E. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions:

     (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

     (ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation.

     F. CORPORATION shall mean Advanced Fibre Communications, Inc., a Delaware corporation.

     G. OWNER shall mean Participant and all subsequent holders of the Purchased Shares who derive their chain of ownership through a Permitted Transfer from Participant.

     H. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

     I. PARTICIPANT shall mean the person to whom the Purchased Shares are issued under the Stock Issuance Program.

A-1.

     J. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the Purchased Shares, PROVIDED AND ONLY IF Participant obtains the Corporation’s prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Participant’s will or the laws of intestate succession following Participant’s death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Participant in connection with the acquisition of the Purchased Shares.

     K. PLAN shall mean the Corporation’s 1996 Stock Incentive Plan.

     L. PLAN ADMINISTRATOR shall mean either the Board or a committee of the Board acting in its administrative capacity under the Plan.

     M. PURCHASE PRICE shall have the meaning assigned to such term in Paragraph A.1.

     N. PURCHASED SHARES shall have the meaning assigned to such term in Paragraph A.1.

     O. RECAPITALIZATION shall mean any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Corporation’s outstanding Common Stock as a class without the Corporation’s receipt of consideration.

     P. REORGANIZATION shall mean any of the following transactions:

     (i) a merger or consolidation in which the Corporation is not the surviving entity,

     (ii) a sale, transfer or other disposition of all or substantially all of the Corporation’s assets,

     (iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation’s outstanding voting securities are transferred in whole or in part to a person or persons different from the persons holding those securities immediately prior to the merger, or

     (iv) any transaction effected primarily to change the state in which the Corporation is incorporated or to create a holding company structure.

     Q. REPURCHASE RIGHT shall mean the right granted to the Corporation in accordance with Article C.

A-2.

     R. SERVICE shall mean the Participant’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an employee, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance, a non-employee member of the board of directors or a consultant.

     S. STOCK ISSUANCE PROGRAM shall mean the Stock Issuance Program under the Plan.

     T. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

     U. VESTING SCHEDULE shall mean the vesting schedule specified in Paragraph C.3, subject to the acceleration provisions of Paragraph C.5.

     V. UNVESTED SHARES shall have the meaning assigned to such term in Paragraph C.1.

A-3.

ADDENDUM
TO
STOCK ISSUANCE AGREEMENT

          The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Issuance Agreement dated 2- (the “Issuance Agreement”) by and between Advanced Fibre Communications, Inc. (the “Corporation”) and 1- (“Participant”) evidencing the stock issuance on such date to Participant under the terms of the Corporation’s 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to such terms in the Issuance Agreement.

INVOLUNTARY TERMINATION FOLLOWING
CORPORATE TRANSACTION

          1. To the extent the Repurchase Right is assigned to the successor corporation (or parent thereof) in connection with a Corporate Transaction, no accelerated vesting of the Purchased Shares shall occur upon such Corporate Transaction, and the Repurchase Right shall continue to remain in full force and effect in accordance with the provisions of the Issuance Agreement. The Participant shall, over Participant’s continued period of Service after the Corporate Transaction, continue to vest in the Purchased Shares in accordance with the provisions of the Issuance Agreement. However, immediately upon an Involuntary Termination of Participant’s Service within twelve (12) months following the Corporate Transaction, the Repurchase Right shall terminate automatically and all the Purchased Shares shall vest in full.

          2. For purposes of this Addendum, the following definitions shall be in effect:

               An INVOLUNTARY TERMINATION shall mean the termination of Participant’s Service by reason of:

               (i) Participant’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

               (ii) Participant’s voluntary resignation following (A) a change in Participant’s position with the Corporation (or Parent or Subsidiary employing Participant) which materially reduces Participant’s level of responsibility, (B) a reduction in Participant’s level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of Participant’s place of employment by more than

fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Participant’s consent.

          MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Participant, any unauthorized use or disclosure by the Participant of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by the Participant adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of the Participant or other person in the Service of the Corporation (or any Parent or Subsidiary).

          IN WITNESS WHEREOF, Advanced Fibre Communications, Inc. has caused this Addendum to be executed by its duly-authorized officer, and Participant has executed this Addendum, all as of the Effective Date specified below.

ADVANCED FIBRE COMMUNICATIONS, INC.

By:

Title:

1- , PARTICIPANT

EFFECTIVE DATE: ________, 199__

2.

ADDENDUM
TO
STOCK ISSUANCE AGREEMENT

     The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Issuance Agreement dated 2- (the “Issuance Agreement”) by and between Advanced Fibre Communications, Inc. (the “Corporation”) and 1- (“Participant”) evidencing the stock issuance on such date to Participant under the terms of the Corporation’s 1996 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to such terms in the Issuance Agreement.

INVOLUNTARY TERMINATION FOLLOWING
CHANGE IN CONTROL

          1. No accelerated vesting of the Purchased Shares shall occur upon a Change in Control, and the Repurchase Right shall continue to remain in full force and effect in accordance with the provisions of the Issuance Agreement. The Participant shall, over Participant’s continued period of Service after the Change in Control, continue to vest in the Purchased Shares in accordance with the provisions of the Issuance Agreement. However, immediately upon an Involuntary Termination of Participant’s Service within twelve (12) months following the Change in Control, the Repurchase Right shall terminate automatically and all the Purchased Shares shall vest in full.

          2. For purposes of this Addendum, the following definitions shall be in effect:

               A CHANGE IN CONTROL shall be deemed to occur in the event of a change in ownership or control of the Corporation effected through either of the following transactions:

               (i) the direct or indirect acquisition by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept, or

               (ii) a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members ceases by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board.

               An INVOLUNTARY TERMINATION shall mean the termination of Participant’s Service by reason of:

               (i) Participant’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

               (ii) Participant’s voluntary resignation following (A) a change in Participant’s position with the Corporation (or Parent or Subsidiary employing Participant) which materially reduces Participant’s level of responsibility, (B) a reduction in Participant’s level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of Participant’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Participant’s consent.

          MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Participant, any unauthorized use or disclosure by the Participant of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by the Participant adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of the Participant or other person in the Service of the Corporation (or any Parent or Subsidiary).

2.

          IN WITNESS WHEREOF, Advanced Fibre Communications, Inc. has caused this Addendum to be executed by its duly-authorized officer, and Participant has executed this Addendum, all as of the Effective Date specified below.

ADVANCED FIBRE COMMUNICATIONS, INC.

By:

Title:

1- , PARTICIPANT

EFFECTIVE DATE: __________ , 199__

3.

EX-10.50

Exhibit 10.50

ADDENDUM
TO
STOCK OPTION AGREEMENT

          The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement (the “Option Agreement”) by and between Advanced Fibre Communications, Inc. (the “Corporation”) and [optionee name] (“Optionee”) evidencing the stock option (the “Option”) granted this day to Optionee under the terms of the Corporation’s 1996 Stock Incentive Plan, and such provisions shall be effective immediately.

          All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement.

INVOLUNTARY TERMINATION FOLLOWING
CORPORATE TRANSACTION/CHANGE IN CONTROL

          1. To the extent the Option is, in connection with a Corporate Transaction, either to be assumed by the successor entity (or parent company) or to be replaced with a cash incentive program in accordance with Paragraph 6 of the Option Agreement, the Option shall not vest on an accelerated basis upon the occurrence of that Corporate Transaction, and the Option shall accordingly continue, over Optionee’s period of Service after the Corporate Transaction, to become exercisable for the Option Shares in one or more installments in accordance with the provisions of the Option Agreement. However, immediately upon an Involuntary Termination of Optionee’s Service within eighteen (18) months following such Corporate Transaction, the Option (or any replacement grant), to the extent outstanding at the time but not otherwise fully exercisable, shall automatically vest and become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares.

          2. The Option shall not vest on an accelerated basis upon the occurrence of a Change in Control, and the Option shall, over Optionee’s period of Service following such Change in Control, continue to become exercisable for the Option Shares in accordance with the provisions of the Option Agreement. However, immediately upon an Involuntary Termination of Optionee’s Service within eighteen (18) months following the Change in Control, the Option, to the extent outstanding at the time but not otherwise fully exercisable, shall automatically vest and become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares.

          3. The Option as accelerated under Paragraphs 1 or 2 shall remain so exercisable until the earlier of (i) the Expiration Date or (ii) the expiration of the one (1)-year period measured from the date of the Optionee’s Involuntary Termination.

          4. For purposes of this Addendum the following definitions shall be in effect:

               (i) An Involuntary Termination shall mean the termination of Optionee’s Service by reason of:

               (A) Optionee’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

               (B) Optionee’s voluntary resignation following (A) a change in Optionee’s position with the Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee’s duties and responsibilities, (B) a reduction in Optionee’s level of compensation (including base salary, fringe benefits and target bonus under any performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of Optionee’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Optionee’s consent.

               (ii) A Change in Control shall be deemed to occur in the event of a change in ownership or control of the Corporation effected through either of the following transactions:

               (A) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, or is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept, or

               (B) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board.

2.

          5. The provisions of Paragraph 3 of this Addendum shall govern the period for which the Option is to remain exercisable following the Involuntary Termination of Optionee’s Service within eighteen (18) months after the Corporate Transaction or Change in Control and shall supersede any provisions to the contrary in Paragraph 5 of the Option Agreement.

          IN WITNESS WHEREOF, Advanced Fibre Communications, Inc. has caused this Addendum to be executed by its duly-authorized officer as of the Effective Date specified below.

ADVANCED FIBRE COMMUNICATIONS, INC.
 

By:  

Title:  

EFFECTIVE DATE:__________________

3.

EX-11

EXHIBIT 11

TELLABS, INC.

COMPUTATION OF PER SHARE EARNINGS

(In millions, except per-share data)	2004			2003			2002
The following chart sets forth the computation of loss per share:
Numerator:
Net loss	$	(29.8	)	$	(241.6	)	$	(313.1	)
Denominator:
Denominator for basic loss per share – weighted average shares outstanding		420.2			413.1			411.4
Effect of dilutive securities:
Employee stock options and awards		—			—			—
Denominator for diluted loss per share — adjusted weighted average shares outstanding and assumed conversions		420.2			413.1			411.4
Loss per share, basic and diluted	$	(0.07	)	$	(0.58	)	$	(0.76	)

Under G.A.A.P., dilutive securities are not included in the computation of diluted earnings per share when a company is in a net loss position. Had dilutive securities been included, weighted average shares outstanding would have been 424.7 million, 416.7 million and 414.9 million in 2004, 2003 and 2002, respectively.

EX-13

Exhibit 13

tellabs 2004 Annual Report

What’s next?

Tellabs Profile

We deliver technology that transforms the way the world communicates^™ . Tellabs experts design, develop, deploy and support wireless and wireline network solutions. Our comprehensive broadband portfolio enables carriers in more than 100 countries to succeed in the new competitive environment. Tellabs (NASDAQ: TLAB) is part of the NASDAQ-100 Index. www.tellabs.com.

Contents

2	Letter to Stockholders from President and CEO Krish Prabhu
3	Financial Highlights
	Our financial position is among the industry’s strongest.
6	Questions for Krish Prabhu
	President and Chief Executive Officer Krish Prabhu answers investors’ frequently asked questions.
8	What’s Next at Home, at Work and on the Go
	Our leading-edge solutions help service providers deliver what’s next.
14	Tellabs Solutions and Applications
16	Management’s Discussion and Analysis
26	Reports of Management & Independent Registered Public Accounting Firm
28	Consolidated Financial Statements
32	Notes to Consolidated Financial Statements
50	11-Year Summary of Selected Financial Data
52	Board of Directors
54	Officers
55	Glossary
56	Investor Information

Cover: Andrew Langille and his classmates discover what’s next in online learning through Tellabs data solutions.

Right: Tellabs solutions help Martin Mendez, Ivan Fassione, Mariano Perez y Perez, Gonzalo Yazalde and Ariel Pietrocola of Pronto Esporte Clube stay in touch while their soccer team is on the road.

People are communicating in ways never before imagined. Tellabs grows with demand for what’s next.

Over 12 years household spending on communications has increased faster than any other spending category.

(Source Most recent available from OECD, the Organisation for Economic Co-operation and Development Worldwide data from Japan, United States, United Kingdom, and 22 other contries.

TELLABS 2004 ANNUAL REPORT / 1

2004 marked a turning point for telecom and Tellabs.

Dear Stockholders, Customers and Employees,

     In 2004, for the first time, people spent more money on mobile phone service than on conventional phone service. For the first time, most U.S. homes connected to the Internet at broadband speeds. And for the first time since 2000, our customers, the world’s leading providers of telecom services, spent more than they did the previous year.

     Worldwide demand for telecom services, especially mobile and broadband, continues to grow. One out of every four persons — double the number in 2000 — now uses a mobile phone. Telecom service providers are refocusing their capital spending to build next-generation networks. Their efforts are focused on enhancing mobile service, offering higher bandwidth in the “last mile” access network, and providing multiple services on a single network. Tellabs is well-positioned to grow in these three areas as the industry’s cycle of network upgrades unfolds.

     In January 2005, Tellabs marked its 30th anniversary. We enjoy long-standing relationships with our customers, who have deployed billions of dollars worth of Tellabs equipment. We have helped telecom service providers navigate through industry transitions from analog to digital, copper to fiber, wireline to wireless, and circuits to packets. Today, we stand ready to deliver what’s next.

  2

Financial Highlights
Tellabs fiscal years ended December 31, 2004, and January 2, 2004.

(In millions, except per-share and employee data)	2004			2003			Change
Revenue	$	1,232		$	980			26	%
Gross profit	$	657		$	354			86	%
Operating loss	$	(32	)	$	(265	)		88	%
Loss before income taxes	$	(10	)	$	(245	)		96	%
Net loss	$	(30	)	$	(242	)		88	%
Loss per share	$	(0.07	)	$	(0.58	)		88	%
Total cash, cash equivalents and marketable securities	$	1,116		$	1,123			-1	%
Total assets	$	3,523		$	2,608			35	%
Total liabilities	$	726		$	389			87	%
Stockholders’ equity	$	2,797		$	2,219			26	%
Net cash provided by operating activities	$	215		$	150			43	%
Working capital	$	1,295		$	1,291			< 1	%
Research and development expense	$	250		$	286			-13	%
Return on average equity		-1.2	%		-10.7	%		89	%
Weighted average shares outstanding		420			413			2	%
Number of employees at year-end		4,125			3,515			17	%

Tellabs’ 2004 results reflected a healthier telecom industry.

     After three years of declining sales, our revenue grew in 2004 by 20% to $1.2 billion (excluding revenue from acquisitions; discussed later). We grew faster than the market by executing well on our strategy to energize our core transport business. We helped our customers introduce tomorrow’s capabilities into today’s networks. For example, we introduced new features to help locate mobile callers during emergencies. In 2004, Tellabs achieved its best-ever sales to mobile service providers, who represented a third of our total revenue.

     It was not a perfect year, though. We had our share of problems as we outsourced manufacturing of international products. The results were orders we could not fill and late deliveries to customers. We have taken forceful action to remedy this problem, and we expect on-time delivery to improve in the first half of 2005.

Profound industry change is under way. That spells opportunity.

     The market for telecom services is a fierce battleground among telephone and cable TV companies. Over the next 10 years, these companies will merge disparate voice, data and video networks into a single, integrated network. These new multiservice networks will deliver a complete, competitive menu

TELLABS 2004 ANNUAL REPORT / 3

of services that includes movies on demand, interactive gaming, high-speed Internet access, VoIP (Voice over Internet Protocol) and more.

     Delivering such services will require much more bandwidth than is currently available in the access portion of the network, which directly connects to homes and businesses. Telecom service providers are spending more and more on building fiber access systems to reach neighborhoods and homes. Analysts project that by 2009, the number of U.S. homes with access to fiber will grow tenfold to 24 million.

Fiber access is a golden opportunity for Tellabs’ strategy to expand into adjacent markets.

     In November, Tellabs acquired the U.S. leader in fiber access, Advanced Fibre Communications (AFC). This acquisition strengthens Tellabs’ position as a strategic supplier to our largest customers, such as Verizon and BellSouth. AFC brings us a portfolio of Fiber to the Home (FTTH) and Fiber to the Curb (FTTC) equipment that we market as Tellabs FiberDirect^SM solutions. Since fiber-access systems reside next to Tellabs transport equipment in networks, we have a unique opportunity to design and deliver end-to-end access and transport solutions that are easier to operate than current systems.

     At $1.6 billion, AFC is Tellabs’ largest acquisition to date. In 2005, our primary focus will be to successfully integrate the people and operations of AFC into Tellabs. While we will continue to control Tellabs’ overall operating expenses in 2005, we are shifting more of our R&D resources towards the high-growth fiber access segment. In December we also acquired an Optical Networking Terminal (ONT) company, Vinci Systems. This action brings to Tellabs a next-generation device that connects fiber to homes more cost-effectively.

     The AFC and Vinci acquisitions generated certain one-time costs that caused Tellabs to report a loss in 2004 of $30 million or 7 cents per share. While we hate to lose money in a year of rebounding revenue, this short-term pain is the best way to position Tellabs in the high-growth area of fiber access.

     We generated positive operating cash flow in 2004, ending the year with more than $1.1 billion in cash and cash equivalents, despite the cash expended in our two acquisitions. In February 2005, we announced plans to buy back up to $300 million in Tellabs shares, since we feel that the market price for Tellabs stock does not accurately reflect our long-term prospects. With our current cash position, repurchasing shares is a good way for us to enhance stockholder value. Tellabs still retains the financial resources to carry out its growth strategies.

4

As multiservice networks are built, the industry shift to packet technology continues.

     Running separate networks for data, voice and video is inefficient, but to combine these services cost-effectively, telecom providers are continuing to transition from circuits to packets.

     Under Tellabs’ strategy to establish a presence in data , we now offer service providers a unique transition path to multiservice networks. The Tellabs MultiservicePLuS^SM solution helps service providers make this complex transition in a graceful, reliable and more cost-effective manner.

     Tellabs 2004 data revenues reflect the start-up nature of this business. We are making significant headway with customers. More than 30 telecom service providers are now testing Tellabs’ data solutions in their labs, and a dozen customers are deploy- ing the Tellabs 8800 system in networks around the world. Among our customers is the world’s largest telecom service provider, NTT Communications of Japan, which is doubling its deployment of the Tellabs 8800 system. In the United States, Broadwing is finalizing the construction of a single converged services network based on the Tellabs 8800 system. Tellabs’ data solutions are well-suited to meet the needs of our customer’s evolving networks.

     During the past year, my first at Tellabs, I met and worked with many of our employees around the world. Based on decades of industry experience, I must say that Tellabs has a hard-working, talented team of employees who are dedicated to our customers’ success. We are grateful to our employees for achieving so much in 2004.

     As industry changes unfold over the next decade, Tellabs will continue as customers’ trusted partner, working side by side to manage the complexities of evolving to next-generation networks. I am confident we have the people, the strategies and the resources to do just that. It is the best way to ensure Tellabs’ long-term growth and success.

     Sincerely

     

     Krish Prabhu

     President and Chief Executive Officer

     February 23, 2005

TELLABS 2004 ANNUAL REPORT / 5

Investors’ Frequently Asked Questions

Tellabs’ President and CEO Krish Prabhu answers investors’ frequently asked questions.

Q. How is your access strategy developing with the completion of the AFC acquisition?

A. We finalized the AFC acquisition on November 30, and are focused on successfully integrating the two companies to provide enhanced solutions to our customers. We also acquired Vinci Systems on December 30, which brings us a third-generation Optical Networking Terminal (ONT) that complements AFC products we now market as Tellabs FiberDirect^SM solutions.

We continue to strengthen our relationships with both Verizon and BellSouth, two major North American communications service providers. We also will work to strengthen our position as the North American leader in fiber-access solutions.

Q. What is the industry doing to provide fiber access to homes?

A. Industry analysts predict that by 2009, about 24 million U.S. households will have the option of fiber access. Verizon, for whom Tellabs is the main provider of Fiber to the Home (FTTH) access solutions, plans in 2005 to extend fiber access to at least 3 million households and businesses. BellSouth, where Tellabs has an installed base of nearly 1 million lines of Fiber to the Curb (FTTC) access solutions, may pass up to 3 million households with fiber access by year-end 2005. We will continue to work with our customers to provide industry-leading fiber-access solutions and implementation services.

Q. What progress have you made on your three key strategies to energize the core business, establish a presence in data and expand into adjacent markets?

A. In 2004, we made solid progress on all three strategies.

In our core business, we enhanced our transport solutions with new features that enable our customers to deliver mobile and data services to businesses and consumers. We will continue to enhance these products with the features that operators need to provide high-quality voice services, deliver new data capabilities and handle increasing demand for network capacity. Our year-over-year revenue growth demonstrates the success of this strategy.

6

We gained traction in our data business. Our data solutions generated more than $17 million in 2004 revenue. Even more important for the long term, we set in motion more than 30 customer trials and have a current pipeline of more than 100 opportunities worldwide. While the decision cycle for data purchasing is long, we are confident of continuing progress during 2005.

We acted on our strategy to expand into adjacent markets through the acquisitions of AFC and Vinci Systems. Tellabs is now the U.S. leader in fiber-access solutions, which are key to enabling telecom companies to offer a competitive menu of voice, data and video services.

Q. What is your international strategy?

A. As communications services migrate from place-centric to people-centric, the worldwide market grows in importance. We are building on strong international customer relationships and a large installed base of managed access equipment in more than 100 countries. We will foster these relationships to provide a platform for growth in our new Ethernet, multiservice and next-generation wireless solutions. In the longer term, as competition heats up in international markets, we also see increasing potential for fiber-access solutions.

Q. What will drive Tellabs’ future growth?

A. Increasing demand for new, higher-speed data and video services over wireless and fixed networks will drive our growth. The trends we see at work, at home and on the go are detailed on the next few pages of this report. We are focused on providing the solutions our customers need to handle constantly changing demands on their communications networks.

TELLABS 2004 ANNUAL REPORT / 7

Through Tellabs FiberDirect^SM solutions, Ryley Conway, Nolan Conway,
Lyndsey Conway and Jessica Wolthman watch what’s next in multimedia entertainment.

Analysts forecast that by 2009, 24 million U.S. households will have access to fiber, up tenfold from 2004.

Cumulative U.S. Homes Passed and Subscribers

In thousands

(Source: KMI Research, August 2004.)

What’s next at home?

     Today, you can save a trip to the music store by downloading music over the Internet. Teens play video games with their peers around the world. Employees skip the commute and work from home. So it’s no surprise that in 2004, for the first time, more than half of U.S. Internet users connected from home with broadband links such as cable modems and Digital Subscriber Line (DSL) service. Japan and Korea already have achieved even higher penetration levels of broadband to the home.

     As a result of the AFC acquisition in late 2004, Tellabs now delivers cost-effective DSL solutions, enabling telecom companies to provide service to millions of North American consumers without building new networks. Tellabs’ cable telephony solution also delivers phone service to hundreds of thousands of cable TV customers worldwide.

Tellabs FiberDirect^SM solution speeds up the Internet. Hang on tight.

     What’s next? The blazing speed of a fiber-optic connection, direct to the neighborhood or to the home, will deliver a host of new entertainment choices unavailable through today’s broadband connections. Analysts estimate that by 2009, fiber access will grow tenfold to reach some 24 million households in the United States alone.

     Through the acquisition of AFC, Tellabs now is the leading provider in the U.S. market for fiber-based access. With more than a million lines connected, we have more experience deploying fiber-access networks in the U.S. than anyone else.

Tellabs MediaDirect^SM solution delivers sharp pictures plus more choices.

     Tellabs MediaDirect^SM solution enables telecom companies to outperform their competitors by delivering new services with high reliability and increased bandwidth. This solution delivers Internet Protocol television (IPTV) and Video on Demand (VoD), which offer razor-sharp video, HDTV (High Definition TeleVision) and a wide array of program choices. The Tellabs AdvancedVoice^SM solution delivers a new, more affordable phone service called VoIP (Voice over Internet Protocol).

     Verizon chose Tellabs as its first source for its Fiber to the Home initiative. And BellSouth uses Tellabs access solutions to connect newly built neighborhoods.

     Stay tuned. This story is just beginning.

TELLABS 2004 ANNUAL REPORT / 9

Growing demand for business data services creates opportunities for Tellabs data solutions.

Worldwide Ethernet and Legacy Data Services

In billions of dollars

(Source: Gartner — Forecast Fixed Public Network Services Worldwide 2002-2008; July 2004, Wm. L. Hahn & Alex Winogradoff.)

Tellabs data solutions enable David Utter to conduct real-time business over the Internet with confidence his critical data will reach its destination.

10

What’s next at work?

     Communication is the lifeblood of business. Worldwide revenue from business data services is growing by more than $10 billion every year. Businesses rely on communication networks for a wide variety of voice, data, video and mobile applications, including critical, real-time financial transactions.

     To meet this demand, telecom service providers must offer data services that are economical and highly reliable. Many businesses plan to switch to more affordable, faster Ethernet services. However, for critical business communication, traditional Ethernet networks often are not reliable enough.

Tellabs AssuredEthernet^SM solution delivers data with guaranteed reliability.

     Tellabs’ Ethernet solutions can deliver affordable data services with the level of reliability that is required for today’s business needs. Our wide range of solutions provides telecom service providers with multiple choices for deploying high-speed services, including the ability to deliver Ethernet over SONET (Synchronous Optical NETwork), SDH (Synchronous Digital Hierarchy), fiber and DSL. In 2005, we will extend our successful international Ethernet-over-copper solutions to the United States. This solution is tailored to fit the 80% of U.S. businesses that lack fiber access.

     The Tellabs solution is unique because it delivers new Ethernet services with the traditional Quality of Service (QoS) that telecom service providers demand. Additionally, with the Tellabs solution, telecom companies even can customize individual data services for each business customer.

Tellabs MultiservicePLuS^SM solution uniquely blends existing and new data services.

     As new data services emerge, business customers need to exchange data over mixed networks. Tellabs MultiservicePLuS^SM solution enables businesses to share information regardless of network type. For example, a bank branch on a Frame Relay network needs to communicate with the new bank headquarters, which uses a newer Ethernet network. With Tellabs’ solution, the bank branch and headquarters can share data over their existing networks. If the bank decides to move the branch to an Ethernet network, Tellabs MultiservicePLuS^SM solution enables seamless migration, which prevents service interruptions, saves time and lowers costs. With other solutions, in order for the two locations to share data, the branch would need to build a new Ethernet network, incurring service interruptions and additional costs.

     With Tellabs, telecom service providers can deploy new data services in real time, without disrupting current services. MCI uses this feature to tie Internet Service Providers (ISPs) together so they can smoothly exchange Internet traffic.

     Tellabs enhanced its position in the data market in 2003 by acquiring Vivace Networks and the Tellabs 8800 series. Today, the Tellabs 8800 series is deployed at NTT Communications, the largest telecom company in the world. This platform is gaining acceptance worldwide as the next-generation solution for delivering new Ethernet and IP services, as well as current Frame Relay and Asynchronous Transfer Mode (ATM) services on converged networks.

     TELLABS 2004 ANNUAL REPORT / 11

In 2004, for the first time, people spent more money on mobile than on traditional phone services worldwide.

Services Revenue:

Worldwide Mobile vs. Fixed

(Source: Gartner – Forecast Global Telecommunications Market Take 3Q04; October 2004, Wm. L. Hahn, et al.)

12

What’s next on the go?

     One-fourth of the world’s population now communicates via a mobile phone. At 1.5 billion users, the number of worldwide mobile subscribers has doubled since 2000. As mobile phones gain new capabilities, people are:

•   sending more than 400 billion Short Message Service (SMS) messages per year

•   taking digital photos and sharing them with friends and family

•   reading newspapers, novels and other texts

•   connecting to e-mail and the Internet

•   viewing video clips of televised sports and news events.

     What’s next? New applications in areas such as gaming and streaming video are on the way. And it will become more common for consumers to buy and pay for goods and services using a mobile phone.

     To support these bandwidth-hungry applications, mobile companies around the world are migrating to next-generation networks that are designed to carry data and voice. This ongoing migration will continue to fuel Tellabs’ growth in the wireless sector. The changing mix of voice, data and video traffic in multiple formats drives demand for new solutions such as the Tellabs 8600 managed edge system and the Tellabs 8800 series, which help mobile service providers meet the changing demands on their networks.

Tellabs IntegratedMobile^SM solution enables mobile services around the world.

     About a third of Tellabs’ 2004 revenue came from the wireless market. In the U.S., all of the leading wireless companies use equipment such as the Tellabs 5500 digital cross-connect system in their transport networks. Many also deploy the Tellabs 3000 voice-quality enhancement series to improve sound quality, thereby increasing call length and revenue.

     In international markets, Tellabs partners with Ericsson and Nokia to transport traffic in wireless networks via the Tellabs 8100 and Tellabs 6300 systems. We also work directly with mobile companies. For example, Beijing Zhengtong Network Telecommunications chose Tellabs IntegratedMobile^SM solutions as part of the wireless network for the 2008 Olympics.

In 2005, our wireless solutions will fit into a smaller space.

     Most wireless operators lease space for their network equipment, so floor space is at an absolute premium. To meet this need, in 2005 we plan to introduce a new feature package for the Tellabs 5500 system that saves space and reduces energy costs by tripling bandwidth capacity in the same space. We also are integrating our voice-quality enhancement solution to fit inside the Tellabs 5500 system, saving wireless operators even more space.

TELLABS 2004 ANNUAL REPORT / 13

Tellabs Solutions and Applications

Solutions	Benefits for Telecom Service Providers
Tellabs® AssuredEthernetSM solutions	Business demand for new Ethernet services is growing rapidly. Tellabs solutions:
enable customized services with	•	Enable simple, rapid deployment of cost-effective Ethernet services
guaranteed delivery.	•	Offer Quality of Service (QoS) guarantees in an IP/MPLS environment so providers can protect existing SLAs (Service Level Agreements)
	•	Enable providers’ success over any network type so they can leverage existing platforms and technology.
Tellabs® MultiservicePLuSSM solution enables service providers to combine	Service providers need a cost-effective way to deliver new services with the same QoS guarantees that apply to existing services. Tellabs solutions:
current ATM/FR services and new Ethernet and IP solutions on the same platform.	•	Enable new Ethernet or IP customers to communicate with existing Frame Relay or ATM customers with a unique service interworking function
	•	Offer QoS guarantees for existing Frame Relay and ATM customers over IP/MPLS networks.
Tellabs® FiberDirectSM solution is a	Tellabs FiberDirect solutions:
complete, simple and cost-effective way to deploy fiber access.	•	Enable providers to quickly and economically transition from copper-based networks to high-speed, high-capacity fiber networks
	•	Bring together the variety of products and services needed to deploy FTTx successfully
	•	Provide a comprehensive suite of advanced voice and broadband services over multiple network architectures.
Tellabs® IntegratedMobileSM solutions enable wireless operators to migrate from 2G networks to 2.5G and 3G services	In the evolving wireless market, service providers must operate more efficiently and offer new 2.5G and 3G services to stay competitive. Tellabs solutions:
without the expense of multiple technology overlays.	•	Maximize use of existing networks by integrating new capabilities on existing equipment
	•	Collapse multiple functions such as grooming and voice-quality enhancement onto a single, scalable platform with a common management system.
Tellabs® MediaDirectSM is a cost-	In today’s competitive environment, Tellabs MediaDirect helps service providers:
effective solution that enables service	•	Offer the “triple play” of voice, video and data
providers to deliver advanced voice,	•	Reduce customer churn and increase revenue
Internet, video and other entertainment services.	•	Deliver video services such as pay-per-view, Video on Demand, personal video recording, and network gaming — all packaged with voice and high-speed Internet services.
Tellabs® AdvancedVoiceSM solution enables the seamless migration of voice and high-speed data applications onto a single, packetized	Service providers face competitive pressures and increased consumer demand for faster, cheaper and more advanced services. To combat these pressures and to meet subscriber demands, Tellabs helps service providers:
network.	•	Converge voice and data traffic onto a single network
	•	Deliver voice and broadband services cost-effectively
	•	Implement converged network solutions at their own pace.
Tellabs® UniversalDSLSM provides a complete solution, delivering DSL services to every subscriber.	Growing demand for high-speed Internet access calls for a reliable, field-proven solution that efficiently delivers DSL services to every subscriber, regardless of location. With this flexible DSL solution, service providers can:
	•	Leverage their existing networks
	•	Minimize operating costs
	•	Deliver a comprehensive suite of DSL services.
Tellabs® ProfessionalServicesSM	Tellabs ProfessionalServices helps service providers address these critical business and competitive challenges:
assists our customers in the planning,	•	Increase revenues	• Reduce costs
design, integration, deployment,	•	Reduce network complexity	• Reduce time to market
support and ongoing management of Tellabs solutions.	•	Improve network resilience and reliability	• Reduce risk.

 14

Examples of Customers	Products	Competitors
Banverket Telenat, BSNL,	Tellabs® 1000 Multi-Service Access series,	Alcatel, Cisco,
MCI, NTT Communications,	Tellabs® 5500 digital cross-connect,	Juniper Networks
Telekom Malaysia,	Tellabs® 6300 managed transport systems,
Telenor, TeliaSonera	Tellabs® 7100 optical transport system, Tellabs® 8100 managed access system, Tellabs® 8800 multi-service router series
MCI,	Tellabs® 8800 multi-service router series	Alcatel, Lucent,
PacketExchange		Nortel
BellSouth,	Tellabs® 1000 Multi-Service Access series,	Alcatel, Motorola
Pembroke Telephone,	Tellabs® 1100 Multi-Service Access series
Verizon
Beijing Zhengtong,	Tellabs® 3000 voice-quality enhancement systems,	Alcatel
China Mobile, China Unicom,	Tellabs® 5320L digital cross-connect, Tellabs 5500 system,
Ericsson, Nokia, TeliaSonera, Verizon Wireless	Tellabs 6300 systems, Tellabs 8100 system, Tellabs® 8600 managed edge system, Tellabs® 8800 multi-service router series,
	Tellabs integrated voice products
BellSouth, Cap Rock Telephone Cooperative,	Tellabs® 1000 Multi-Service Access series, Tellabs® 1200 Multi-Service	Motorola
ETEX Telephone Cooperative, Project Mutual Telephone, Texas Lone Star Network, Twin Valley Telephone	Aggregation series, Tellabs 7100 system, Tellabs® 8800 multi-service router series
SBC Communications;	Tellabs® 1000 Multi-Service Access series,	Alcatel, Lucent,
Suratel, a TVCable Ecuador Company;	Tellabs® 2300 telephony distribution system,	Nortel
TeliaSonera	Tellabs 7100 system, Tellabs® 8800 multi-service router series
SBC Communications	Tellabs® 1000 Multi-Service Access series,	Alcatel, Lucent
	Tellabs® 1200 Multi-Service Aggregation series,
	Tellabs 8100 system
BSNL, CTI, Eschelon Telecom, Inc.,	Deployment services,	Not applicable
Global Crossing, J-COM, Movilnet,	Professional services,
Telefonica	Support services,
	Training

TELLABS 2004 ANNUAL REPORT / 15

Management’s Discussion and Analysis

Introduction and Overview of Business

Tellabs designs, develops, deploys and supports products used in wireless and wireline networks in almost 100 countries. More than two-thirds of telephone calls and Internet sessions in the United States and several other countries flow through our equipment. Our product portfolio includes solutions for next-generation transport, Ethernet networks, multiservice edge, next-generation mobile, fiber-based access, advanced voice and video and DSL (Digital Subscriber Line). We are focused on three key strategies: energizing our core business, establishing a presence in 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 telecommunications service providers. In addition, we generate revenue by providing installation and professional services related primarily to our own products and systems.

     Within North America we derive the majority of our revenue from transport products, principally digital cross-connect systems that manage and route network traffic and combine, consolidate and segregate signals to maximize efficiency. Demand for these products is sensitive to end-user demand for wireless services, bandwidth, industry capacity utilization and competing technologies. We also generate revenue in North America from access products. Demand for these products is driven by the local telephone companies’ plans to deliver triple-play (voice, data and video) services to residential customers as a way to compete with cable TV providers. According to industry analysts, Tellabs has a market-leading position in the U.S. bandwidth management and access markets.

     Outside North America we earn the majority of our revenue from managed access and transport systems that control the flow of voice, data and video across communications networks. Demand comes primarily from two sources: business services for voice and high-speed data and network transport services for wireless communications. Demand for these products is sensitive to end-user demand for bandwidth, industry capacity utilization and competing technologies.

     In addition, we are a leading provider of voice-quality enhancement solutions globally and one of the top three providers of cable telephony solutions worldwide.

     We also earn revenue from network construction and other professional services. Network construction revenue, which comprises more than half of our services revenue, arises primarily from sales of our transport products in North America and tends to lag product sales by approximately one fiscal quarter. As a result, it has tended to increase or decrease in similar proportion to the increase or decrease in revenue from those products. Professional services offered by the company include network deployment, traffic management, support services and training. Another major source of services revenue is support agreements related to our managed access and transport systems outside North America.

     The markets for our products have undergone dynamic change over the last few years. Beginning in 2001, carrier overcapacity, a softening economy and other factors caused our customers to significantly reduce their capital spending. The impact on Tellabs was a dramatic decline in revenue for each of the years 2001 through 2003 with year-over-year growth returning in 2004. As these changes unfolded we were faced with excess manufacturing capacity, excess inventories and a cost structure that could not be supported by our smaller revenue base. We responded by closing manufacturing facilities, reducing global head-count, consolidating office space, exiting certain product lines and instituting cost controls across the organization. We also reviewed our product portfolio and cut back or stopped development efforts on some products. In addition, at the end of 2003, we moved to outsource the majority of our remaining manufacturing operations to third-party electronics manufacturing services providers to take advantage of their greater purchasing power and other efficiencies. These actions caused us to record material charges in 2001 through 2004 for excess and obsolete inventory and excess purchase commitments, severance costs, facilities shutdown costs, including accelerated depreciation on certain manufacturing and office building and equipment due to shortened useful lives, and various contractual obligations. We also recorded charges for other impaired and surplus assets.

     Market stability began in 2003 and continued in 2004 as carriers invested in their networks at levels at or above 2003. This stability enabled us to post year-over-year revenue growth for the first time since fiscal 2000. However, change continues to be a significant factor in our markets. Growing demand for wireless services, including the new 3G services, is driving investment by both wireless and wireline carriers. This shift helps drive sales of our transport, VQE and managed access products.

     In order to achieve our targeted synergies following our acquisition of AFC, and to support achievement of our strategic and financial goals, we are currently reviewing our spending, asset utilization and product development roadmap opportunities to optimize revenue, improve asset utilization and contain spending. We expect that potential opportunities could include closing facilities, reducing our

16 

workforce and realigning research and development spending within our product portfolio. Although we have not completed these plans, it is likely that future implementation of the plans could result in restructuring and similar charges.

Acquisitions

On December 30, 2004, Tellabs acquired Vinci Systems Inc. (Vinci), a privately held developer of Optical Networking Terminals (ONTs) for Fiber to the Premise (FTTP) access systems. Under the terms of the agreement, we will pay up to $52.5 million in cash and Tellabs restricted stock related to the acquisition of Vinci. This acquisition enables us to deliver a more cost-effective fiber access solution.

     On November 30, 2004, Tellabs acquired Advanced Fibre Communications, Inc. (AFC), a leading supplier of access products for approximately $1.6 billion. Under the terms of the merger, AFC stockholders received 0.504 shares of Tellabs common stock and $12.00 in cash for each AFC share of common stock. We issued approximately 44.8 million shares of our common stock for the acquisition. We used our U.S.-based cash and cash equivalents to satisfy the cash portion of the purchase price. As a result of the transaction, historical Tellabs stockholders own approximately 90% of the combined company and historical AFC stockholders own approximately 10%. In conjunction with the acquisition, Frank Ianna, a director of AFC since February 2004 and retired president of AT&T Network Services, joined Tellabs’ board of directors. Our results of operations for the fourth quarter and full year 2004 include AFC’s results for the one-month period following the acquisition. Going forward we will report revenue from AFC’s and Vinci’s products in a new revenue category called Access. (See Note 4, Business Combinations, on page 37.)

     Our consolidated balance sheet at December 31, 2004, includes the estimated fair values of the assets and liabilities of AFC and Vinci as determined under the accounting rules for purchase acquisitions. The amounts reflect our best estimate of the fair values of the assets and liabilities at that date, which are subject to change as we complete the valuation and purchase-accounting processes.

     As a result of our merger with AFC, we became party to a multiyear agreement with Verizon Services Group (“Verizon”) to be the primary FTTP project vendor in providing the central office and premises electronics required for the delivery of telephone, data and video services to customers’ homes or business locations over fiber optic cable. Although the overall contract is expected to be profitable, gross margins are below Tellabs historical gross margins. One component, the ONT, is sold substantially below our current cost. Therefore, the associated revenue and profitability are affected by the timing and mix of components in the deployment of FTTP systems and the mix of customers. We expect to ship significantly larger volumes of ONTs in 2005 than in 2004 and that ONTs will constitute a larger percentage of our overall revenue. If that does occur, the impact would be lower overall gross margins.

     We have an active remediation program in place to address the profitability of the ONT component. Over the next year we expect product design changes, component price reductions and increased production volumes to help improve gross margins. In addition, Vinci is developing a lower-cost ONT which will help improve the overall FTTP gross margins. The other components of the FTTP systems are expected to continue to sell to customers at a profit.

     The Verizon agreement has several provisions requiring penalties for failure to meet key milestones by specified dates. Prior to its acquisition by Tellabs, AFC failed to meet certain milestones related to delivery of products or features, which triggered the penalty provisions. In total, AFC recorded $5.3 million in penalties prior to being acquired by Tellabs.

     In June 2004 Verizon informed AFC that it believed AFC’s failure to meet certain milestones and to deliver certain product features under a corrective action plan constituted a default and a breach of their agreement. Verizon has reserved all of its legal rights and remedies under the agreement, which may include termination of the agreement without the required advance notice, pursuing claims against AFC and Tellabs for costs and other damages caused by the breach, adjusting or eliminating the exclusivity clause and canceling previously placed orders. We could experience additional penalties in the future if we fail to comply with the remaining milestones. However, Verizon has not terminated the contract and continues to purchase products and services from AFC and Tellabs, including FTTP systems.

Results of Operations

For 2004, we recorded a net loss of $29.8 million ($0.07 per share) compared with a net loss of $241.6 million ($0.58 per share) in 2003 and a net loss of $313.1 million ($0.76 per share) in 2002. The year-over-year improvements were driven by higher revenue, lower restructuring and other charges, higher gross margins and lower operating expenses exclusive of restructuring and unusual charges.

TELLABS 2004 ANNUAL REPORT / 17

Revenue

In 2004 we recategorized our product offerings into four areas to better reflect our business dynamics: transport, managed access, broadband data and voice quality enhancement (“VQE”). In December 2004, we added a fifth category, access, to incorporate the access products we obtained through our acquisition of AFC and Vinci.

							2004 vs.			2003 vs.
(In millions, except percentages)	2004		2003		2002		2003			2002
Transport	$	588.2	$	419.4	$	579.1		40	%		(28	)%
Managed Access		331.0		336.1		455.0		(2	)%		(26	)%
Voice Quality Enhancement		84.3		68.2		103.7		24	%		(34	)%
Access		53.3		—		—		—			—
Broadband Data		17.4		6.4		—		172	%		—
Services		157.6		150.3		179.2		5	%		(16	)%
Total	$	1,231.8	$	980.4	$	1,317.0		26	%		(26	)%

     Total revenue grew by 26% (20% excluding the December 2004 revenue from AFC) in 2004 compared with a 26% decline in 2003. Total 2004 revenue was $1,231.8 million compared with $980.4 million in 2003 and $1,317.0 million in 2002. Revenue within North America amounted to $813.0 million (66% of total revenue) in 2004 compared with $597.8 million (61% of total revenue) in 2003 and $916.4 million (70% of total revenue) in 2002. International revenue was $418.8 million (34% of total revenue) in 2004 compared with $382.6 million (39% of total revenue) in 2003 and $400.6 million (30% of total revenue) in 2002.

     Transport revenue for 2004 increased by $168.8 million, or 40%, to $588.2 million from $419.4 million in 2003. Transport revenue for 2003 decreased by $159.7 million, or 28%, from $419.4 million in 2002. The improvement in 2004 was attributable to increased spending by wireless carriers to meet growing capacity requirements and to build out their networks to provide new 3G services. We also experienced increased orders from wireline carriers due to increased end-user demand after a period of restrained spending. The decline in 2003 was attributable to the industrywide spending curtailment that began in 2001. This category includes the Tellabs^® 5300 and 5500 digital cross-connect systems, Tellabs^® 5500 NGX transport switch, Tellabs^® 6500 transport switch and Tellabs^® 7100 optical transport system.

     Managed access revenue remained relatively constant at $331.0 million in 2004 compared with $336.1 million in 2003, but declined by $118.9 million, or 26%, from $455.0 million in 2002. This category includes the Tellabs^® 8100 managed access system, the Tellabs^® 6300 managed transport system and the Tellabs^® 2300 telephony distribution system. The decline in revenue in 2003 was primarily attributable to a decline in revenue from our Tellabs 2300 products as a result of a change in business strategy by a major customer.

     VQE revenue increased by $16.1 million, or 24%, in 2004 to $84.3 million from $68.2 million in 2003. VQE revenue declined by $35.5 million, or 34%, in 2003 from $103.7 million in 2002. As with our transport products, the growth in 2004 was attributable to increased spending by wireless carriers. This category includes the Tellabs^® 3000 series of VQE products and other products.

     Access revenue of $53.3 million in 2004 represents one month of revenue from our merger with AFC at the end of November 2004. This category includes the Tellabs^® 1000 Multi-Service Access systems.

     Broadband data revenue more than doubled in 2004 to $17.4 million from $6.4 million in 2003, when Tellabs had the product available for sale during the last six months of the year. This category includes the Tellabs^® 8800 multi-service router series and the Tellabs^® 8600 next-generation wireless aggregation platform.

     Services revenue increased by $7.3 million, or 5%, in 2004 to $157.6 million from $150.3 million in 2003, and it declined by $28.9 million, or 16%, in 2003 from $179.2 million in 2002. The decline in revenue from 2002 to 2003 was attributable to lower sales of products both in the North America and international markets. Revenue from Services did not recover in 2004 at the same rate as product revenue because a larger percentage of our product sales in North America were of products that require less installation or are more readily installed by our customers without assistance from Tellabs.

Gross Profit & Margin

(In millions, except percentages)	2004			2003			2002
Gross Profit	$	657.0		$	354.0		$	486.5
Gross Margin		53.3	%		36.1	%		36.9	%
Product Gross Profit	$	612.2		$	317.1		$	440.1
Product Margin		57.0	%		38.2	%		38.7	%
Services Gross Profit	$	44.8		$	36.9		$	46.4
Services Margin		28.4	%		24.6	%		25.9	%

18 

Gross Profit

Total gross profit was $657.0 million (53.3% of revenue) in 2004 compared with $354.0 million (36.1% of revenue) in 2003, and $486.5 million (36.9% of revenue) in 2002. Unusual charges for excess and obsolete inventories and excess purchase commitments reduced gross profit by $70.7 million (7.2% of revenue) in 2003 and by $99.7 million (7.6% of revenue) in 2002. In addition, in 2003 we incurred $23.7 million (2.4% of revenue) of accelerated depreciation on our U.S. manufacturing facility and equipment due to our decision to outsource our manufacturing operations. The impact of unusual charges on 2004 gross profit was not significant.

     Gross profit declined in 2003 compared with 2002 due primarily to lower revenue. Gross profit improved in 2004 due to higher revenue compared with 2003, the absence of significant unusual charges compared with 2003 and lower product cost as a result of outsourcing our manufacturing operations at the end of 2003.

     Gross margin improved in 2004 compared with 2003 due to the absence of significant unusual charges (9.9%), lower manufacturing-related costs (6.9%), improved margins on professional services (0.7%) and overall product and services mix (1.1%). The inclusion of access revenue and cost of revenue for one month in 2004 reduced full-year margins by 1.4% compared with 2003. Gross margin declined slightly in 2003 compared with 2002 due to the increased impact of restructuring and inventory-related charges (2.4%), offset by favorable product mix driven by reduced sales of the Tellabs 6500 system, which has significantly lower margins than our other products (0.9%) and improved manufacturing and services efficiencies (0.7%).

Product Gross Profit

Total product gross profit was $612.2 million (57.0% of product revenue) in 2004 compared with $317.1 million (38.2% of product revenue) in 2003, and $440.1 million (38.7% of product revenue) in 2002. Unusual charges for excess and obsolete inventories and excess purchase commitments reduced product gross profit by $71.7 million (8.6% of product revenue) in 2003, and by $99.7 million (8.8% of product revenue) in 2002. In addition, in 2003 we incurred $23.7 million (2.9% of product revenue) of accelerated depreciation on our U.S. manufacturing facility and equipment due to our decision to outsource our manufacturing operations.

     Product gross profit improved in 2004 due to higher product revenue compared with 2003, the absence of significant unusual charges compared with 2003 and 2002, and lower product cost as a result of outsourcing our manufacturing operations at the end of 2003. The impact of unusual charges on 2004 product gross profit was not significant. Product gross profit declined in 2003 due primarily to lower product revenue compared with 2002.

     Product gross margin improved in 2004 compared with 2003 due to the absence of significant unusual charges (11.7%), lower manufacturing-related costs (8.1%) and favorable product mix and other (0.7%). The inclusion of access product revenue and cost of product revenue for one month in 2004 reduced full-year product margins by 1.7% compared with 2003. Product gross margin declined slightly in 2003 compared with 2002 due to the increased impact of restructuring and inventory-related charges (2.7%), offset by favorable product mix driven by reduced sales of the Tellabs 6500 system, which has significantly lower margins than our other products (1.3%) and improved manufacturing efficiencies due to outsourcing (0.9%).

Services Gross Profit

Total services gross profit was $44.8 million (28.4% of services revenue) in 2004 compared with $36.9 million (24.6% of services revenue) in 2003, and $46.4 million (25.9% of services revenue) in 2002. Services gross profit improved in 2004 due to higher services revenue compared with 2003. Services gross profit declined in 2003 due primarily to lower services revenue compared with 2002.

     Services gross margin improved in 2004 compared with 2003 due to labor efficiencies achieved as a result of reduced headcount in our services business. The inclusion of access services revenue and cost of services revenue for one month in 2004 reduced 2004 services margins by 0.8%.

Gross Margin Trend

As previously discussed herein, we are obligated to sell access products to Verizon under a supply agreement that contains fixed selling prices. While we anticipate this agreement to be profitable, gross margins are below Tellabs historical gross margins. We are working to reduce the cost of these products through internal development and by the acquisition of Vinci.

TELLABS 2004 ANNUAL REPORT / 19

     In addition, our total gross margin will continue to be subject to variability due to product mix. Our gross margin is different for each product and services category and for each product within a category because they are dependent on specific system configurations sold and customer and geographic pricing differences. Under normal conditions, this variability has tended to impact our gross margin in the range of 2–3% up or down. Going forward, we expect our total gross margin will be in the low 40% range and to trend up through 2005.

Operating Expenses

				Expense				Percent of Revenue
(In millions)	2004			2003		2002		2004			2003			2002
Sales and marketing	$	155.1		$	143.5	$	168.8		12.6	%		14.6	%		12.8	%
Research and development		250.3			286.1		335.2		20.3	%		29.2	%		25.5	%
General and administrative		81.5			99.1		129.0		6.6	%		10.1	%		9.8	%
Subtotal		486.9			528.7		633.0		39.5	%		53.9	%		48.1	%
Restructuring and other charges		14.1			77.2		169.0
Purchased in-process R&D		102.1			—		5.4
Intangible asset amortization		17.8			12.6		8.8
Asset impairment charge		47.2			—		—
Net loss on sale of real estate		20.6			—		—
Total Operating Expenses	$	688.7		$	618.5	$	816.2
Headcount at end of year		4,125	*		3,515		4,828

*Includes 1,084 employees at AFC and Vinci who joined Tellabs at the end of 2004.

     Total operating expenses increased to $688.7 million in 2004 after declining to $618.5 million in 2003 from $816.2 million in 2002. Total operating expenses for 2004 include $15.5 million of operating expenses from AFC (excluding $89.0 million of purchased in-process research and development charges) for the one-month period following the merger in the fourth quarter of 2004. Spending on sales and marketing, R&D and general and administrative declined in total by $41.8 million, or 8%, from 2003 to 2004 and by $104.3 million, or 16%, from 2002 to 2003.

     A significant portion of the improvements resulted from lower expenses in headcount-related areas such as benefits, travel and telecommunications due to the reduction of our global workforce. We also significantly reduced spending on prototypes and we incurred lower facilities costs due to having closed or vacated a number of owned and leased facilities over the periods. Sales and marketing expense increased in 2004 due to higher commissions and incentives on higher sales volume compared with 2003.

Restructuring and Other Charges

During 2004 we recorded net restructuring charges in operating expenses of $14.1 million compared with $77.2 million in 2003 and $169.0 million in 2002. (See Note 3, Restructuring and Other Charges.) The charges for 2004 included the following:

•   $15.4 million primarily for the closure of our research facility in Montreal, Canada, in the first quarter of 2004, of which $9.4 million related to disposal of fixed assets, $3.0 million related to severance costs, $2.2 million related to contractual obligations, and $0.8 million related to facilities costs and other.

•   $1.6 million for severance-related costs due to a reorganization of our Denmark-based business.

•   A net reversal of restructuring reserves in the amount of $2.9 million due to changes in estimates of costs related to other restructurings initiated prior to 2004.

     The reorganization of our Denmark operations is part of a plan to improve the profitability of our operations at that location. As part of this plan, in January 2005 we announced a further reduction of approximately 80 employees at the Denmark facility. We expect to record an estimated $8.1 million of severance and related expenses associated with those reductions during 2005, principally in the first quarter. It is likely we will incur other unusual charges related to the restructuring as we complete our plan. However, we are currently unable to estimate the magnitude or nature of those charges.

     In January 2005, we also announced our intention to reorganize our operations in Finland, which will result in a headcount reduction of approximately 70 positions. As a result, we expect to record an estimated $3.6 million of charges for severance and related expenses and other costs during 2005, principally in the first quarter. It is possible we will incur other unusual charges related to the restructuring as we complete our plan. However, we are currently unable to estimate the magnitude or nature of those charges.

20 

     We will also eliminate approximately 50 jobs at other U.S.-based facilities. We will incur costs for severance-related benefits related to these actions in 2005, primarily in the first quarter.

Purchased In-Process Research and Development

During 2004 we charged $102.1 million to operating expenses for the estimated fair value of in-process research and development (IPR&D) that we acquired in our acquisitions of AFC and Vinci. IPR&D refers to the value of technology under development that does not have an alternative use outside of its value within the acquired business. Generally accepted accounting principles require that IPR&D be expensed in whole at the time it is acquired. The value of the IPR&D at AFC was approximately $89.0 million of the total charges and was primarily attributable to development of enhanced versions of the company’s Fiber to the Premise products. The remainder, approximately $13.1 million, was attributable to development at Vinci of Optical Networking Terminals. The estimated fair values of the IPR&D at both AFC and Vinci were determined by using a discounted cash flow analysis that incorporated estimates of the amounts of costs remaining to complete the development, the amount of revenue that would result from the fully-developed technology and an estimate of risk.

Intangible Asset Amortization

Amortization increased in 2004 to $17.8 million from $12.6 million in 2003 and $8.8 million in 2002. The increase in 2003 was attributable to amortization of developed technology acquired in our acquisition of Vivace in 2003, and the increase in 2004 was due to amortization of developed technology acquired in our acquisitions of Vivace in 2003 and AFC in 2004.

Asset Impairment Charge

During the fourth quarter of 2004 we reviewed our amortizable intangible assets for indicators of impairment. We determined that impairment indicators existed for our Tellabs 5500 NGX asset group because actual and forecasted revenue for that asset group was lower than expected. We further determined that future undiscounted cash flows would not be sufficient to support the total carrying value of the asset group. We therefore recorded an impairment charge of $47.2 million to reduce the carrying value of those assets, principally amortizable intangibles, to their fair value. We determined the fair value of the assets by reference to the present value of the cash flows attributable to those assets over the remaining life of the intangibles, the primary asset in the asset group.

Net Loss on Sale of Real Estate

During the fourth quarter of 2004, we sold an administrative and research and development facility in Denmark and entered into a one-year lease for a portion of the space. The sale resulted in a loss of approximately $21.1 million.

Other Income (Expense)

(In millions)	2004			2003			2002
Interest income, net	$	26.9		$	24.2		$	29.9
Other expense, net		(5.4	)		(4.4	)		(28.0	)
Total	$	21.5		$	19.8		$	1.9

     Other expense, net includes impairment charges to write down the carrying value of certain cost-basis equity investments in start-up technology companies. These charges, which arose as a result of our normal review of long-lived assets, were $11.2 million in 2004, $3.3 million in 2003 and $29.6 million in 2002. Other expense, net for 2004 includes a $6.6 million foreign currency gain resulting from converting a portion of our non-U.S. offshore cash from Euro-denominated investments to investments denominated in U.S. dollars.

Income Taxes

(In millions, except percentages)	2004			2003			2002
Income tax (expense) benefit	$	(19.6	)	$	3.1		$	14.7
Effective tax rate		192.2	%		(1.3	)%		(4.5	)%

     Our tax expense increased in 2004 to $19.6 million from a tax benefit of $3.1 million in 2003 due to an increase in foreign taxes on higher foreign source income. Our tax benefit decreased to $3.1 million in 2003 from a benefit of $14.7 million in 2002. The decrease in tax benefit from 2002 to 2003 was due to a smaller benefit on domestic losses, partially offset by lower foreign taxes as a result of lower overall foreign source income.

     Our tax expense for each of the years 2002 through 2004 has been unfavorably impacted by our inability to record a tax benefit for all or a portion of the domestic and foreign tax losses and other unused tax benefits (referred to herein as deferred tax assets) that we are carrying forward to use on tax returns in future periods. Generally, un-benefited tax assets increase tax expense and decrease tax benefits in our results of operations in the year they arise or in the year we are required to record a valuation allowance against them.

TELLABS 2004 ANNUAL REPORT / 21

     At the end of 2003, we had $251.4 million of deferred tax assets for which no benefit was recorded, that is, tax assets that were offset by a valuation allowance. Because AFC and Vinci together had significant deferred tax liabilities, we reversed approximately $187.2 million of the valuation allowance that we had recorded against our pre-acquisition deferred tax assets. We recorded the reversal of valuation allowance as a reduction in goodwill from those acquisitions. At the end of 2004, we had approximately $38.9 million of deferred tax assets for which no benefit was recorded.

     If we generate domestic pre-tax losses in 2005, such losses may not result in a tax benefit if we determine that, based on our recent history of losses and future projections of income, it is more likely than not that such losses will not be utilized (due to absence of tax liabilities). That is, we would be required to record a valuation allowance against the tax benefit arising from those losses. If we generate domestic pre-tax income in 2005, we would record a tax benefit by reversing an amount of our existing valuation allowance on U.S. deferred tax assets equal to the income tax expense on the income. After the valuation allowance is reduced to zero, we would record a tax expense on domestic pre-tax income arising thereafter at a more normalized U.S. statutory rate. We cannot reasonably estimate when such a level of domestic pre-tax income would arise.

Financial Condition, Liquidity and Capital Resources

Our principal source of liquidity remains our cash, cash equivalents and marketable securities, which decreased by $6.8 million during 2004 to $1,116.2 million. During 2004, we generated $214.7 million of cash from operating activities and we used $251.2 million in net cash for the acquisitions of AFC and Vinci. We believe that the current level of working capital, particularly cash and marketable securities, 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 available sources of working capital include cash-on-hand, cash generated from future operations, short-term or long-term financing, equity offerings or any combination of these sources. 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.

     On February 2, 2005, Tellabs announced that its Board of Directors had authorized the purchase of up to $300.0 million in shares of the company’s outstanding common stock (approximately 9.5% of the outstanding shares based on the closing price on that date). Purchases will be made from time to time in the open market or private transactions. Tellabs provides no assurances as to the quantity of shares it will purchase or the actual purchase prices. As of February 28, 2005, we have purchased $118.7 million (16.5 million shares) of our common stock.

Cisco marketable securities

As a result of our merger with AFC we acquired the 10.6 million shares of Cisco Systems, Inc. (“Cisco”), common stock that AFC owned as a result of its investment in privately held Cerent Corporation, which was acquired by Cisco in 1999. The shares are presented as Other marketable securities – Cisco stock in the current assets portion of our balance sheet for the year ending December 31, 2004. In 2000, AFC entered into two three-year hedge contracts, pledging all of the Cisco stock to secure the obligations under the contracts. When the hedge contracts matured in 2003, AFC entered into stock loan agreements with a lender, borrowing 10.6 million shares of Cisco stock to settle the hedge contracts. The fair value of those stock loans is reflected as a current liability on our balance sheet for the year ending December 31, 2004. The value of both the asset and liability move in tandem with each other since each is based upon the number of shares we hold at the current stock price.

     In 2004, AFC received a private letter ruling from the Internal Revenue Service holding the use of borrowed shares to settle the hedge contracts in 2003 did not require recognition of a capital gain on the Cisco stock until the stock loans are settled. Following issuance of the ruling, AFC received a refund of $218.6 million in federal and state income taxes that had previously been paid in respect of the transactions.

     Our balance sheet at December 31, 2004, reflects the deferred tax liability that will be due on the hedge contract gains upon termination of the Cisco stock loans. Our agreement with the lender of the stock has no defined date when we must repay the loan, however, the loan is callable at the discretion of the lender. Further, we have no current intention to dispose of the Cisco shares or otherwise take any actions that would result in us having to pay the capital gains tax on the stock. Although we do not have any current intentions of unwinding this transaction, if we did unwind this transaction, we would use the proceeds from the sale of the stock to pay off the stock loan.

22 

Contractual Obligations

The following table sets forth an overview of our known contractual obligations as of December 31, 2004, that will affect our liquidity and cash flows in future periods:

	Payments Due by Period
			Less than		1–3		3–5		More than
(In millions)	Total		1 Year		Years		Years		5 Years
Operating lease obligations	$	82.8	$	18.0	$	28.1	$	17.6	$	19.1
Net operating lease obligations related to restructuring activities		36.8		7.2		12.1		11.6		5.9
Purchase commitments to contract manufacturers and suppliers		267.8		267.8		—		—		—
Cisco stock loan*		204.0		204.0		—		—		—
Cisco stock loan borrowing fees**		8.9		1.4		3.4		3.1		1.0
Total obligations	$	600.3	$	498.4	$	43.6	$	32.3	$	26.0

*Our agreement with the lender of the stock has no defined date when we must repay the loan, however, the loan is callable at the discretion of the lender.

**For purposes of contractual obligations disclosure, we used Cisco’s average share price of $19.14 for the quarter ended December 31, 2004, to determine the hypothetical value of the borrowing fees assuming the loans are settled in 2010.

     We use several contract manufacturers and suppliers to provide manufacturing services for our products. During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain contract manufacturers and suppliers to enable them to procure inventory based upon criteria defined by us. Under these agreements, the maximum liability for purchase commitments as of December 31, 2004, was $267.8 million, of which $18.0 million was accrued on the balance sheet.

     The Cisco stock loan borrowing fees are partially based on Cisco’s average share price at the end of each quarter.

Off-balance sheet arrangements

None.

Critical Accounting Policies

The methods, estimates, and judgments that we use in applying our accounting policies can have a significant impact on the results we report in the consolidated financial statements. Some of these estimates require difficult and subjective judgments, often as a result of the need to estimate matters that are inherently uncertain. For the reasons discussed below, we consider our critical accounting estimates to be the allowance for excess and obsolete inventory and excess purchase commitments (collectively E&O), goodwill valuation, the valuation allowance for deferred tax assets, reserve requirements for lease obligations on vacated facilities and the valuation of amortizable intangible assets.

     We have discussed the development and selection of these critical accounting policies and estimates with the Audit and Ethics Committee of Tellabs Board of Directors.

Excess & Obsolete Inventory and Excess Purchase Commitments

We determine our inventory cost using the first-in, first-out method and we value our inventory at the lower of cost or market, with market determined by reference to current replacement cost. We determine the amount of inventory that is excess and obsolete and purchase commitments in excess of requirements using estimates of future demand for individual components of raw materials and finished goods.

     To determine E&O, we compare our existing inventory and inventory purchase commitments with estimates of future product demand and usage requirements. We consider quantities in excess of two years’ expected usage to be excess and we record a full valuation allowance for that amount. For quantities that fall between one- and two-years’ demand we use management judgment to determine the appropriate E&O amount. We do not record an allowance if the quantity is less than one year’s forecasted demand.

     Because our visibility to future sales volume and product mix is limited and actual results can differ materially from our estimates, charges for E&O can have a material impact on our financial statements.

Goodwill

At December 31, 2004, we had approximately $1.1 billion of goodwill on our balance sheet, which arose from acquisitions including the recent acquisitions of AFC and Vinci.

     Accounting rules require that we evaluate goodwill for impairment annually. Because we report our operating results as a single segment or reporting unit, we performed the impairment test in 2004 by comparing the per-share market price of our stock with our net book

TELLABS 2004 ANNUAL REPORT / 23

value per share on our annual measurement date in the fourth quarter. Because the market price exceeded our net book value, we concluded that our goodwill was not impaired. Therefore, we did not perform additional impairment testing or record an impairment charge.

     Segments are generally determined by the way a company manages and measures its business, with particular weight given to the manner in which results of operations are reported internally and the measures provided to, and used by, the company’s chief decision-maker. If facts were to change such that we operated in multiple segments rather than a single segment, then we would be required to apportion our goodwill to each segment, or part of a segment referred to as a reporting unit, and conduct the impairment test on a segment basis or reporting unit basis using a fair value measurement that would not utilize our stock price as a key indicator of value. We cannot reasonably estimate if an impairment would result from that process, or the amount of any such impairment, because it would depend on the number and configuration of segments or reporting units, valuations of the underlying businesses, and the amount of goodwill apportioned to each segment or reporting unit.

Valuation Allowance for Deferred Tax Assets

Deferred tax assets arise when we record charges or expenses in our financial statements that will not be allowed as income tax deductions until future periods. The term deferred tax asset also includes unused tax net operating losses and unused tax credits that we are allowed to carry forward to future years. Accounting rules permit us to carry deferred tax assets on the balance sheet at full value as long as it is “more likely than not” the deductions, losses, or credits will be used in the future. A valuation allowance must be recorded against the deferred tax assets via a charge to income tax expense if the test cannot be met. The accounting rules state that a company with a recent history of losses would have a difficult, perhaps impossible, time supporting a position that utilization of its deferred tax assets was more likely than not to occur.

     Because of a recent history of losses we determined that it was appropriate to maintain a valuation allowance (approximately $38.9 million at the end of 2004) against our domestic deferred tax assets.

     We are currently not able to forecast when an earnings improvement of sufficient size will occur for us to reverse any of the remaining valuation allowances that we have recorded.

Restructuring Reserves – Leases

At the end of 2004, we had $41.8 million of remaining reserves for lease obligations that arose from facility closures that occurred in 2004 and prior years. We determined the amount of the reserve for each facility by calculating our outstanding lease obligation, then reducing it by an estimate of potential sublease income. We examine real estate market conditions in each location where we have a vacated facility and use input from local real estate professionals to formulate an estimate of potential sublease income. We review our estimates quarterly and adjust our reserves as necessary. We believe our estimate of restructuring lease obligations is a critical accounting estimate because it requires us to make assumptions about matters that are highly uncertain: real estate rental market conditions, the length of time required to secure tenants, the amount of tenant incentives and the potential sublease income. Although the changes in our reserves for restructuring lease obligations have not been material in the past, it is possible that future changes in estimates could have a material impact on our financial statements.

Intangible Assets

At the end of 2004 we had $156.0 million of amortizable intangible assets, primarily purchased technology, on our balance sheet, which arose primarily from our acquisitions in 2004 and 2003.

     We evaluate the carrying value of our intangible assets for impairment whenever indicators of impairment exist. If an impairment indicator exists, we compare the sum of the undiscounted future cash flows expected to result from the intangibles, or asset group of which the intangibles are a part, to our carrying value. If the sum of the undiscounted future cash flows is less than the carrying value, then we compare the fair value of the asset group with our carrying value to determine if an impairment charge is required. The amount of impairment is calculated by subtracting the fair value of the asset from the carrying value of the asset.

     We believe that the accounting estimate related to asset impairment is a critical accounting estimate because it requires us to make assumptions about future sales prices, sales volumes and margins for our products, including products that employ new technologies, and uncertainties around customer acceptance, that are highly uncertain. The amount of any such impairment could be material to our financial statements.

24 

Strategy and Outlook

We expect capital spending by our customers to be stable globally in 2005 with growth in North America. On a global basis, wireless carriers will continue to build next-generation networks to deliver new, data-oriented services. In North America, we expect the regional Bell operating companies to upgrade the access portion of their networks with fiber technology as a means to deliver broadband services to their customers. We also expect that customers will begin to accelerate spending on broadband data infrastructure equipment globally. Tellabs has products either currently available or in development to take advantage of these opportunities.

     In 2005, we will continue to focus on our strategies to energize our core products, establish a position in data and expand into adjacent markets, specifically fiber access. In addition, we are driving toward a business target model that calls for us to achieve over time an overall gross margin of 50% of revenue, operating expenses of 30% of revenue (excluding unusual charges), operating margins at 20% of revenue, and 15% annual revenue growth. While we have achieved and even exceeded these targets in the past, we can not say when or if we will achieve them again, given today’s market conditions and our product portfolio.

     Gross margin will be lower in 2005 than in 2004, reflecting the addition of AFC, whose products have lower overall gross margins than the traditional Tellabs products. We expect overall gross profit margin to improve through the course of 2005, as we begin to ship the single-family ONTs we acquired from Vinci, which have better gross margins than the ONTs acquired from AFC. In addition, for the full year 2005, we expect that synergies associated with the AFC acquisition will reduce overall cost of revenue by $15 million, thus improving overall gross margin performance toward our target.

     Our operating expenses will grow in 2005, reflecting the acquisitions of AFC and Vinci. We expect to reduce 2005 operating expenses by $30 million, compared with the full-year 2004 run rate of Tellabs, AFC (including Marconi NAA) and Vinci. We expect to achieve these savings through a combination of synergies related to the AFC acquisition, reducing fixed cost, especially facilities, adjusting product roadmaps to match market opportunities, and other cost containment activities.

     Operating income is expected to be positive in 2005, including restructuring and other unusual charges discussed previously. In connection with the restructuring actions taken early this year, we expect to take a restructuring charge to earnings in the first quarter, as described earlier. It is possible that we will take further charges in 2005 in connection with cost-reduction activities and the rationalization of our manufacturing supply chain.

TELLABS 2004 ANNUAL REPORT / 25

Management’s Report on Internal Control over Financial Reporting

Management of Tellabs, Inc., and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, as required by the Securities Exchange Act of 1934 Rules 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control–Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

     Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Advanced Fibre Communications, Inc., which is included in the 2004 consolidated financial statements of the Company and constituted approximately $1.1 billion and $800 million of total and net assets, respectively, as of December 31, 2004, and $55 million of revenues for the year then ended. Management did not assess the effectiveness of internal control over financial reporting at this entity because the Company only recently acquired this business on November 30, 2004.

     Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report that appears on page 27. Ernst & Young LLP’s audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Advanced Fibre Communications, Inc.

Michael J. Birck
Chairman of the Board

Krish Prabhu
President and Chief Executive Officer

Timothy J. Wiggins
Executive Vice President and
Chief Financial Officer

March 10, 2005

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Tellabs, Inc.:

     We have audited the accompanying consolidated balance sheets of Tellabs, Inc., and subsidiaries (the “Company”) as of December 31, 2004, and January 2, 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2004, and January 2, 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2005, expressed an unqualified opinion thereon.

Ernst & Young, LLP
Chicago, Illinois,
March 10, 2005

26 

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

To the Stockholders and Board of Directors of Tellabs, Inc.:

     We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting , that Tellabs, Inc., and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting , management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Advanced Fibre Communications, Inc., which is included in the 2004 consolidated financial statements of the Company and constituted approximately $1.1 billion and $800 million of total and net assets, respectively, as of December 31, 2004, and $55 million of revenues for the year then ended. Management did not assess the effectiveness of internal control over financial reporting at this entity because the Company only recently acquired this business on November 30, 2004. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Advanced Fibre Communications, Inc.

     In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

     We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of the Company as of December 31, 2004, and January 2, 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004, and our report dated March 10, 2005, expressed an unqualified opinion thereon.

Ernst & Young, LLP
Chicago, Illnois
March 10, 2005

TELLABS 2004 ANNUAL REPORT / 27

Consolidated Statements of Operations

	Year Ended			Year Ended			Year Ended
(In millions, except per-share data)	12/31/04			1/2/04			12/27/02
Revenue
Products	$	1,074.2		$	830.1		$	1,137.8
Services		157.6			150.3			179.2
		1,231.8			980.4			1,317.0
Cost of Revenue
Products		462.0			513.0			697.7
Services		112.8			113.4			132.8
		574.8			626.4			830.5
Gross Profit		657.0			354.0			486.5
Operating Expenses
Research and development		250.3			286.1			335.2
Sales and marketing		155.1			143.5			168.8
General and administrative		81.5			99.1			129.0
Restructuring and other charges		14.1			77.2			169.0
Asset impairment charge		47.2			—			—
Net loss on sale of real estate		20.6			—			—
Purchased in-process research and development		102.1			—			5.4
Intangible asset amortization		17.8			12.6			8.8
		688.7			618.5			816.2
Operating Loss		(31.7	)		(264.5	)		(329.7	)
Other Income (Expense)
Interest income, net		26.9			24.2			29.9
Other expense, net		(5.4	)		(4.4	)		(28.0	)
		21.5			19.8			1.9
Loss Before Income Tax		(10.2	)		(244.7	)		(327.8	)
Income tax (expense) benefit		(19.6	)		3.1			14.7
Net Loss	$	(29.8	)	$	(241.6	)	$	(313.1	)
Loss Per Share
Basic	$	(0.07	)	$	(0.58	)	$	(0.76	)
Diluted	$	(0.07	)	$	(0.58	)	$	(0.76	)
Weighted Average Shares Outstanding		420.2			413.1			411.4

The accompanying notes are an integral part of these statements.

28 

\

Consolidated Balance Sheets

(In millions, except share data )	12/31/04			1/2/04
ASSETS
Current Assets
Cash and cash equivalents	$	292.9		$	245.9
Investments in marketable securities		823.3			877.1
		1,116.2			1,123.0
Other marketable securities — Cisco stock		204.0			—
Accounts receivable, net of returns and allowances of $16.6 and $5.4		309.4			196.7
Inventories
Raw materials		39.2			12.5
Work in process		13.6			4.1
Finished goods		63.6			25.2
		116.4			41.8
Income taxes		23.4			22.7
Miscellaneous receivables and other current assets		50.0			114.6
Total Current Assets		1,819.4			1,498.8
Property, Plant and Equipment
Land		21.0			26.7
Buildings and improvements		194.1			227.7
Equipment		404.0			389.2
		619.1			643.6
Accumulated depreciation		(290.3	)		(327.8	)
		328.8			315.8
Goodwill		1,092.3			552.3
Intangible Assets, Net of Amortization		156.0			107.8
Other Assets		126.0			132.8
Total Assets	$	3,522.5		$	2,607.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	96.3		$	47.8
Accrued liabilities
Compensation		70.9			34.9
Payroll and other taxes		11.4			6.2
Restructuring and other charges		13.4			64.8
Cisco stock loan		204.0			—
Other		128.2			54.1
Total Current Liabilities		524.2			207.8
Long-Term Restructuring Liabilities		33.0			44.8
Income Taxes		117.1			100.1
Other Long-Term Liabilities		51.0			35.5
Stockholders’ Equity
Preferred stock: authorized 5,000,000 shares of $.01 par value; no shares issued and outstanding		—			—
Common stock: authorized 1,000,000,000 shares of $.01 par value; 466,910,981 and 417,859,719 shares issued, including treasury stock		4.7			4.2
Additional paid-in capital		1,145.9			556.8
Deferred compensation expense		(21.8	)		(9.5	)
Treasury stock, at cost: 3,250,000 shares		(129.6	)		(129.6	)
Total accumulated other comprehensive income		125.9			95.5
Retained earnings		1,672.1			1,701.9
Total Stockholders’ Equity		2,797.2			2,219.3
Total Liabilities and Stockholders’ Equity	$	3,522.5		$	2,607.5

The accompanying notes are an integral part of these statements.

TELLABS 2004 ANNUAL REPORT / 29

Consolidated Statements of Stockholders’ Equity

	Year Ended					Year Ended					Year Ended
(In millions)	12/31/04					1/2/04					12/27/02
	Shares		Amount			Shares		Amount			Shares		Amount
Common Stock
Balance at beginning of year		417.9	$	4.2			415.4	$	4.1			413.5	$	4.1
Stock issued for business acquisitions		46.7		0.5			—		—			—		—
Stock issued for employee stock programs		2.3		—			2.5		0.1			1.9		—
Balance at end of year		466.9		4.7			417.9		4.2			415.4		4.1
Additional Paid-In Capital
Balance at beginning of year				556.8					543.6					496.0
Stock issued for business acquisitions				428.6					2.4					—
Fair value of options issued in acquisitions				143.6					6.4					42.9
Restricted stock award activity				8.0					0.1					(0.1	)
Stock options exercised				8.9					4.3					4.8
Balance at end of year				1,145.9					556.8					543.6
Deferred Compensation
Balance at beginning of year				(9.5	)				(19.3	)				(1.4	)
Deferred compensation from acquisitions				(13.5	)				(1.4	)				(28.4	)
Amortization of deferred compensation				5.5					11.2					10.5
Restricted stock award activity				(5.3	)				—					—
Amortization of restricted stock awards				1.0					—					—
Balance at end of year				(21.8	)				(9.5	)				(19.3	)
Treasury Stock
Balance at beginning and end of year		3.3		(129.6	)		3.3		(129.6	)		3.3		(129.6	)
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year				95.5					(52.0	)				(160.1	)
Reclassification adjustment for gain included in net earnings				(1.4	)				(8.9	)				(7.1	)
Unrealized holding (loss) gain on marketable securities, net of tax				(3.1	)				4.9					8.2
Net unrealized holding (loss) gain on marketable securities				(4.5	)				(4.0	)				1.1
Foreign currency translation adjustment				34.9					151.5					107.0
Balance at end of year				125.9					95.5					(52.0	)
Retained Earnings
Balance at beginning of year				1,701.9					1,943.5					2,256.6
Net loss				(29.8	)				(241.6	)				(313.1	)
Balance at end of year				1,672.1					1,701.9					1,943.5
Total Stockholders’ Equity			$	2,797.2				$	2,219.3				$	2,290.3

The accompanying notes are an integral part of these statements.

30

Consolidated Statements of Cash Flow

	Year Ended			Year Ended			Year Ended
(In millions)	12/31/04			1/2/04			12/27/02
Operating Activities
Net loss	$	(29.8	)	$	(241.6	)	$	(313.1	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		82.3			110.2			142.6
Purchased in-process research and development		102.1			—			5.4
Restructuring and other charges		11.7			172.6			268.7
Asset impairment charge		47.2			—			—
Net loss on sale of real estate		20.6			—			—
Deferred income taxes		11.6			(14.9	)		110.0
Deferred compensation amortization		6.5			11.2			10.5
(Gain) loss on sale of investments		(1.4	)		4.0			30.0
Provision for doubtful accounts		(0.9	)		(13.6	)		(25.4	)
Tax benefit associated with stock option exercises		—			1.6			2.0
Net changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable		(48.7	)		47.1			162.0
Inventories		(24.8	)		143.8			113.2
Miscellaneous receivables and other current assets		65.8			(87.1	)		(12.1	)
Other assets		(9.1	)		2.0			(32.3	)
Accounts payable		13.0			(34.1	)		9.2
Restructuring and other charges		(52.2	)		(84.2	)		(191.6	)
Other accrued liabilities		10.9			(16.9	)		(29.9	)
Income taxes		18.1			154.9			(66.0	)
Long-term liabilities		(8.2	)		(5.1	)		(5.4	)
Net Cash Provided by Operating Activities		214.7			149.9			177.8
Investing Activities
Capital expenditures		(41.4	)		(17.2	)		(59.4	)
Disposals of property, plant and equipment		31.5			7.7			25.3
Payments for purchases of investments		(1,318.8	)		(2,287.8	)		(697.0	)
Proceeds from sales and maturities of investments		1,379.1			2,009.8			543.5
Payments for acquisitions, net of cash acquired		(244.3	)		(122.6	)		(291.7	)
Net Cash Used for Investing Activities		(193.9	)		(410.1	)		(479.3	)
Financing Activities
Proceeds from issuance of common stock under option plans		8.9			5.9			2.8
Payments of notes payable		—			—			(8.8	)
Net Cash Provided by (Used for) Financing Activities		8.9			5.9			(6.0	)
Effect of Exchange Rate Changes on Cash		17.3			46.6			59.2
Net Increase (Decrease) in Cash and Cash Equivalents		47.0			(207.7	)		(248.3	)
Cash and Cash Equivalents at Beginning of Year		245.9			453.6			701.9
Cash and Cash Equivalents at End of Year	$	292.9		$	245.9		$	453.6
Other Information
Interest paid	$	0.3		$	—		$	1.4
Income taxes (refunded) paid, net	$	(4.0	)	$	(146.1	)	$	23.9
Issuance of common stock and options for acquisitions	$	576.0		$	—		$	—

The accompanying notes are an integral part of these statements.

TELLABS 2004 ANNUAL REPORT / 31

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Nature of Business

We operate as one business segment in the design, assembly, marketing and servicing of a diverse line of communications equipment used in public and private networks worldwide.

Principles of Consolidation

Our consolidated financial statements include the accounts of Tellabs and our subsidiaries. All intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

We consider all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.

Restricted Cash

Restricted cash equivalents and marketable securities of $20 million are included in other assets. The cash equivalents and marketable securities are held as collateral to back a three-year bond posted for a U.S. customer contract.

Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, marketable securities and cost-basis investments. The carrying value of the cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value because of their short-term nature. We determine the fair value of marketable securities and derivatives based on quotes from brokers or current rates offered for instruments with similar characteristics. See discussion in Note 7 regarding derivatives.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. Depreciation is computed using both the declining-balance and straight-line methods. Buildings are depreciated over 25 to 40 years; building improvements over 7 years; leasehold improvements over the life of the lease, currently 3 to 15 years; and equipment over 3 to 10 years. We evaluate property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

Stock Options

We are permitted under SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS No. 123, to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, in most cases, no compensation cost has been recognized for our fixed stock option plan grants. If we had elected to recognize compensation expense for our stock-based compensation plans consistent with the methods prescribed by SFAS No. 123, net loss and net loss per share would have been changed to the pro forma amounts shown below:

(In millions, except per-share data)	2004			2003			2002
Net loss as reported	$	(29.8	)	$	(241.6	)	$	(313.1	)
Add: stock-based employee compensation expense included in reported net loss, net of related tax effects		6.5			11.2			10.5
Less: Total stock-based employee compensation expense determined under fair-value based method for all grants, net of related tax effects		(62.0	)		(62.6	)		(129.6	)
Pro forma net loss	$	(85.3	)	$	(293.0	)	$	(432.2	)
Loss per common share
As reported	$	(0.07	)	$	(0.58	)	$	(0.76	)
Pro forma	$	(0.20	)	$	(0.71	)	$	(1.05	)

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, 2003 and 2002:

32

	2004			2003			2002
Expected volatility		70.8	%		73.4	%		72.2	%
Risk-free interest rate		3.4	%		3.0	%		2.8	%
Expected life in years		4.7			5.1			5.9
Expected dividend yield		0.0	%		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.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases at enacted tax rates when such amounts are expected to be realized or settled. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Goodwill

Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition. We compare our market capitalization to book value annually as an indicator of potential impairment.

Intangible Assets

Our intangible assets are made up primarily of purchased technology from acquisitions. These assets are amortized over their estimated useful lives and are reviewed for impairment when indicators of impairment exist such as poor or declining operating performance or cash flows.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price or fee is fixed or determinable, and collectibility is reasonably assured, in accordance with the guidance in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.

Products

The majority of our revenue comes from product sales for which we recognize revenue either upon shipment or upon delivery to the customer, depending upon the contractual delivery terms.

     Some of our customer agreements contain acceptance clauses that grant the right to return or exchange products that do not conform to our published specifications. When we have sufficient historical evidence that our products meet the published specifications, we recognize revenue upon shipment or upon delivery, and treat any potential returns as warranties. Otherwise, we recognize revenue when the conditions of acceptance have been met.

     A few of our customer agreements grant the right to return or exchange product based upon subjective matters. We have established sufficient historical evidence on rates of return for most of our products to be able to accrue for returns under the guidance of SFAS No. 48, Revenue Recognition When Right of Return Exists. We recognize revenue net of potential returns upon shipment or upon delivery of product to the customer.

     Some of our customer agreements are in the form of distribution agreements, with contractual rights of return, promotional rebates, and other rebates and credits. We recognize revenue net of estimated returns and rebates, which are calculated based on contractual provisions and historical evidence of returns activity.

Services

We also recognize revenue for services performed for customers. Most of our services revenue relates to the installation of our product at customer sites. Customers may purchase installation services from us, install our products themselves, or hire third parties to perform the installation. Revenue for installation services is recognized upon completion.

     Revenue from maintenance and support contracts is recognized ratably over the service period. Other services revenue, including training and other business support services, is recognized upon completion.

Earnings Per Share

Earnings per share is based on the weighted average number of shares (basic) and the weighted average shares adjusted for assumed exercises of stock options and vesting of restricted stock (diluted). Earnings per share in periods of a net loss is based solely on basic weighted average number of shares under generally accepted accounting principles.

Foreign Currency Translation

The financial statements of our foreign subsidiaries are generally measured using the local currency as the functional currency. In such cases, assets and liabilities are translated at exchange rates in effect at the balance sheet date, and income and expenses are translated at weighted average exchange rates during the year. The effect of

TELLABS 2004 ANNUAL REPORT / 33

translating a subsidiary’s stockholders’ equity into U.S. dollars is recorded as a cumulative translation adjustment in the equity section of the Consolidated Balance Sheets.

Foreign Currency Transactions

Foreign currency transaction gains and losses resulting from changes in exchange rates are recognized in Other Income (Expense). Net gains (losses) of $3.8 million, $(1.8) million and $(5.9) million were recorded in 2004, 2003 and 2002, respectively.

2. New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS 123 (revised 2004), Share-Based Payment, which is a revision of SFAS 123. SFAS 123(R) supersedes APB No. 25. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, beginning in our third quarter of 2005, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

     SFAS 123(R) must be adopted no later than July 1, 2005. We expect to adopt SFAS 123(R) in the third quarter of 2005.

     SFAS 123(R) permits us to adopt its requirements using one of two methods:

1.	A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
2.	A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosure either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

     We have currently not determined which method we will use.

     As permitted by SFAS 123, we currently account for share-based payments to employees using the APB No. 25 intrinsic value method and therefore we usually do not recognize compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method will have an impact on our results of operations, although it will have no incremental impact on our overall financial position.

3. Restructuring and Other Charges

During the fourth quarter of 2004, we recorded restructuring charges for severance and related costs of $1.6 million related to a reorganization of our Denmark-based business. Our fourth-quarter actions in Denmark are part of a plan to improve the profitability of our international transport switching business. As part of this plan, in January 2005 we announced a further reduction of approximately 80 employees at the Denmark facility. In January 2005 we also announced our intention to reorganize our operations in Finland, which will result in a headcount reduction of approximately 70 positions. This plan to drive toward improved profitability also includes headcount reductions on a smaller scale in other locations throughout the world. As a result of these actions, we expect to record charges for severance and related costs and other costs associated with these reductions during 2005, principally in the first quarter.

     Although we have not committed to any plans other than those already announced, we believe that it is possible that further plans, if implemented, could result in further restructuring and other charges for workforce reductions, asset impairments, contractual and other obligations (including facilities costs) and inventory valuation.

     In 2003, management approved plans to further restructure our operations due to difficult market conditions in the telecommunications industry. A major component of the restructuring was the outsourcing of our global manufacturing operations, which resulted in work-force reductions of approximately 500 employees, facility closures, asset disposals and the sale of the majority of our inventory to the outsourcers. Additional restructuring activities during 2003 included non-manufacturing work-force reductions and facility closures. As a result of these actions, we recorded charges for severance and related costs, asset impairments and accelerated depreciation on our manufacturing facility in North America. We also recorded charges for excess and obsolete inventories and excess purchase commitments. Our manufacturing operations in North America ceased at the end of October 2003 and international manufacturing operations ceased at the beginning of January 2004. We recorded restructuring and other charges related to all of these activities in 2003 and 2004.

     In 2002, we approved plans to restructure our operations, including a realignment of worldwide inventory levels to match customer demand, which resulted in the write-off of excess inventories and an accrual for excess inventory purchase commitments; workforce reductions; the closure and consolidation of excess facilities, including manufacturing facilities in Ronkonkoma, New York, and Shannon,

34

Ireland, along with the write-off of related fixed assets; and an adjustment of the reserves for excess leased facilities from our 2001 restructuring programs in light of current economic conditions.

     Below is an analysis of the restructuring and other charges recorded during 2004, 2003 and 2002 by major income statement classification:

Statements of Operations
Classification
	Description	2004			2003			2002
(In millions)
Cost of revenue	Disposal of property, plant and equipment	$	5.5		$	1.0		$	—
	Inventory adjustments		2.3			49.4			53.2
	Excess purchase commitments		0.1			23.2			58.1
	Accelerated depreciation on buildings and equipment		—			23.7			—
	Other obligations		1.7			—			—
	Subtotal in Cost of Revenue		9.6			97.3			111.3
	Reversal of excess purchase commitments accrual		(12.0	)		(1.9	)		(11.6	)
	Total in Cost of Revenue		(2.4	)		95.4			99.7
	Total in Gross Profit		(2.4	)		95.4			99.7
Operating expenses	Disposal of property, plant and equipment		13.2			22.6			67.3
	Severance and related expenses		6.6			33.7			51.3
	Consolidation of excess leased facilities		1.9			1.2			44.7
	Accelerated depreciation on buildings and equipment		—			24.8			—
	Other obligations		2.4			3.7			12.6
	Subtotal in Operating Expenses		24.1			86.0			175.9
	Proceeds from fixed asset disposals in excess of estimates		(5.2	)		(5.0	)		—
	Reversal of excess leased facilities accrual		(3.2	)		—			(0.7	)
	Reversal of severance accruals		(1.4	)		(1.4	)		(6.2	)
	Reversal of accrual for other obligations		(0.2	)		(2.4	)		—
	Total in Operating Expenses		14.1			77.2			169.0
	Total Restructuring and Other Charges	$	11.7		$	172.6		$	268.7

Disposal of property, plant and equipment

We recorded impairment charges of $18.7 million in 2004 for property, plant and equipment to be disposed of or held for sale. This charge is composed of: $4.7 million for a loss on the sale of our Bolingbrook manufacturing facilities; $7.7 million for the closure of our Montreal research and development facility; $5.5 million for U.S. research and development and manufacturing assets; and $0.8 million for property, plant and equipment sold to our manufacturing contractor as part of our international manufacturing outsourcing. We also received $5.2 million in proceeds from the sale of property, plant and equipment in excess of our original estimate.

     Our review of property, plant and equipment needs during the restructuring activities identified assets that would be sold or disposed. We recorded a loss of $23.6 million in 2003 related to the disposal of this property, plant and equipment. The property, plant and equipment consisted primarily of manufacturing equipment, lab and data equipment, and computer software. This equipment was disposed of primarily by conducting periodic open bid auctions with items sold to the highest bidders. In 2003, we reduced a reserve related to the disposal of property, plant and equipment by $5.0 million to reflect the receipt of sales proceeds in excess of our original estimates.

     We recorded charges of $67.3 million in 2002 related to equipment and leasehold improvements made excess by the closure of our manufacturing facilities in New York and Ireland and the consolidation of a number of smaller facilities.

Severance and related expenses

In the first half of 2004, we recorded additional accruals for severance and related costs of $5.0 million attributable to a change in our estimate of the number of employees to be terminated under our fourth-quarter 2003 restructuring plan and to severance and related costs

TELLABS 2004 ANNUAL REPORT / 35

pertaining to the closure of our Montreal, Canada, facility in the fourth quarter of 2003. In December 2004, we recorded an accrual for severance and related costs of $1.6 million pertaining to the Denmark workforce reduction approved toward the end of 2004. These charges were partially offset by a $1.4 million reduction of accruals for severance and related costs pertaining to certain restructuring activities that were initiated in 2003 and prior periods.

     As a result of the outsourcing of our manufacturing operations and our goal to align our employee levels with expected workforce needs, we recorded charges totaling $33.7 million for severance pay and related costs for the reduction of approximately 1,500 employees worldwide in 2003. We also reversed $1.4 million in severance accruals due to changes in the estimated severance and related costs from prior restructuring programs.

     In 2002, we reduced our workforce by approximately 2,000 employees resulting in severance and related charges of $51.3 million. We also reversed $6.2 million of severance reserves due to changes in our estimates of severance costs for restructurings in prior years.

Inventory adjustments and excess purchase commitments

In 2004, we accrued $2.3 million for the revaluation of inventories related to international manufacturing outsourcing, and increased the accrual for North America purchase commitments by $0.1 million. There was also a $12.0 million reduction of the reserve for excess purchase commitments in 2004 due to a favorable settlement with a vendor.

     Due to a slowdown in customer spending levels during 2003 and 2002, and a review of our inventory levels during outsourcing activities, we wrote down the value of our inventories and related non-cancelable inventory purchase commitments for excess amounts. Included in product cost of goods sold for 2003 were net charges of $70.7 million related to the write-down of inventories and accruals for non-cancelable inventory purchase commitments. North American manufacturing outsourcing resulted in a $7.4 million charge, international manufacturing outsourcing resulted in a $10.9 million charge, and $52.4 million was recorded prior to manufacturing outsourcing to write down excess and obsolete inventory and accrue for non-cancelable inventory purchase commitments. Net charges for 2002 were $53.2 million for excess and obsolete inventory and a net $46.5 million for excess purchase commitments. The inventory adjustments were recorded as a reduction to inventory, while the reserve for excess non-cancelable purchase commitments was recorded to accrued restructuring and other charges.

Consolidation of excess leased facilities

In 2004, we accrued $1.9 million for costs associated with the consolidation of excess leased facilities. This amount included accruals for our Montreal research and development office, which we closed in the first quarter of 2004. There was also a reduction of $3.2 million for excess facilities accruals relating to final settlement of obligations associated with previously vacated facilities and favorable subleasing activity in North America.

     Also as a result of the outsourcing of our manufacturing operations, we recorded $1.2 million in charges related to the consolidation of excess facilities in 2003.

     In 2002, we recorded $23.6 million net charges for lease costs for facilities closures, including our manufacturing facility in Ronkonkoma, New York, two research facilities in Virginia and numerous smaller offices. We also recorded additional reserves of $20.4 million for facilities vacated in prior years due to a decline in the real estate sublease market.

Accelerated depreciation on building and equipment

During 2003, due to a change in the estimated lives of certain buildings and equipment because of the outsourcing of our North American manufacturing operations, we recorded $48.5 million in accelerated depreciation on the related buildings and equipment. Of this amount, $23.7 million was charged to cost of revenue during the year with the remaining $24.8 million charged to operating expenses.

Other obligations

We accrued $2.4 million for contract termination costs in 2004 because we failed to meet certain contractual requirements related to volume usage. In addition, we accrued $1.7 million in wage transition charges related to outsourcing our international manufacturing operations. We also reduced a previously established accrual of $0.2 million for software licenses.

     In 2003, we recorded $3.7 million in charges for other obligations that arose as a direct result of our 2003 restructuring activities. These charges represent non-cancelable agreements for software licenses that have been deemed excess due to workforce reductions and product roadmap changes.

     Charges for 2002 included $4.7 million to write down the value of our facility in Ireland, $4.3 million for repayment of local incentive grants and $3.6 million for other fees.

     Of the remaining $46.4 million accruals as of December 31, 2004, $13.4 million is classified as short-term as it is expected to be paid in the next 12 months. The long-term balance of $33.0 million will be paid over the remaining terms of the facility leases, which expire at various times through 2011.

     Of the $109.6 million accruals as of January 2, 2004, $64.8 million was classified as short-term as it was expected to be paid in the next 12 months. The long-term

36

balance of $44.8 million was primarily related to excess facilities, and was expected to be paid over the remaining lease terms through 2011.

     The following table displays our restructuring and other charges activity during 2004 and the status of the reserves at December 31, 2004:

	Balance		Additional		Cash			Non-Cash			Balance
Description of reserve	1/2/04		Reserves		Activity			Activity			12/31/04
(In millions)
Consolidation of excess leased facilities	$	54.8	$	1.9	$	(12.1	)	$	(2.8	)	$	41.8
Inventory write-offs		—		2.3		—			(2.3	)		—
Excess purchase commitments		38.4		0.1		(20.6	)		(17.7	)		0.2
Severance and related expenses		13.5		6.6		(16.2	)		(1.9	)		2.0
Disposal of property, plant and equipment		—		18.7		—			(18.7	)		—
Other obligations		2.9		4.1		(2.8	)		(1.8	)		2.4
	$	109.6	$	33.7	$	(51.7	)	$	(45.2	)	$	46.4

     The following table displays our restructuring and other charges activity during 2003 and the status of the reserves at January 2, 2004:

	Balance		Additional		Cash			Non-Cash			Balance
Description of reserve	12/27/02		Reserves		Activity			Activity			1/2/04
(In millions)
Consolidation of excess leased facilities	$	81.8	$	1.2	$	(28.9	)	$	0.7		$	54.8
Inventory write-offs		—		49.4		—			(49.4	)		—
Excess purchase commitments		30.0		23.2		(16.2	)		1.4			38.4
Severance and related expenses		9.5		33.7		(29.1	)		(0.6	)		13.5
Disposal of property, plant and equipment		—		23.6		—			(23.6	)		—
Accelerated depreciation		—		48.5		—			(48.5	)		—
Other obligations		9.6		3.7		(10.0	)		(0.4	)		2.9
	$	130.9	$	183.3	$	(84.2	)	$	(120.4	)	$	109.6

4. Business Combinations

On December 30, 2004, we acquired Vinci Systems, a privately held developer of Optical Networking Terminals for Fiber to the Premise access systems. Under the terms of the agreement, we will pay up to $52.5 million in cash and restricted Tellabs stock related to the acquisition of Vinci. This acquisition enables us to deliver a more cost-effective fiber access solution. In-process research and development costs of $13.1 million related to this acquisition were expensed in 2004 based on a preliminary appraisal.

     On November 30, 2004, we acquired 100% of the outstanding common stock of AFC, a leader in access products, for 0.504 shares of our common stock and $12.00 in cash for each AFC share, for a total value of approximately $1.6 billion ($794.5 million, net of cash acquired) plus liabilities assumed. We issued approximately 44.8 million shares of our common stock for the acquisition, with the cash portion financed with U.S.-based cash and cash equivalents, including AFC’s. AFC’s products enable carriers to provide voice, video and high-speed Internet access over a single network infrastructure. By acquiring AFC, Tellabs became the industry leader in the broadband access market, a market in which Tellabs had not previously been a significant participant. In addition, Tellabs believes that its international distribution channels and deep relationships with regional Bell operating companies will provide growth opportunities for both Tellabs and AFC products not achievable as stand-alone companies. Goodwill and intangible assets from this acquisition were $537.4 million and $185.2 million, respectively. The intangible assets, excluding in-process research and development, will be amortized on a straight-line basis over a weighted average amortization period of seven years. In-process research and development costs of $89.0 million were expensed in 2004.

     Components of the purchase price were as follows:

(In millions)
Cash paid to AFC stockholders	$	1,067.5
Fair value of Tellabs common stock issued		419.7
Fair value of stock options converted		143.6
Acquisition costs		7.9
		1,638.7
Deferred compensation		(4.2	)
Purchase price	$	1,634.5

TELLABS 2004 ANNUAL REPORT / 37

     The value of our common stock issued for the acquisition was determined based on an average of our stock price three days before and three days after September 7, 2004, the date of the revised merger agreement. The Black-Scholes option valuation model was used to determine the fair value of the Tellabs stock options exchanged. The deferred compensation represents the intrinsic value of the unvested AFC stock options on the acquisition date, which will be recognized over the remaining vesting period of the options.

     The purchase price allocation for AFC has not been finalized pending completion of appraisals. A preliminary allocation of the purchase price is as follows:

(In millions)
Cash, cash equivalents and marketable securities	$	840.0
Other marketable securities – Cisco stock		198.0
Other current assets		122.7
Property, plant and equipment		61.3
Goodwill		537.4
Intangible assets: backlog/leasehold estates/customer relationships		28.2
Intangible assets: Developed technology		66.0
Intangible assets: Trade name		2.0
Purchased in-process research and development costs		89.0
Other long-term assets		32.9
Total assets		1,977.5
Cisco stock loan		198.0
Other current liabilities		117.2
Other long-term liabilities		27.8
Total liabilities		343.0
Purchase price	$	1,634.5

     The pro forma results of operations for 2004 and 2003 as though AFC had been acquired at the beginning of the respective periods are as follows:

	(Unaudited)
	Year ended		Year ended
(In millions, except per-share amounts)	12/31/04		1/2/04
Revenue	$	1,665.9	$	1,498.5
Net earnings (loss)		46.4		(236.7	)
Earnings (loss) per share – basic	$	0.10	$	(0.52	)
Earnings (loss) per share – diluted		0.10		(0.52	)

     In June 2003, we acquired 100% of the outstanding preferred and common stock of Vivace Networks, Inc., a developer of flexible, high performance multi-service routers, for $130.3 million ($122.6 million, net of cash acquired) plus liabilities assumed. We believe this acquisition brings two complementary products that enable us to expand into the high-growth global service provider multi-service router market. Goodwill and intangible assets from this acquisition were $93.5 million and $37.5 million, respectively. The intangible assets are being amortized over a seven-year useful life using the straight-line method.

     We have entered into an employee retention incentive program which will award shares of our stock worth $10.0 million to eligible employees if certain employment targets are met over a two-year timeframe. The cost of this program will be recognized ratably over the two-year time period.

     Components of the purchase price were as follows:

(In millions)
Cash paid to Vivace stockholders	$	124.6
Fair value of stock options exchanged		6.4
Acquisition costs		0.7
		131.7
Deferred compensation		(1.4	)
Purchase price	$	130.3

     The Black-Scholes option valuation model was used to determine the fair value of the Tellabs stock options exchanged. The deferred compensation represents the intrinsic value of the unvested Vivace stock options on the acquisition date, which will be recognized over the remaining vesting period of the options.

     The allocation of the purchase price is as follows:

(In millions)
Goodwill	$	93.5
Intangible assets subject to amortization—developed technology		37.5
Other assets		16.7
Total assets		147.7
Total liabilities		17.4
Purchase price	$	130.3

     In January 2002, we acquired 100% of the outstanding voting stock of Ocular Networks, Inc. (“Ocular”), a developer of optical solutions for the metropolitan (“metro”) optical networking market, for $323.0 million. We believed that by acquiring Ocular it extended the addressable market for our products within the metro optical network. Ocular’s product offerings complement our offerings by focusing on small to mid-size tier 2 and 3 central offices, a market opportunity that has previously not been addressed by us. Goodwill and intangible assets from this acquisition

38

were $267.1 million and $69.8 million, respectively. The intangible asset is being amortized over a 10-year useful life using the straight-line method. In-process research and development costs of $5.4 million were expensed during the first quarter of 2002.

     Components of the purchase price were as follows:

(In millions)
Cash paid to Ocular stockholders	$	278.5
Fair value of stock options exchanged		42.9
Payable to former Ocular restricted stockholders		28.5
Acquisition costs		2.4
		352.3
Deferred compensation		(29.3	)
Purchase price	$	323.0

     The Black-Scholes option valuation model was used to determine the fair value of the Tellabs stock options exchanged. The deferred compensation represents the intrinsic value of the unvested Ocular stock options on the acquisition date, which will be recognized over the remaining vesting period of the options. Also included in the purchase price was a payable of $28.5 million to former holders of restricted Ocular stock awards that were given to certain key employees. On the acquisition date, the restricted stock award holders exchanged these awards for the right to receive $28.5 million in cash, which we agreed to pay out either immediately, if certain pre-defined conditions were met, or over the original vesting period of the awards. All of this liability has been paid as of January 2, 2004.

     The allocation of the purchase price is as follows:

(In millions)
Goodwill	$	267.1
Intangible assets subject to amortization—developed technology		64.4
Purchased in-process research and development costs		5.4
Fair value of assets acquired		8.2
Total assets		345.1
Total liabilities		22.1
Purchase price	$	323.0

     These acquisitions were accounted for under the purchase method of accounting. The operating results of the businesses have been included in the accompanying consolidated results of operations from their date of acquisition. Pro forma combined results of operations assuming the acquisitions had occurred at the beginning of the year are not presented for Vinci, Vivace and Ocular as they would not differ materially from reported results. In addition, we estimate that $157.9 million of goodwill will be deductible for tax purposes.

5. Goodwill and Intangible Assets

During the first quarter of 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 eliminates the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives, which range from approximately 1 year to 13 years, on a straight-line basis. The weighted average amortization period is 7 years for all intangible assets, 6 years for developed technology, 12 years for customer relationships and backlog, 7 years for leasehold estates and less than 1 year for trade names and trademarks.

     During the fourth quarter of 2004, we recorded a charge of $47.2 million for the impaired developed technology and other assets related to the Tellabs 5500 NGX transport switch product, which we acquired as part of the Ocular acquisition, based on reduced cash flow estimates. Of the total charge, $45.6 million was to write off all of the remaining developed technology asset. Also during the fourth quarter of 2004, we wrote off all of the $102.1 million based on the preliminary estimates of the value of purchased in-process research and development assets from our acquisitions of AFC and Vinci as required by GAAP.

TELLABS 2004 ANNUAL REPORT / 39

     The gross carrying amount and accumulated amortization of intangible assets subject to amortization are as follows:

(In millions)	As of 12/31/04									As of 1/2/04
	Gross			Accumulated							Gross		Accumulated
	Assets			Amortization			Net				Assets		Amortization		Net
Developed technology	$	153.5		$	26.6		$	126.9			$	124.9	$	17.1	$	107.8
Customer relationships/backlog		34.2			0.8			33.4				—		—		—
Trade name/trademarks		2.0			0.4			1.6				—		—		—
Leasehold estates		(6.0	)		(0.1	)		(5.9	)			—		—		—
Total	$	183.7		$	27.7		$	156.0			$	124.9	$	17.1	$	107.8

     The estimated amortization expense for each of the next five years is as follows:

(In millions)
2005	$	37.0
2006	$	26.5
2007	$	22.6
2008	$	22.3
2009	$	18.7

6. Investments

Marketable securities are accounted for at market prices, with the unrealized gain or loss, less deferred income taxes, shown as a separate component of stockholders’ equity. Realized gains and losses are based on specific identification of the security sold. At December 31, 2004, and January 2, 2004, available-for-sale marketable securities consisted of the following:

	Amortized		Unrealized			Market
(In millions)	Cost		Gain/(Loss)			Value
2004
U.S. government and agency debt obligations	$	531.2	$	(3.2	)	$	528.0
Corporate debt obligations		187.1		(1.6	)		185.5
Foreign government obligations		64.4		0.3			64.7
Preferred and common stocks		45.7		(0.7	)		45.0
Foreign bank obligations		0.1		—			0.1
	$	828.5	$	(5.2	)	$	823.3
2003
U.S. government and agency debt obligations	$	377.9	$	0.9		$	378.8
Corporate debt obligations		253.2		0.5			253.7
Foreign government obligations		172.2		(0.6	)		171.6
Preferred and common stocks		46.1		1.6			47.7
Foreign bank obligations		25.3		—			25.3
	$	874.7	$	2.4		$	877.1

     The contractual maturities of our available-for-sale debt securities at December 31, 2004, are $103.9 million less than one year, $534.3 million more than one year to three years and $140.2 million after three years.

     As a result of our acquisition of AFC we acquired the 10.6 million shares of Cisco common stock that AFC owned as a result of its investment in privately held Cerent Corporation, which was acquired by Cisco in 1999. The shares are presented as Other marketable securities –Cisco stock in the current assets portion of our balance sheet as of December 31, 2004. In 2000, AFC entered into two three-year hedge contracts, pledging all of the Cisco stock to secure the obligations under the contracts. When the hedge contracts matured in 2003, AFC entered into stock loan agreements with a lender, borrowing 10.6 million shares of Cisco stock to settle hedge contracts on the Cisco stock. The fair value of those stock loans is reflected as a current liability on our balance sheet as of December 31, 2004. The value of both the asset and liability move in tandem with each other since each is based upon the number of shares we hold at the current stock price. There are fees associated with the stock loan agreement which have been approximately $1.0 million per year.

     In addition to the above investments, we maintain investments in start-up technology companies and partnerships that invest in start-up technology companies. These investments are recorded in Other Assets at cost. At December 31, 2004, and January 2, 2004, these investments totaled $5.8 million and $15.0 million, respectively.

     We conduct a quarterly review of each investment in our portfolio, including historical and projected financial performance, expected cash needs and recent funding events. Other-than-temporary impairments are recognized if the market value of the investment is below its cost basis for an extended period of time or the issuer has experienced significant financial declines or difficulties in raising capital to continue operations. Other-than-temporary impairments were $11.2 million for the year ended December 31, 2004, $3.3 million for the year ended January 2, 2004, and $29.6 million for the year ended December 27, 2002. These charges are

40

included in Other Expense in the Consolidated Statements of Operations.

7. Derivative Financial Instruments

We conduct business on a global basis in several major currencies and are subject to risks associated with fluctuating foreign exchange rates. In response to this, we developed a foreign currency exposure management policy with the objective of mitigating financial exposure to changing foreign exchange rates resulting from nonfunctional currency receivables and payables that are expected to be settled in one year or less. We utilize derivatives, primarily foreign currency forward contracts, to manage our foreign currency exposure. We do not engage in hedging specific individual transactions, but rather use derivatives to manage overall exposure levels for a specific currency. Gains and losses related to these derivatives are recorded to the Consolidated Statement of Operations each period.

     We enter into derivative foreign exchange contracts only to the extent necessary to meet our overall goal of minimizing nonfunctional foreign currency exposures. We do not enter into hedging transactions for speculative purposes.

     In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, all forward exchange contracts are recorded on the balance sheet at fair value. Forward foreign exchange contracts receivable are included in other current assets, while forward foreign exchange contracts payable are included as part of accrued liabilities in the Consolidated Balance Sheet.

Changes in the fair value of these instruments are included in earnings, as part of other income and expense, in the current period. We had a net gain of $14.4 million, $17.0 million, and $5.5 million on forward exchange contracts in 2004, 2003 and 2002, respectively. Our current hedging practices do not qualify for special hedge accounting treatment as prescribed in SFAS No. 133 since hedges of existing assets or liabilities that will be re-measured with changes in fair value reported currently in earnings are specifically excluded.

     Derivative financial instruments involve elements of market and credit risk not recognized in the financial statements. The market risk that results from these instruments relates to changes in the foreign currency exchange rates, which is generally offset by movements in the value of the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of our derivative contracts. We do not believe there is a significant credit risk associated with our hedging activities because the counterparties are all large international financial institutions with high credit ratings. In addition, we also limit the aggregate notional amount of agreements entered into with any one financial institution in order to mitigate credit risk.

     Our net foreign currency exposure is diversified among a broad number of currencies. The notional amounts reflected in the table that follows represent the U.S. dollar values of the agreed-upon amounts that will be delivered to a third party on the agreed-upon date:

	Notional Value
	of Forward		Fair Value of
(In millions)	Contracts		Forward Contracts
Forward contracts at December 31, 2004:
Related forward contracts to sell foreign currencies for Euro	$	113.1	$	8.6
Related forward contracts to buy foreign currencies for Euro		8.5		—
Related forward contracts to sell foreign currencies for Danish kroner		8.9		—
Related forward contracts to sell foreign currencies for British pound		16.3		—
Related forward contracts to sell foreign currencies for U.S. dollar		19.7		—
Related forward contracts to buy foreign currencies for U.S. dollar		14.1		—
Related forward contracts to buy foreign currencies for Thai baht		1.4		—
Total	$	182.0	$	8.6
Forward contracts at January 2, 2004:
Related forward contracts to sell foreign currencies for Euro	$	96.7	$	0.1
Related forward contracts to buy foreign currencies for Euro		1.3		—
Related forward contracts to sell foreign currencies for Danish kroner		5.8		—
Related forward contracts to sell foreign currencies for British pound		17.6		(0.1	)
Related forward contracts to buy foreign currencies for British pound		0.4		—
Related forward contracts to buy foreign currencies for U.S. dollar		3.9		—
Related forward contracts to sell foreign currencies for U.S. dollar		59.0		—
Related forward contracts to buy foreign currencies for Brazilian reis		0.4		—
Related forward contracts to sell foreign currencies for Canadian dollar		36.7		.2
Related forward contracts to buy foreign currencies for Thai baht		3.1		—
Total	$	224.9	$	0.2

Pursuant to our policy, we entered into most of the above contracts immediately prior to the respective year-ends. Accordingly, the carrying value of such contracts at December 31, 2004, and January 2, 2004, approximates fair value.

TELLABS 2004 ANNUAL REPORT / 41

8. Assets Held for Sale and Loss on Sale of Real Estate

In 2003, as a result of a plan to consolidate facilities and reduce expenses, we vacated one of our buildings in Vitikka, Finland, and began to actively market it for sale. There was no loss recognized at the time the Vitikka facility qualified as held for sale under FAS 144, as the net book value of $2.8 million was below the market price less estimated costs to sell. We expect to locate a buyer and complete a sale of the building in 2005.

     In 2003, we determined that the main manufacturing and office facility located in Bolingbrook, Illinois, was no longer needed because we had committed to outsource our North American manufacturing operations. As a result of that decision, we changed the estimated useful life of the facility and recognized additional depreciation expense of $38.4 million, bringing the net book value of the asset to the fair value less cost to sell of $6.1 million. $24.8 million of the additional depreciation expense was included in operating expenses, and $13.6 million was included in cost of revenue in our statement of operations for 2003. In 2004, we determined that, due to excess capacity, we would sell the facility we use for order assembly and shipment in Bolingbrook, Illinois, and lease back a portion of the facility. As a result of this decision, we recognized a loss of $4.7 million to write down the asset to the fair value less cost to sell of $9.2 million. This loss was included in cost of revenue in our statement of operations for 2004. We sold both of the Bolingbrook, Illinois, facilities in a single transaction in 2004. (See further discussion in Note 3.)

     As a result of prior restructuring plans, we committed to sell facilities in Lisle, Illinois, and Round Rock, Texas, with carrying amounts at the end of 2002 totaling $13.1 million. The carrying value of the land, buildings and leasehold improvements approximated their fair value less costs to sell, which was determined based on the quoted market prices of similar assets; therefore, no impairment loss was recorded in 2002. In 2003, it was determined that neither property could be sold at the current book value, and $4.8 million of impairment charges were recorded. In 2004, a further impairment of the Round Rock facility was recorded for $0.8 million. These impairment losses were included in operating expenses in our statements of operations for 2003 and 2004. Both the Lisle, Illinois, and Round Rock, Texas, facilities were sold in 2004.

     In addition, during the fourth quarter of 2004, we sold an office building for a $21.1 million loss in Denmark and entered into a one-year lease for a portion of the space.

     As of December 31, 2004, the total carrying value of properties held for sale was $2.8 million, as only the Vitikka property remains to be sold. As of January 2, 2004, the total carrying value of properties held for sale was $18.2 million. These balances are included in the Miscellaneous Receivables and Other Current Assets in both of the Consolidated Balance Sheets.

9. 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 other than Access products for a period ranging from 1 to 5 years. The basic limited warranty for Access products covers parts and labor for periods ranging from 1 to 10 years.

     Factors that enter into the estimate of our warranty liability include the number of units shipped, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. On the Consolidated Balance Sheets, the short-term portion of the warranty reserve is included in Other Current Liabilities, while the long-term portion is included in Other Long-Term Liabilities. Our product warranty liabilities are as follows:

(In millions)	12/31/04			1/2/04			12/27/02
Balance at beginning of year	$	19.5		$	13.9		$	14.4
AFC warranty liability acquired in acquisition		24.8			—			—
Accruals for product warranties		6.3			11.6			8.5
Settlements		(9.4	)		(6.0	)		(9.0	)
Balance at end of year	$	41.2		$	19.5		$	13.9
Balance sheet classification at end of year
Other current liabilities	$	21.2		$	6.4		$	6.2
Other long-term liabilities		20.0			13.1			7.7
Total product warranty liabilities	$	41.2		$	19.5		$	13.9

10. Employee Stock Plans

At December 31, 2004, we had 15 stock-based compensation plans with options still outstanding. Under these plans, we typically grant options to purchase our common stock, or restricted shares, at no less than 100% of the market price on the date granted. Options and restricted shares granted in 2004 and 2003 generally become exercisable on a cumulative basis at a rate of 20% on each of the first two annual anniversaries and 60% on the third anniversary of the grant date and have a maximum term of 10 years. Prior to 2003, options generally became exercisable on a cumulative basis at a rate of 25% on each of the first through fourth anniversaries of the grant date. AFC options that converted to Tellabs options from the acquisition vest over three to four years with a maximum term of 10 years. A total of 251,927,574 shares was authorized for grant under the plans of which

42

39,087,402 remain available for grant. Certain plans also provide for the granting of stock appreciation rights (SARs) in conjunction with, or independently of, the options under the plans. The SARs are typically assigned 10-year terms. At December 31, 2004, there were 131,200 SARs outstanding under the plans. At December 31, 2004, the exercise prices of our outstanding SARs ranged from $4.07 to $70.06.

     A summary of the status of our option plans as of December 31, 2004, January 2, 2004, and December 27, 2002, and of changes during the years ending on these dates is presented in the following chart:

	2004					2003					2002
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding—beginning of year		41,240,918		$	19.35		42,333,868		$	22.49		37,926,204		$	30.95
Granted/converted		34,339,304	*	$	10.93		10,374,119		$	6.57		16,781,435		$	5.23
Exercised		(2,331,337	)	$	3.84		(2,409,640	)	$	2.57		(2,144,053	)	$	1.35
Forfeited		(6,037,615	)	$	22.76		(9,057,429	)	$	23.31		(10,229,718	)	$	29.98
Outstanding—end of year		67,211,270		$	15.28		41,240,918		$	19.35		42,333,868		$	22.49
Exercisable at end of year		40,415,004					20,450,233					17,278,637
Available for grant		39,087,402					24,701,201					25,688,260
Weighted average fair value of options granted during the year	$	5.49				$	4.15				$	4.31

*AFC stock options as of the acquisition date were converted into our stock options. We issued 29,728,119 options with a weighted average exercise price of $11.19 as of that date.

     In 2004, 609,000 restricted shares were granted under this program (including 103,000 shares relating to the AFC acquisition). Compensation expense is recognized on a straight-line basis over the vesting period and is based on the market price of Tellabs stock on the date of grant.

     In addition to the plans discussed above, we maintain an employee stock purchase plan. Under the plan, employees elect to withhold a portion of their compensation to purchase our common stock at fair market value. We match 15% of each employee’s withholdings, which increases their compensation for payroll tax purposes. Compensation expense is recognized for the amount that we contribute to the plan through our matching of participant withholdings.

     We have a program to award shares of our common stock to employees in recognition of their past service. Each full-time employee who has worked for a continuous 5-, 10-, 15-, 20-, 25- or 30-year period is awarded 10, 15, 25, 50, 75 or 100 shares, respectively. When an employee stock award is granted, compensation expense is charged for the fair market value of the shares issued.

TELLABS 2004 ANNUAL REPORT / 43

     Options outstanding and exercisable as of December 31, 2004, by price range are as follows:

			Outstanding				Exercisable
			Weighted
			Average		Weighted				Weighted
	Number		Remaining		Average		Number		Average
Range of	Outstanding		Contractual		Exercise		Exercisable		Exercise
Exercise Prices	As of 12/31/2004		Life		Price		As of 12/31/2004		Price
$  0.03- $ 6.50		10,669,370		7.0	$	5.15		6,467,435	$	4.66
$  6.56- $12.60		35,762,471		8.0	$	9.08		15,640,620	$	9.46
$12.69- $20.35		10,343,719		5.5	$	16.18		8,362,786	$	16.35
$20.42- $27.75		3,058,883		4.5	$	24.37		3,046,389	$	24.37
$29.25- $34.28		426,799		5.3	$	31.52		400,072	$	31.47
$35.11- $42.57		322,848		5.3	$	39.53		295,951	$	39.56
$45.06- $50.31		2,195,789		5.8	$	49.91		1,770,360	$	49.81
$51.69- $58.50		539,663		4.8	$	53.54		539,663	$	53.54
$59.25- $65.63		3,801,803		5.2	$	61.75		3,801,803	$	61.75
$70.06- $70.63		89,925		5.1	$	70.46		89,925	$	70.46
		67,211,270		7.0	$	15.28		40,415,004	$	19.09

11. Employee Benefit and Retirement Plans

Our employees may voluntarily participate in the Tellabs Advantage Program and upon meeting eligibility requirements, we will match (dollar-for-dollar) up to the first 4% (from July 1, 2003 - December 31, 2004) or 3% (from January 1, 2003 - - June 30, 2003) of the employee’s compensation. Both employee and employer contributions are immediately vested. The investment election for the employee’s contribution is employee-driven and our match follows this election. In addition, the employee may elect to change this investment election and reallocate assets on a daily basis. Although the Tellabs Stock Fund is one of several funds offered to participants, at no time do we direct the investment of an employee’s contribution or our match into any one fund offered under the program. We maintain similar plans for the benefit of eligible employees at our Finland and Denmark subsidiaries.

     Until July 1, 2003, we contributed to a retirement plan under the program consisting of a money purchase plan and a profit-sharing plan for which, upon meeting eligibility requirements, all employees become eligible participants. Each quarter, we contributed an amount equal to 5% of a participant’s quarterly salary, subject to the terms set forth in the program. This quarterly contribution was entirely funded by us. Of the 5% contribution, 4.5% was deposited into a money purchase plan and invested per the participant’s direction into the funds offered under the program with the exception of the Tellabs Stock Fund. The participant may not direct any portion of this 4.5% into the Tellabs Stock Fund. Participants were allowed to change their money purchase plan investment elections at any time and may continue to reallocate the investments among the same funds available under the program (with the exception of the Tellabs Stock Fund) on a daily basis. Contributions to the profit-sharing plan were suspended as of July 1, 2003.

     The investment of the remaining 0.5% of this quarterly 5% contribution (10% of our retirement contribution) was deposited into the profit-sharing plan and was directed by us into the Tellabs Stock Fund and still may not be reallocated unless the participant is age 55 or older. Contributions to the profit-sharing plan were suspended as of July 1, 2003.

     Effective July 1, 2003, we instituted a Discretionary Company Contribution. This contribution is declared by the Board of Directors and is funded entirely by us. The amount of the contribution is based on a percent of pay for a specific period as declared by the Board. All full-time active employees are immediately eligible to receive this contribution and the investment of these funds follows the participants’ elections on file for the program. This contribution is immediately vested. The Board of Directors declared a 2% contribution for the third and fourth quarters of 2003 and for each quarter of 2004.

     Our contributions to these programs were $18.8 million, $25.9 million and $22.9 million for 2004, 2003 and 2002, respectively.

     We provide a deferred income plan that permits certain officers and management employees to defer portions of their compensation. All deferrals prior to September 2, 2001, are guaranteed a fixed return. In September 2001, the plan was amended to offer multiple investment funds whose investment returns are based on market performance; therefore, all deferrals on or after September 2, 2001, also

44

can be transferred into the amended plan and invested in the new fund options. Funds invested prior to September 2, 2001, also can be transferred into the amended plan. The deferred income obligation is included in Other Long-Term Liabilities and adjusted, with a corresponding charge (or credit) to compensation expense, to reflect changes in the fair value of the amount owed to the employee. We fund any payments from the deferred income plan from our investment in corporate-owned life insurance policies. The cash surrender value of such policies is recorded in Other Assets.

     We maintain a defined-benefit retiree medical plan. Under the plan, which was implemented in 1999, we provide qualified retirees with a subsidy to offset their medical costs and allow the retirees to participate in the Company-sponsored healthcare plan. In 2004, no contribution was made and in 2003 and 2002, $2.0 million and $2.4 million were contributed, respectively, to our defined-benefit retiree medical plan.

     The following table summarizes plan assets, obligations, and assumptions of the retiree medical plan as of December 31, 2004 and December 31, 2003:

(In millions)	2004			2003
Change in benefit obligation
Accumulated postretirement benefit obligation at beginning of year	$	8.6		$	7.9
Service cost		0.7			0.9
Interest cost		0.5			0.5
Plan amendments		—			—
Actuarial (gain) loss		(1.1	)		1.6
Benefits paid		(0.3	)		(0.3	)
AFC acquisition		2.7			—
Curtailment		—			(2.0	)
—
Accumulated postretirement benefit obligation at end of year	$	11.1		$	8.6
Change in plan assets
Assets at fair value at beginning of year	$	8.5		$	6.4
Return on plan assets		0.1			0.1
Company contributions		—			2.0
Benefits paid		—			—
Assets at fair value at end of year	$	8.6		$	8.5

(In millions)	2004			2003
Reconciliation of (accrued) prepaid cost
Funded status of the plan	$	(2.5	)	$	(0.1	)
Unrecognized prior service cost		1.5			1.6
Unrecognized net loss		0.4			1.2
(Accrued) prepaid cost	$	(0.6	)	$	2.7
Components of net periodic benefit cost
Service cost	$	0.7		$	0.9
Interest cost		0.5			0.5
Expected return on assets		(0.4	)		(0.4	)
Amortization of:
Unrecognized prior service cost		—			0.2
Net periodic postretirement benefit cost	$	0.8		$	1.2
Additional costs due to restructure Special termination benefits		—			0.2
Total cost for the year	$	0.8		$	1.4

     We incurred additional costs of $0.2 million in 2003 for certain extra benefits paid to terminated or retired employees. We expect to contribute $0.8 million to our retiree medical plan in 2005.

     We amortize the prior service cost using a straight-line method over the average remaining years of service to full eligibility for benefits of the active retiree medical plan participants.

Weighted average assumptions	2004			2003
Discount rate used to determine benefit costs		6.00	%		6.75	%
Discount rate used to determine benefit obligation		6.00	%		6.00	%
Expected long-term rate of return on assets		5.00	%		5.00	%

     There is no trend rate assumption required for this plan, because all liabilities are related to a fixed-dollar subsidy, and are not related to medical claims. Therefore, any change in future medical inflation trends or assumptions will have no effect on the liabilities of this plan.

     The plan’s assets are invested 100% in fixed-income securities. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The

TELLABS 2004 ANNUAL REPORT / 45

long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check for reasonableness and appropriateness.

     The following table presents estimated future benefit payments for the retiree medical plan as of December 31, 2004:

(In millions)
2005	$	0.3
2006		0.3
2007		0.3
2008		0.3
2009		0.4
2010–2014		2.4

12. Income Taxes

Components of the company’s (loss) earnings before income taxes are as follows:

	Year Ended			Year Ended			Year Ended
(In millions)	12/31/04			1/2/04			12/27/02
Domestic source	$	(47.3	)	$	(250.8	)	$	(330.2	)
Foreign source		37.1			6.1			2.4
Loss before income tax	$	(10.2	)	$	(244.7	)	$	(327.8	)

     The provision for income tax (expense) benefit consists of the following:

	Year Ended			Year Ended			Year Ended
(In millions)	12/31/04			1/2/04			12/27/02
Current:
Federal	$	0.6		$	5.7		$	132.3
State		(0.4	)		(0.4	)		1.4
Foreign		(8.2	)		(17.1	)		(26.2	)
		(8.0	)		(11.8	)		107.5
Deferred:
Federal		—			—			(89.1	)
State and foreign		(11.6	)		14.9			(3.7	)
		(11.6	)		14.9			(92.8	)
Income tax (expense) benefit	$	(19.6	)	$	3.1		$	14.7

     Deferred tax assets (liabilities) for 2004 and 2003 are composed of the following:

	Ending Balance			Ending Balance
(In millions)	12/31/04			1/2/04
Deferred tax assets
NOL and tax credit carryforwards	$	177.6		$	195.6
Inventory reserves		14.4			22.2
Accrued liabilities		35.5			11.6
Deferred compensation plan		7.9			7.9
Deferred employee benefit expenses		13.4			5.0
Fixed assets and depreciation		—			10.4
Restructuring accruals		17.5			36.2
Amortizable intangibles		2.0			—
Unrealized loss on marketable securities		2.1			—
Other		—			5.8
Gross deferred tax assets		270.4			294.7
Deferred tax liabilities
Amortizable intangibles		—			(25.3	)
Unrealized gain on marketable securities		(198.1	)		(1.0	)
Fixed assets and depreciation		(21.4	)		—
Other		(4.3	)		(0.7	)
Gross deferred tax liabilities		(223.8	)		(27.0	)
Valuation allowance		(38.9	)		(251.4	)
Net deferred tax asset	$	7.7		$	16.3

46

     Federal income taxes at the statutory rate are reconciled with the company’s income tax provision as follows:

	Year Ended			Year Ended			Year Ended
(In percentages)	12/31/04			1/2/04			12/27/02
Statutory U.S. income tax rate		(35.0	)%		(35.0	)%		(35.0	)%
State income tax, net of federal benefits		4.1			1.4			1.7
Research and development credit		—			—			(0.7	)
Foreign earnings taxed at different rates		91.6			0.4			9.0
Loss on investment in securities		—			(2.5	)		—
(Loss) gain on investment in subsidiary		—			0.6			(5.1	)
Valuation allowance on net deferred tax assets		(267.9	)		30.8			25.4
Assessments related to prior year tax matters		17.8			2.8			—
Write-off of in-process research and development		352.2			—			—
Nondeductible stock compensation expense		33.9			—			—
Other, net		(4.5	)		0.2			0.2
Effective income tax rate		192.2	%		(1.3	)%		(4.5	)%

     The net deferred income tax asset decreased from $16.3 million at January 2, 2004, to $7.7 million at December 31, 2004. The $8.6 million change in the net deferred tax balance is primarily attributable to utilization of net operating losses in foreign jurisdictions. Our net deferred tax asset includes a deferred tax liability of $198.1 million representing taxes that will be due on certain hedge contract gains upon termination of our Cisco stock loans.

Deferred Tax Valuation Allowance

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. Prior to December 27, 2002, we established valuation allowances only for future tax benefits from certain state net operating losses, credits with relatively short carryforward periods, and certain foreign net operating losses. At December 27, 2002, we determined it appropriate to establish a full valuation allowance against our remaining net U.S. deferred tax assets. For the year ended December 31, 2004, we continued to maintain a full valuation allowance on our net U.S. deferred tax assets. Until an appropriate level of profitability is attained, we expect to continue to record a full valuation allowance on our net deferred tax assets related to future U.S. and certain non-U.S. tax benefits.

     During 2004, the valuation allowance maintained against our net U.S. deferred tax asset was reduced as a result of deferred tax liabilities of $177.2 million and $9.9 million recorded in accounting for the purchase of AFC and Vinci. The reduction in the valuation allowance was credited against goodwill recorded with respect to these acquisitions, and did not impact our tax expense.

Summary of Carryforwards

We have carryforward U.S. federal and state net operating losses and research and development credits. The value of these assets decreased from $174.4 million as of January 2, 2004, to $165.4 million as of December 31, 2004. This decrease was primarily attributable to utilization of net operating losses in 2004. The state net operating loss carryforwards and credits will expire at various dates between 2005 and 2023, a majority of which will expire between 2012 and 2023. The federal net operating loss and R&D tax credit carryforwards will expire at various dates between 2020 and 2023.

     We have net operating loss carryforwards relating to certain non-U.S. subsidiaries for which a full valuation allowance has been previously established. The value of these assets was $9.6 million at December 31, 2004, compared with $9.4 million at January 2, 2004. We also have net operating losses relating to other non-U.S. subsidiaries for which deferred tax assets exist that are not reduced by a valuation allowance. The value of these assets was $2.6 million at December 31, 2004, compared with $11.8 million at January 2, 2004. The non-U.S. net operating loss carryforwards will expire at various dates between 2005 and 2013.

Investment in Foreign Operations

Deferred U.S. income taxes and foreign withholding taxes are not provided on the undistributed cumulative earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested in those operations. The undistributed cumulative earnings of foreign subsidiaries that are considered permanently reinvested outside the U.S. were $664.5 million at December 31, 2004.

     The American Jobs Creation Act of 2004 (the “AJCA”), signed into law in October 2004, includes a provision that allows Tellabs to elect to claim a special one-time dividend received deduction with respect to a qualifying cash repatriation from its foreign subsidiaries. We are evaluating

TELLABS 2004 ANNUAL REPORT / 47

the potential benefits of making this election with respect to a cash repatriation of between $0 and $600.0 million. We expect to complete our evaluation subsequent to enactment of anticipated Technical Corrections legislation. Through the end of 2004, preliminary estimates indicate that Tellabs would owe approximately $70.0 million in U.S. income tax if $600.0 million in cash were repatriated by its foreign subsidiaries under the provisions of the AJCA as enacted.

Audits

We are subject to tax examinations and potential assessments in various jurisdictions. During 2004 we reached a settlement with the IRS in connection with their examination of our 1998-2000 tax years, resulting in an $8.5 million tax benefit. The IRS is currently examining our federal income tax returns for 2001 through 2003. We do not expect the outcome of these examinations to have a material effect on our consolidated results of operations, consolidated financial position or cash flow.

13. Product Group and Geographical Information

We manage our business in one operating segment. Consolidated revenue by current product group designations is as follows:

(In millions)	2004		2003		2002
Transport	$	588.2	$	419.4	$	579.1
Managed Access		331.0		336.1		455.0
Voice-Quality Enhancement		84.3		68.2		103.7
Access		53.3		—		—
Broadband Data		17.4		6.4		—
Services		157.6		150.3		179.2
Total	$	1,231.8	$	980.4	$	1,317.0

     During 2004, revenue from a single customer accounted for 27% of consolidated revenue. During 2003, revenue from a single customer accounted for 21% of consolidated revenue. During 2002, revenue from a single customer accounted for 17% of consolidated revenue, and a second customer accounted for 11% of consolidated revenue.

     Consolidated revenue by country, based on the location of our customers, is as follows:

(In millions)	2004		2003		2002
United States	$	797.0	$	588.8	$	904.3
Other geographic areas		434.8		391.6		412.7
Total	$	1,231.8	$	980.4	$	1,317.0

     Long-lived assets by country are as follows:

(In millions)	2004		2003
United States	$	1,558.0	$	921.3
Finland		102.7		119.4
Denmark		16.0		51.2
Other geographic areas		9.3		16.9
Total	$	1,686.0	$	1,108.8

14. Operating Lease Commitments

We have a number of operating lease agreements primarily involving office space, buildings and office equipment. These leases are non-cancelable and expire on various dates through 2014. As of December 31, 2004, future minimum lease commitments under non-cancelable leases are as follows:

(In millions)
2005	$	18.0
2006		15.4
2007		12.7
2008		9.6
2009		8.0
2010 and thereafter		19.1
Total minimum lease payments	$	82.8

     Total future minimum lease payments have not been reduced by $3.8 million of future sublease payments to be received under non-cancelable subleases. Total rental expense for the years ended December 31, 2004, January 2, 2004, and December 27, 2002, was approximately $10.0 million, $15.0 million and $16.5 million, respectively.

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15. Earnings Per Share

The following chart sets forth the computation of loss per share:

(In millions, except per-share data)	2004			2003			2002
Numerator:
Net loss	$	(29.8	)	$	(241.6	)	$	(313.1	)
Denominator:
Denominator for basic loss per share – weighted average shares outstanding		420.2			413.1			411.4
Effect of dilutive securities:
Employee stock options and awards		—			—			—
Denominator for diluted loss per share – adjusted weighted average shares outstanding and assumed conversions		420.2			413.1			411.4
Loss per share, basic and diluted	$	(0.07	)	$	(0.58	)	$	(0.76	)

     Under GAAP, dilutive securities are not included in the computation of diluted earnings per share when a company is in a net loss position. Diluted weighted average shares outstanding were 424.7 million, 416.7 million and 414.9 million in 2004, 2003 and 2002, respectively.

16. Quarterly Financial Data (unaudited)

Selected quarterly financial data for 2004 and 2003 are as follows:

(In millions, except per-share data)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter1
2004
Revenue	$	263.8		$	304.3		$	284.3		$	379.4
Gross profit	$	150.5		$	174.8		$	153.1		$	178.6
Net earnings (loss)	$	13.4		$	49.6		$	45.9		$	(138.7	)
Earnings (loss) per share – basic and diluted	$	0.03		$	0.12		$	0.11		$	(0.32	)
2003
Revenue	$	222.5		$	234.1		$	244.5		$	279.3
Gross profit	$	93.5		$	44.5		$	93.2		$	122.8
Net loss	$	(42.9	)	$	(110.7	)	$	(64.8	)	$	(23.2	)
Loss per share – basic and diluted	$	(0.10	)	$	(0.27	)	$	(0.16	)	$	(0.06	)

¹ The fourth quarter of 2004 includes the following pre-tax charges: Purchased in-process research and development charges of $102.1 million; asset impairment charges of $47.2 million; a net loss on the sale of real estate of $20.6 million; and a $11.2 million impairment charge for the write-down of certain start-up investments.

     The per-share computation for the year is a separate, annual calculation. Accordingly, the sum of the quarterly per share amounts do not necessarily equal the per share amounts for the year.

17. Subsequent Event

On February 2, 2005, our Board of Directors authorized the purchase of up to $300 million in shares of our outstanding common stock. Purchases of common shares may be made from time-to-time in the open market or in private transactions and will be recorded as treasury stock. As of February 28, 2005, we have purchased $118.7 million (16.5 million shares) of our common stock.

TELLABS 2004 ANNUAL REPORT / 49

11-Year Summary of Selected Financial Data (Unaudited)

(In millions, except per-share, employee and stockholder data)	20044			2003			2002			2001
Statement of Operations Data
Revenue	$	1,231.8		$	980.4		$	1,317.0		$	2,199.7
Gross profit	$	657.0		$	354.0		$	486.5		$	763.2
Operating (loss) profit	$	(31.7	)	$	(264.5	)	$	(329.7	)	$	(279.4	)
(Loss) earnings before income taxes and cumulative effect of change in accounting principle	$	(10.2	)	$	(244.7	)	$	(327.8	)	$	(244.8	)
(Loss) earnings before cumulative effect of change in accounting principle	$	(29.8	)	$	(241.6	)	$	(313.1	)	$	(182.0	)
Net (loss) earnings	$	(29.8	)	$	(241.6	)	$	(313.1	)	$	(182.0	)
(Loss) earnings per share before cumulative effect of change in accounting principle – diluted 1	$	(0.07	)	$	(0.58	)	$	(0.76	)	$	(0.44	)
(Loss) earnings per share – diluted 1	$	(0.07	)	$	(0.58	)	$	(0.76	)	$	(0.44	)
Weighted average shares outstanding – diluted 1		420.2			413.1			411.4			409.6
Balance Sheet Data
Total assets	$	3,522.5		$	2,607.5		$	2,705.7		$	2,865.8
Total liabilities	$	725.3		$	388.2		$	415.4		$	400.2
Stockholders’ equity	$	2,797.2		$	2,219.3		$	2,290.3		$	2,465.6
Other Information
Net cash provided by operating activities	$	214.7		$	149.9		$	177.8		$	419.3
Working capital	$	1,295.2		$	1,291.1		$	1,359.2		$	1,625.1
Long-term debt	$	—		$	—		$	—		$	3.4
Research and development expenditures 2	$	250.3		$	286.1		$	340.6		$	422.7
Return on average equity		–1.2	%		–10.7	%		–13.2	%		–7.1	%
Stock price at year-end	$	8.59		$	8.36		$	7.43		$	15.79
Number of employees at year-end		4,125			3,515			4,828			7,334
Number of stockholders 3		8,035			6,659			6,397			5,845

1	Restated to reflect two-for-one stock splits in 1999, 1996, 1995 and 1994, and a three-for-two stock split in 1993.
2	2004 and 1996 research and development expenditures do not include purchased in-process research and development costs of $102.1 and $74.7 million, respectively.
3	Represents the number of stockholders at the record date for the next annual meeting of stockholders.
4	Includes the acquisition of AFC in November 2004.
5	We adopted SAB 101 “Revenue Recognition in Financial Statements” in 2000 which is shown as a change in accounting principle.

50

20005			1999			1998			1997			1996			1995			1994
$	3,387.4		$	2,322.4		$	1,706.1		$	1,280.9		$	925.4		$	680.5		$	524.7
$	1,835.4		$	1,382.3		$	1,000.0		$	761.3		$	533.4		$	376.2		$	280.8
$	995.0		$	731.8		$	484.4		$	379.8		$	183.6		$	168.8		$	106.0
$	1,109.4		$	802.1		$	577.7		$	417.2		$	190.3		$	175.6		$	104.2
$	760.0		$	549.7		$	391.5		$	275.5		$	127.6		$	123.3		$	76.2
$	730.8		$	549.7		$	391.5		$	275.5		$	127.6		$	123.3		$	76.2
$	1.82		$	1.32		$	0.96		$	0.69		$	0.32		$	0.32		$	0.20
$	1.75		$	1.32		$	0.96		$	0.69		$	0.32		$	0.32		$	0.20
	418.4			417.0			408.9			401.1			393.1			387.6			362.7
$	3,073.1		$	2,354.6		$	1,651.9		$	1,250.1		$	786.8		$	581.0		$	407.4
$	445.5		$	307.1		$	247.4		$	257.9		$	158.2		$	127.1		$	104.2
$	2,627.6		$	2,047.5		$	1,404.5		$	992.2		$	628.6		$	453.9		$	303.2
$	426.1		$	452.2		$	239.3		$	219.1		$	185.5		$	103.0		$	114.7
$	1,910.0		$	1,511.4		$	1,054.9		$	685.0		$	374.7		$	283.9		$	148.0
$	2.9		$	9.4		$	3.3		$	3.1		$	2.9		$	3.9		$	4.9
$	412.4		$	311.0		$	224.1		$	171.9		$	113.7		$	86.5		$	68.7
	31.3	%		31.8	%		32.7	%		34.0	%		23.6	%		32.6	%		29.9	%
$	56.50		$	64.19		$	34.28		$	27.38		$	19.75		$	9.25		$	6.97
	8,643			7,068			5,073			4,394			3,418			2,814			2,565
	5,367			5,504			4,371			3,725			3,035			2,685			1,832

TELLABS 2004 ANNUAL REPORT / 51

Board of Directors

Michael J. Birck, 67, chairman and co-founder Tellabs. Chairman since 2000, chief executive officer 2002-2004, chief executive officer and president 1975-2000. Director of engineering at Wescom Inc. 1968-1975. Director, Molex Incorporated, Illinois Tool Works. M.S.E.E., New York University; B.S.E.E., Purdue University. Tellabs director since 1975.

Bo Hedfors, 61, founder and president of Hedfone Consulting, Inc. (telecom and Internet consulting), since 2002. President, global wireless infrastructure business at Motorola 1998-2002. President and CEO of Ericsson, Inc., 1994-1998; chief technology officer of LM Ericsson 1990-1993; president of Honeywell Ericsson Development Co. 1984-1986. Director, Openwave Systems, Inc., SwitchCore AB. M.S.E.E., Chalmers University of Technology. Tellabs director since 2003.

Mellody L. Hobson, 35, president and director of Ariel Capital Management, LLC/Ariel Mutual Funds since 2000. Senior vice president and director of marketing at Ariel Capital Management, Inc. 1994-2000; vice president of marketing at Ariel Capital Management, Inc. 1991-1994. A.B., Princeton University, Woodrow Wilson School. Tellabs director since 2002. (Will not stand for re-election in 2005.)

Frank lanna, 55, president of AT&T Network Services 1998-2003. Various executive and senior management positions at AT&T 1990-1998; various management and staff positions at AT&T 1972-1998. M.S.E.E., Massachusetts Institute of Technology; B.E.E.E., Stevens Institute of Technology. Tellabs director since 2004.

Fred A. Krehbiel, 63, chief executive officer of Molex Incorporated since 2004; co-chairman of the board since 1999; co-chief executive officer 1999-2001; chief executive officer 1988-1999; chairman of the board 1993-1999. Director, DeVry, Inc., W.W. Grainger. B.A., Lake Forest College. Tellabs director since 1985.

Board of Director Structure and Process

     Tellabs is managed by and under the direction of its board of directors.

     Each director who is not an officer of the Company is paid an annual retainer of $30,000 plus a fee of $1,500 and expenses for each board of director meeting attended in person and $1,000 for each substantive telephonic board of director meeting.

     Committee members receive a fee of $1,000 for each committee meeting attended in person and $500 for each substantive telephonic committee meeting. In addition, the chairperson of the audit and ethics committee receives an annual retainer of $4,000. Commencing in 2005, the annual retainer will increase to $8,000 for the chairperson of the audit and ethics committee and the chairs of the compensation and nominating and governance committees shall receive an annual retainer of $4,000.

     The board has an audit and ethics committee, a nominating and governance committee and a compensation committee.

     Members of the audit and ethics committee are Michael Lavin — Chairman, Melody Hobson, Fred Krehbiel and William Souders.

     Nominating and governance committee members are Jan Suwinski — Chairman, Bo Hedfors, Michael Lavin and Stephanie Pace Marshall.

     Compensation committee members are William Souders — Chairman, Melody Hobson, Stephanie Pace Marshall and Jan Suwinski.

     Effective as of the 2005 annual meeting, Bo Hedfors will replace Mellody Hobson on the audit and ethics committee and Frank lanna will replace Ms. Hobson on the compensation committee.

52

Michael E. Lavin, 59, Midwest area managing partner KPMG LLP 1993-2002; partner 1977-2002; various management and staff positions 1967-1976. Director, People’s Energy Corporation. B.B.A., University of Wisconsin. Tellabs director since 2003.

Stephanie Pace Marshall, Ph.D., 59, founding president of Illinois Mathematics and Science Academy since 1986. Ph.D., Loyola University; M.A., University of Chicago; B.A., Queens College. Tellabs director since 1996.

Krish A. Prabhu, 50, president and chief executive officer of Tellabs since 2004. Partner, Morgenthaler Ventures 2001-2004. Chief operating officer of Alcatel Telecom 1999-2001; chief executive officer of Alcatel USA 1997-1999; various senior management positions at Alcatel 1991-1997; various management and research and development positions at Rockwell Network Transmission Division (now Alcatel) 1984-1991. Ph.D. and M.S.E.E., University of Pittsburgh; M.S., Indian Institute of Technology; B.S., Bangalore University. Tellabs director since 2004.

William F. Souders, 76, chairman and chief executive officer of Emery Air Freight Corporation 1988-1989; executive vice president and director at Xerox Corporation 1974-1986. B.A., Lake Forest College. Tellabs director since 1990.

Jan H. Suwinski, 63, professor of Business and Operations, Cornell University, Johnson Graduate School of Management since 1997; executive vice president of OptoElectronics Group, Corning Incorporated 1990-1996; various executive and operations positions, 1965-1990. Director, Thor Industries, Inc., Ohio Casualty Group. M.B.A. and B.M.E., Cornell University. Tellabs director since 1997.

TELLABS 2004 ANNUAL REPORT /53

Officers

Michael J. Birck, 67, chairman and co-founder. Chairman since 2000, chief executive officer 2002-2004, chief executive officer and president 1975-2000. Director of engineering at Wescom Inc. 1968-1975; director, Molex Incorporated, Illinois Tool Works. M.S.E.E., New York University; B.S.E.E., Purdue University. Tellabs director since 1975.

Krish A. Prabhu, 50, president and chief executive officer since 2004. Partner, Morgenthaler Ventures 2001-2004. Chief operating officer of Alcatel Telecom 1999-2001; chief executive officer of Alcatel USA 1997-1999; various senior management positions at Alcatel 1991-1997; various management and research and development positions at Rockwell Network Transmission Division (now Alcatel) 1984-1991. Ph.D. and M.S.E.E., University of Pittsburgh; M.S., Indian Institute of Technology; B.S., Bangalore University. Tellabs director since 2004.

John M. Brots, 45, executive vice president, supply chain management since 2005. Vice president of supply chain management 2004. Vice president of North American operations from 2000-2003; various positions from 1988-2003. Various positions at Tracor, Inc., Sperry Aerospace and Gulton Aerospace from 1983-1988. M.B.A., St. Edwards University; B.S., Cameron University.

Carl A. DeWilde, 57, executive vice president, access products since 2004. Chief operating officer and chief technology officer at Xtera Communications 2000-2004. Senior vice president of development at Fujitsu Network Communications 1992-2000; various positions at Alcatel 1990-1992; various positions at Siemens 1980-1990. B.S.E.E., Hogeschool Zeeland.

J. Thomas Gruenwald, 57, executive vice president, broadband networking products since 2004. Senior vice president of operations at Tellabs International 2002-2004; various engineering and executive positions 1991-2002. Various positions at AT&T Bell Laboratories 1978-1990. Ph.D. and M.S., Purdue University; B.S., University of Cincinnati.

Jean K. Holley, 45, executive vice president and chief information officer since 2005. Senior vice president and chief information officer 2004. Chief information officer at USG Corp from 1998-2003. Various positions at Waste Management from 1989-1998. M.S., Illinois Institute of Technology; B.S., University of Missouri-Rolla.

Daniel P. Kelly, 43, executive vice president, core products since 2004. Various engineering and executive positions 1985-2004. M.B.A., University of Chicago; M.S.E.E. and B.S.E.E., University of Notre Dame.

Stephen M. McCarthy, 50, executive vice president of global customer sales and service since 2004. Various engineering and executive positions at Tellabs 1999-2004. Senior vice president of Automatic Data Processing’s (ADP) major accounts central division 1997-1998. Various positions at Ameritech 1989-1997. M.B.A., DePaul University; B.S., University of Illinois.

Victoria L. Perrault, 51, executive vice president of human resources since 2004. Various positions at AFC 1996-2004. Director of human resources at Aegon USA 1993-1996. J.D., University of California, Hastings College of the Law; B.A., University of California at Berkeley.

James M. Sheehan, 42, general counsel, executive vice president and secretary since 2002. Vice president and deputy general counsel
2000-2002; director and assistant general counsel 1995-2000. J.D., University of Illinois College of Law; B.S., University of Illinois.

Timothy J. Wiggins, 48, executive vice president and chief financial officer since 2003. Executive vice president and chief financial officer at Chicago Bridge & Iron Company, N.V. 1996-2001; various senior positions at Fruehauf Trailer Corporation and Autodie Corporation 1988-1996; senior manager at Deloitte, Haskins and Sells (now Deloitte & Touche), 1979-1988. Certified Public Accountant; B.S., Michigan State University.

54

Glossary

2G Wireless — Digital wireless networks that carry voice and low-speed data.

2.5G Wireless — 2G wireless networks that can be upgraded to carry 3G traffic in the future.

3G Wireless — Wireless networks built for digital voice and high-speed data.

Access — Equipment that provides a connection between end-customer locations and service provider central offices.

ATM (Asynchronous Transfer Mode) — High - speed transmission technology. A high-bandwidth, low-delay, packet-like switching and multiplexing technique.

Backbone — The main high-capacity paths within a communications network.

Bandwidth — The carrying capacity of a communications channel.

Broadband — A high-bandwidth fiber optic, coaxial or hybrid line with more capacity than a standard voice-grade phone line, capable of carrying numerous voice, data and video channels at once.

Circuit — A connection between two points on a communications network.

Connectivity — Network capability that enables different devices to communicate with each other.

Data — Typically, network traffic other than voice. Increasingly, voice is encoded and transported as data.

Digital — Digital systems transport information in the binary 1s and 0s format, like computer code, to improve clarity and quality.

Digital cross-connect system — A specialized high-speed data channel switch, which connects transmission paths based on network needs (rather than call by call). Digital cross-connects manage and route network traffic, and combine, consolidate and segregate signals to maximize efficiency.

DSL (Digital Subscriber Line) — A high-speed Internet connection to a home or business delivered over copper.

Ethernet — A data network standard to connect computers, printers, workstations, terminals and servers.

Ethernet-over-SDH/Ethernet-over-SONET — Industry standards that enable Ethernet data traffic to be easily carried over SDH or SONET networks.

Fiber to the Premise, Curb or Neighborhood (FTTx) — Fiber optic cable deployed directly to homes and neighborhoods to deliver broadband communications services.

Fiber optic cable — High-capacity cable that transmits communications along a glass fiber using laser light.

Frame Relay — Data-oriented switching interface standard that transmits bursts of data over Wide Area Networks (WANs).

Gigabit Ethernet — A high-speed, standardized data format used to implement wide area data networks.

HDTV (High Definition TeleVision) — A television standard that delivers better quality picture and sound.

Internet — The world’s largest decentralized network of computers and network servers.

Intranet — A private computer network based on Internet protocols.

IP (Internet protocol) — Common name given to a set of rules that enable cooperating computers to share information across a network.

IPTV (Internet Protocol Television) — Technology that enables video and other entertainment services over two-way broadband networks.

MultiProtocol Label Switching (MPLS) — A packet switching standard that assigns multiple traffic types within a data stream levels of priority to implement Quality of Service (QoS).

Multiservice or Multi-service — Transportation of a variety of communications services at once (e.g., ATM, Ethernet or IP).

Network — A system of equipment and connections for the transmission of signals that carry voice, data and/or video.

Optical Network Terminal (ONT) — A device that closes an optical circuit at a residence, business or neighborhood.

Optical transmission — A technology that transmits signals as light over fiber optic cable.

Packet — Data organized into a certain format for transmission over a communications network.

Quality of Service (QoS) — Measurement of the integrity of traffic moving across a network, especially important for real-time transmissions such as financial transactions or video services.

SDH (Synchronous Digital Hierarchy) — Transport format for transmitting high-speed digital information over fiber optic facilities outside of North America, comparable to SONET.

Service Level Agreement (SLA) — An agreement between an end user and a service provider that establishes metrics for Quality of Service (QoS) and measures the service provided to ensure the agreement is met.

SONET (Synchronous Optical NETwork) — Transport format for sending high-speed digital signals through fiber optics in North America, comparable to SDH.

Switch — A device that establishes and routes communications paths.

Transport — The process of moving voice, data or video across communications networks.

VPN (Virtual Private Network) — A connection that enables businesses to securely transmit their own voice, data and/or video traffic over a public network (e.g., owned by a phone company or Internet service provider) at a lower cost than a dedicated private network.

VoD (Video on Demand) — A service that enables end users to watch any video program at any time.

VoIP (Voice over Internet Protocol) — The transmission of voice traffic over data or Internet links.

Voice-quality enhancement — A technique that isolates and filters out unwanted signals and sounds such as echo and background noise to improve sound quality.

Wireless — Mobile networks that use radio rather than cables.

Wireline — Networks that use cables rather than radio.

TELLABS 2004 ANNUAL REPORT / 55

Information for Our Investors

Ownership Structure and Investor Rights

Stockholder class and voting rights: All Tellabs stockholders are entitled to one vote for each share held. Only stockholders of record as of Feb. 22, 2005, the record date for the annual meeting determined by the board of directors, are entitled to receive notice of, to attend and to vote at the annual meeting.

Votes cast in person or by proxy at the annual meeting of stockholders will be tabulated by the inspectors of election appointed for the meeting who determine whether a quorum, a majority of the shares entitled to be voted, is present.

Stockholders Owning More than 5% of the Company’s shares:

AXA Financial, Inc.
Michael J. Birck

Stockholder Logistics

If you have a question for the board of directors, would like to make a stockholder proposal or nominate a director for the board, contact Jim Sheehan, Tellabs general counsel, executive vice president and secretary at +1.630.798.8800.

For inclusion in the Company’s proxy statement for the Tellabs 2006 Annual Meeting of Stockholders, proposals of stockholders must be received by Jim Sheehan, Secretary of the Company, no later than Nov. 19, 2005.

To nominate one or more directors for consideration at the 2006 annual meeting, a stockholder must provide notice of the intent to make such nomination(s) by personal delivery or by mail to the Secretary of the Company, no later than Nov. 19, 2005. The Company’s bylaws set specific requirements that such written notice must satisfy. Copies of those requirements will be sent to any stockholder upon written request.

Code of Ethics, Certificate of Incorporation and Bylaws

Tellabs adopted a code of ethics applicable to its officers, directors and employees. Tellabs’ Integrity Policy, certificate of incorporation and bylaws are available online at tellabs.com/investors.

Important Dates for Stockholders

(Dates subject to change)

First Quarter 2005

Record Date: Tuesday, February 22 Earnings Call: Wednesday, April 20 (7:30 a.m. Central time)
Annual Meeting: Thursday, April 21

Second Quarter 2005

Earnings Call: Tuesday, July 26 (7:30 a.m. Central time)

Third Quarter 2005

Earnings Call: Tuesday, October 25 (7:30 a.m. Central time)

We’re Here to Help You

You can contact Tom Scottino in Investor Relations at +1.630.798.3602. You also can get investor information online at tellabs.com/investors.

Transfer Agent

Computershare Investor Services serves as the stock transfer agent for Tellabs. If you need to transfer stock, change ownership, report lost or stolen certificates, or change your address, please contact Computershare Investor Services at +1.312.360.5389.

Common Stock Market Data

	2004			2003
		High	Low		High	Low
First Quarter		11.37	8.05		9.73	5.07
Second Quarter		10.02	7.63		8.74	5.26
Third Quarter		10.32	7.40		8.28	5.85
Fourth Quarter		9.59	7.87		8.80	6.77

56

Requests for Information

Additional information is available without charge. For additional copies of annual reports, 10-Ks, 10-Qs or other financial information, please contact:

Secretary Tellabs, Inc.
One Tellabs Center
1415 West Diehl Road
Naperville, IL 60563
U.S.A.
Or visit: sec.gov

Stock Trading Information

Tellabs stock is traded in the United States, listed on the NASDAQ Stock Market under the symbol TLAB. It appears in most daily newspaper stock tables as Tellabs. Tellabs is a component of the NASDAQ-100 Index and the Standard & Poor’s 500 Index.

Trademarks

All trademarked, servicemarked or registered trademark product names used herein are the property of Tellabs or one of its affiliates in the United States and/or in other countries. All other product or company names used herein may be the property of their respective companies.

Annual Meeting

The 2005 Annual Meeting of Stockholders will be held at 2 p.m. Central time on Thursday, April 21, 2005, at:

The Signature Room at
Seven Bridges
6440 Double Eagle Drive
Woodridge, III. 60517
U.S.A.

Doors will open at 1 p.m.

Internet users can hear a simultaneous live webcast of the annual meeting at tellabs.com.

Electronic Voting

As an added convenience, stockholders can vote their proxy by mail or via the Internet at proxyvote.com.

Independent Registered Public Accounting Firm

Ernst & Young LLP, Chicago, Illinois U.S.A.

The Tellabs Foundation

The Tellabs Foundation supports nonprofit organizations in the priority areas of education, environment and health. For an annual report on corporate and foundation community activities, contact Meredith Hilt at meredith.hilt@tellabs.com.

Worldwide Locations

Please visit tellabs.com and see the “Tellabs Locations” section for the most up-to-date, complete information on Tellabs’ global presence. The “Contact Us” page also provides easy access to the right people.

For Information:

In Asia Pacific
Phone: +65.6336.7611
Fax: +65.6336.7622

In Europe, Middle East
and Africa
Phone: +44.870.238.4700
Fax: +44.870.238.4851

In Latin America and Caribbean
Phone: +1.954.839.2800
Fax: +1.954.839.2828

In North America
Phone: +1.630.798.8800
Fax: +1.630.798.2000

How to Reach Us

One Tellabs Center
1415 West Diehl Road
Naperville, IL 60563 U.S.A.
Phone: +1.630.798.8800
Fax: +1.630.798.2000
tellabs.com

Report printed entirely on recycled paper. This report costs $1.60 per copy, less than half the cost of the average annual report. (C)2005 Tellabs, Inc. All rights reserved. Printed in U.S.A.

On the back cover: Tellabs FiberDirect solution gives Gary Good and Dean Hawkins blazing speed that provides their edge in online gaming.

TELLABS 2004 ANNUAL REPORT

     

EX-21

EXHIBIT No. 21

Tellabs Inc. and Subsidiaries
Subsidiaries of the Registrant
as of December 31, 2004

Name	State or Other Jurisdiction
	of Incorporation
Tellabs San Jose, Inc.	Delaware
Tellabs Reston, Inc.	Delaware
White Oak Merger Corp.	Delaware
NetCore Systems, Inc.	Delaware
Salix Technologies, Inc.	Delaware
Future Networks, Inc.	Georgia
Vinci Systems, Inc.	Delaware
Tellabs Petaluma, Inc.	Delaware
Advanced Fibre Technology Communications (HK) Limited	Hong Kong
Hangzhou AFTEK Communication Company, Ltd.	China
Advanced Fibre Communications (HK) Limited	Hong Kong
AFC Foreign Sales Corporation	U.S. Virgin Islands
Tellabs North America, Inc.	Delaware
Tellabs Bedford, Inc.	Delaware
AccessLan India	India
AFC India Private Limited	India
Advanced Fibre Communications International GmbH	Switzerland
Advanced Fibre Communications Mexico S. de R.L. de C.V.	Mexico
Advanced Fibre Communications France S.A.S.	France
Advanced Fibre Communications International Limited	Cayman Islands
Advanced Fibre Communications U.K. Limited	United Kingdom
AFC Nevada Holding Corporation	Nevada
AFC Treasury Holdings Corporation	Nevada
AFC Equity Holdings Corporation	Nevada
AFC Securities Holdings Corporation	Nevada
AFC Harris Multimedia Communications Private Limited	Mauritius
AFC Harris Multimedia Communications Limited	India
Tellabs Mexico, Inc.	Delaware
Tellabs de Mexico, S.A. de C.V.	Mexico
Tellabs TG, Inc.	Delaware
Tellabs Transport Group, Inc.	Quebec
Tellabs Operations, Inc.	Delaware
Telecommuncations Laboratories, Inc.	Delaware
Telecon Acquisition Corp.	Delaware
Tellabs Export, Inc.	Delaware
Tellabs Japan, Inc.	Delaware
Tellabs Manufacturing, Inc.	Delaware
Tellabs International, Inc.	Illinois
Tellabs Communications Canada Ltd.	Canada
Tellabs do Brazil, Ltda.	Brazil
Tellabs H.K. Ltd.	Hong Kong
Tellabs Pty. Ltd.	Australia
Tellabs International de Mexico	Mexico
Tellabs Asia Pacific Private Limited	Singapore
Tellabs (Thailand) Co., Ltd.	Thailand
Tellabs Korea, Inc.	Korea
Tellabs India Private Limited	India
Tellabs Communications International Ltd.	China
Tellabs de Venezuela, S.A.	Venezuela
Tellabs Communications (Malaysia) Sdn Bhd	Malaysia
Tellabs Malaysia Sdn Bhd (49% joint venture)	Malaysia
Tellabs Holdings, B.V.	The Netherlands
Tellabs Enterprises B.V.	The Netherlands
Tellabs Oy	Finland
Kiinteisto Oy Mestarinkaare	Finland
Kiinteisto Oy Sinimaentie 6	Finland
Tellabs Denmark A/S	Denmark
Tellabs Communications (India) Private Limited	India
FIBCOM India Ltd (40% Joint Venture)	India
Tellabs Holdings, Ltd.	Ireland
Tellabs (Ireland) Ltd	Ireland
Tellabs Ltd.	Ireland

EXHIBIT No. 21

Name	State or Other Jurisdiction
	of Incorporation
Tellabs Research Ltd.	Ireland
Tellabs Communications Ireland Limited	Ireland
Tellabs Communications Technologies	Ireland
Tellabs EMEA Holdings, Ltd.	Ireland
Tellabs AB	Sweden
Tellabs (S.A.) (Proprietary) Limited	South Africa
Tellabs SAS	France
Tellabs Italia S.r.l.	Italy
Tellabs Netherlands B.V.	The Netherlands
Tellabs Poland Sp. z o.o.	Poland
Tellabs Southern Europe S.A.	Spain
Tellabs Gmbh	Germany
Tellabs Austria Vertriebs GmbH	Austria
Tellabs Norway A/S	Norway
Tellabs U.K. Ltd.	United Kingdom
Tellabs Communications UK Limited	United Kingdom
E. Coherent Communications Systems Ltd.	United Kingdom

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report (From 10-K) of Tellabs, Inc. of our reports dated March 10, 2005, with respect to the consolidated financial statements of Tellabs, Inc., Tellabs, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Tellabs, Inc., included in the Tellabs 2004 Annual Report to shareholders.

Our audits also included the financial statement schedule of Tellabs, Inc. listed in Item 15(a). This schedule is the responsibility of Tellabs, Inc.’s management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-45788, 33-48972, 33-55487, 333-49557, 333-83509, 333-87637, 333-95135, 333-56546, 333-81360, 333-107457 333-116794 and 333-122712, and Form S-4 No. 333-116794) of our reports dated March 10, 2005, with respect to the consolidated financial statements and schedule of Tellabs, Inc., Tellabs Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Tellabs, Inc. included and incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2004.

/s/ Ernst & Young LLP

Chicago, Illinois
March 10, 2005

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Krish A. Prabhu, certify that:

1.	I have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter 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: March 10, 2005

/s Krish A. Prabhu

Krish A. Prabhu

Chief Executive Officer

EX-31.2

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 annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter 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: March 10, 2005

/s Timothy J. Wiggins

Timothy J. Wiggins

Chief Financial Officer

EX-32.1

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 Annual Report of Tellabs, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Krish A. 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 A. Prabhu

Krish A. Prabhu

Chief Executive Officer

Date: March 10, 2005

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-32.2

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 Annual Report of Tellabs, Inc. (the “Company”) on Form 10-K for the year ended December 31, 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

Date: March 10, 2005

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-99.1

Exhibit 99.1

FORWARD-LOOKING STATEMENTS AND RISKS AND FUTURE FACTORS IMPACTING TELLABS

Except for historical information, the matters discussed or incorporated by reference in Part I of this report may include forward-looking statements made pursuant to the safe harbor provisions of 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” 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; manufacturing efficiencies; research and new product development; protection and access to intellectual property, patents and technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment 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 the Company’s filings with the SEC. 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. The foregoing discussion should be read in conjunction with our financial statements and related notes and management’s discussion and analysis included in our SEC filings from time to time.

Our operating results will fluctuate, which may cause volatility in our stock price.

Our operating results have varied significantly from quarter to quarter, and our operating results can be expected to continue to fluctuate, due to a variety of factors, many of which are beyond our control. These factors include, but are not limited to:

•   changing conditions in the telecommunications market and in the U.S. and global economy in general;

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•   the volume and timing of orders from and shipments to customers;

•   the timing of, and our ability to obtain, new customer contracts;

•   the timing of, and our ability to recognize revenue for, product and service sales;

•   the potential deferral of customer acceptance of new products compared to our legacy products;

•   the market acceptance of new and enhanced versions of our products and services;

•   variations in the mix of products and services we sell, which currently includes, one element of our fiber to the premise (“FTTP”) system which we currently sell to Verizon at a negative gross profit margin until we are able to reduce unit costs;

•   our utilization of production capacity and employees, and our ability to manufacture and ship products efficiently;

•   the availability and cost of key components;

•   introductions or announcements of new products by competitors;

•   changes in accounting rules, such as expensing employee stock option grants;

•   our ability to integrate and operate acquired businesses and technologies; and

•   seasonality, which has often caused revenues to differ from quarter to quarter.

Our recent operating results may not be a good predictor of our results in future periods. Our expense levels are based in part on expectations of future revenues. If revenue levels in a particular period are lower than expected, our operating results will be adversely affected. The failure to meet the expectations of the investment community may cause our stock price to decline, possibly substantially. A significant stock price decline could result in litigation, which could be costly, lengthy and divert management’s attention and resources from business operations.

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

The market for communications network equipment, software and integration services is rapidly changing. Our success will depend in part on our ability to develop successfully and introduce new products that are accepted in markets in which we will operate. We will not be able to predict with certainty technological trends or new products in the market. In addition, we will not be able to predict whether our products and services will meet with market acceptance or be profitable. We may not be able to compete successfully, and competitive pressures may adversely affect our business, financial condition, operating results or prospects.

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

The communications industry is characterized by rapid technological advancement. Companies in the industry face evolving industry standards, changing market conditions, and frequent new product and service introductions and enhancements. The introduction of new products using new technologies or the adoption of new industry standards can make existing products or

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products under development obsolete or unmarketable. In order to grow and remain competitive, we will need to adapt to these rapidly changing technologies, to enhance our existing solutions and to introduce new solutions to address our customers’ changing demands.

In addition, new product developments often require long-term forecasting of market trends, development and implementation of new technologies and processes, and a substantial capital commitment. We have invested, and anticipate continuing to invest, substantial resources for the development of new products. These investments often must be made before knowing whether the resulting new product will meet with market acceptance or result in revenue. For example, we will continue to incur costs and expenses in preparation for the deployment of our FTTP systems, which may precede the generation of revenues from FTTP systems.

We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of new product solutions. These new solutions and enhancements must meet the requirements of current and prospective customers and must achieve significant market acceptance. In addition, some of our customer agreements, particularly those with large customers, may contain provisions for payments that are tied to key milestones related to the availability of new product features. For example, our agreement with Verizon to provide FTTP systems has several provisions requiring compensation payments to Verizon for failure to meet key milestones or provide product features by specified dates. We could experience an offset to revenues and reduced net income in future quarters due to penalties imposed under customer agreements as a result of failures to comply with contractual terms. In fact, we have paid penalties toVerizon in the past for missing agreed upon milestones. If we fail to anticipate or respond on a cost-effective and timely basis to technological developments, changes in industry standards or customer requirements, or if we have any significant delays in product development or introduction, our business, financial condition, operating results or prospects could be adversely affected.

Our new products will be early in their life cycles and will face challenges for market acceptance.

We have made and will continue to make significant investments in new products. These new products are early in their life cycle and as such are subject to uncertain market demand and may face obstacles in manufacturing and deployment and competitive response. Customers may not invest the additional capital required for initial system deployment. Additionally, as customers in these markets complete infrastructure deployments, they may require greater levels of service, support and financing than we provided in the past. There can be no assurance that we can provide products, services, support and financing to effectively compete for these market opportunities.

A limited number of our customers will comprise a large portion of our revenues and any decrease in revenues from these customers could have an adverse effect on our business, financial condition, operating results and prospects.

A large portion of our revenue is dependent on sales to a limited number of customers. The largest single customer group is independent local exchange carriers, which includes BellSouth, Qwest Communications, SBC and Verizon. There can be no assurance that large existing

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customers will continue to purchase products from us at current levels, if at all. In the event that a significant existing customer merges with another company, there can be no assurance that it will continue to purchase our products. The loss of one or more large existing customers or a decrease in the level of purchases from these customers could have a material adverse effect on our business, financial condition, operating results and prospects.

Our revenues depend on the capital spending programs and financial capabilities of our customers and ultimately on the demand for new telecommunications services from end users.

Our customers will be telecommunications carriers and, in the U.S., include, without limitation, incumbent local exchange carriers, independent operating companies and regional Bell operating companies, or RBOCs. Our ability to generate revenues will depend upon the capital spending patterns and financial capabilities of these customers, continued customer demand for our products and services, and end user demand for advanced telecommunications services. The telecommunications industry has recently been affected by financial problems and reduced capital spending by carriers. These conditions have adversely affected our operating results in prior fiscal years and, if these conditions persist or worsen, could cause a slowdown in the combined company’s sales. Further, there can be no assurance that carriers, foreign governments or other customers will pursue infrastructure upgrades that will necessitate the implementation of advanced product solutions such as those offered by us. Infrastructure improvements may be delayed or prevented by a variety of factors including cost, regulatory obstacles, mergers, the lack of consumer demand for advanced telecommunications services and alternative approaches to service delivery. Reductions in capital expenditures by companies in the telecommunications industry could seriously harm our revenues, net income and cash flows.

We operate in a highly competitive industry.

Our products and services offered will continue to face competitive pressures. Our success in competing with other manufacturers of communications equipment products and services will depend primarily on our ability to integrate acquired company’s businesses effectively with ours, and on our engineering, manufacturing and marketing skills, the price, quality and reliability of our products, our delivery and service capabilities and our control of operating expenses and management of assets. We may also face more intense competition in certain markets as a reaction to our larger presence. Pricing pressures could increase from current and future competitors and customers. Many current competitors have, and future competitors may also have, more engineering, manufacturing, marketing, financial and personnel resources available to them, may have better access to such resources and may be better able to attract and retain highly qualified personnel resources. Competition may also be affected by consolidation among communications equipment providers as well as entrants into the communications equipment market. As a result, other providers may be able to respond more quickly to new or emerging technologies and changes in customer requirements. In addition, technological change, the increasing addition of Internet, data, video, voice and other services to networks, the possibility of regulatory changes and industry consolidation are likely to continue to cause rapid evolution in the competitive environment. The full scope and nature of these changes are difficult to

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predict. Increased competition could lead to price cuts, reduced gross margins and loss of market share, which may adversely affect our business, operating results and financial condition.

Conditions in international markets could affect our operations.

Due to our international sales and our international operations and research and development organizations, we will be subject to the risks of conducting business internationally. These risks include:

•   local economic and market conditions;

•   political and economic instability;

•   unexpected changes in legislative or regulatory requirements;

•   fluctuations in currency exchange rates;

•   tariffs and other barriers and restrictions, including established relationships between government-controlled carriers and local equipment vendors;

•   longer payment cycles;

•   difficulties in enforcing intellectual property and contract rights;

•   greater difficulty in accounts receivable collection;

•   potentially adverse taxes, including any U.S. taxes imposed upon our actual or deemed repatriation of earnings of foreign subsidiaries;

•   potentially lower margins and less certainty of support for customer relationships where foreign sales are made through local distributors; and

•   the burdens of complying with a variety of foreign laws and telecommunications standards.

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

We may encounter difficulties obtaining necessary raw materials and supplies.

Our ability to produce and service our products and meet customer demands will be dependent upon our ability to obtain timely deliveries of important raw materials and supplies. The availability of these raw materials and supplies is subject to market forces beyond our control. From time to time there may not be sufficient quantities of raw materials and supplies in the marketplace to meet the customer demand for our products. In addition, the costs to obtain these

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raw materials and supplies are subject to price fluctuations. Many companies utilize the same raw materials and supplies in the production of their products as we use in our products. Companies with more resources than us may have a competitive advantage in obtaining raw materials and supplies due to greater buying power. In addition, we currently purchase certain key components from sole or limited-source vendors, and most of our component purchases are on a purchase order basis without guaranteed supply arrangements. If supply is disrupted, we may be unable to identify an alternative source in a timely manner, at favorable prices or of acceptable quality. These circumstances could limit our ability to meet scheduled deliveries to customers and increase our expenses. Reduced supply or higher prices for raw materials and supplies may adversely affect our business, operating results and financial condition.

We depend on contract manufacturers and third-party service providers.

We have purchase agreements with contract manufacturers which require the manufacturers to purchase component parts to be used in manufacturing our products and authorize them to buy components in accordance with agreed-upon lead times. As customers increasingly demand shorter delivery timeframes, the difficulty of accurately forecasting component needs creates additional risk. Failing to estimate requirements accurately can lead to monetary penalties, excess or obsolete inventory or disruptions in manufacturing of our products. In addition, the contract manufacturers may not allocate sufficient resources to the timely completion of our orders in accordance with our quality standards. Qualifying a new contract manufacturer is costly and time consuming and could result in significant interruptions in the supply of products to our customers.

We rely on a small number of contract manufacturers to perform the majority of the manufacturing operations for our products. The qualification of these manufacturers is an expensive and time-consuming process, and these contract manufacturers build products for other companies, including our competitors. We are constantly reviewing their contract manufacturing capability to ensure that our production requirements are met in terms of cost, capacity and quality. Periodically, we may decide to transfer the manufacturing of a product from one contract manufacturer to another, to better meet our production needs. It is possible that we may not effectively manage this transition or the new contract manufacturer may not perform as well as expected and, as a result, we may not be able to fill orders in a timely manner which could harm our business. These limitations and the failure to timely deliver products may adversely affect our business, operating results and financial condition.

We rely on the use of third-party customer service providers to deliver, install and turn-up products offered to customers. We depend on such third-party agents to perform key on-site services for our customers. We cannot control the availability of such resources in the markets served or the quality of the services provided by such third parties. Scarcity of resources, price fluctuations or quality or delivery issues may adversely affect our business, operating results and financial condition.

We may be unable to sell customer-specific inventory, which could result in lower gross profit margins and net income.

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Some customers’ order specifications require us to design and build systems and purchase parts that are unique to a customer. In many cases, we forecast and purchase components in advance and allocate resources to design and manufacture the systems. If customers’ requirements change or if they delay or cancel orders, we may be unable to cost-effectively rework system configurations or return parts to inventory as available-for-sale. Writedowns and accruals for unrealizable inventory will negatively impact our gross profit margins and net income.

Intellectual property rights may not be adequate to protect our business.

Our future success depends in part upon our proprietary technology. Although we have attempted to protect our proprietary technology through various mechanisms, including patents, copyrights, trademarks, contractual obligations and trade secrets, third parties nevertheless may attempt to use our technology without authorization. Policing the unauthorized use of products and technologies is difficult, particularly in certain foreign countries, whose laws may not protect intellectual property rights to the same extent as the laws of the U.S. or other countries. Litigation may be necessary to enforce our intellectual property rights, which could be costly and disruptive while not guaranteeing a successful result. In addition, competitors may be able to develop competitive technology independently without violating our proprietary rights. Any inability to protect or enforce proprietary rights and information could result in loss of competitive advantage, loss of customer orders and decreased revenues.

We may be subject to intellectual property infringement claims that are costly and time consuming to defend and could limit our ability to use some technologies in the future.

As the competition in the communications equipment industry increases and the functionality of the products in this industry converges, companies in the communications equipment industry are increasingly becoming the target of infringement claims and other intellectual property disputes. We are likely to remain subject to claims based upon third-party patents or other proprietary rights, including claims that may originate from competitors. Any such third parties may choose to litigate their claims, or we may pursue litigation to determine the scope and validity of such third parties’ rights. We may be unsuccessful in any such litigation. We may be unable to secure, on commercially reasonable terms, any licenses that we may seek to secure. Third-party claims, whether with or without merit, potentially can result in:

•   costly litigation;

•   diverting management’s time, attention and resources;

•   delaying or halting product shipments;

•   requiring us to pay damages;

•   requiring us to enter into royalty-bearing licensing arrangements or to obtain substitute technology of lower quality or higher cost; or

•   otherwise imposing obligations or restrictions that could adversely affect our business, financial condition and operating results.

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Product quality or performance problems could impact our business.

The development and production of new products with high technology content often involves problems with software, components and manufacturing methods. If significant reliability, quality or network monitoring problems develop, including those due to defects in software or faulty components, a number of negative effects on our business could result, including:

•   costs associated with fixing software or hardware defects;

•   high service and warranty expenses;

•   payment of liquidated damages for performance failures;

•   high inventory obsolescence expense;

•   high levels of product returns;

•   delays or interruptions in product turn-up;

•   delays in collecting accounts receivable;

•   reduced orders from existing customers; and

•   declining interest from potential customers.

We may not realize expected benefits from any restructuring initiatives.

In response to industry and market conditions, we have restructured businesses and reduced our workforce. In light of the rapidly changing market for communications equipment, we may have to restructure in the future to achieve certain cost savings and to strategically realign our resources. We cannot predict whether we will realize expected synergies and improved operating performance as a result of any restructuring and streamlining of operations. We also cannot predict whether any restructuring and streamlining of operations will adversely affect our ability to retain key employees, which, in turn, would adversely affect our operating results. Further, in the event the market fluctuates up or down, we may not have the appropriate level of resources and personnel to appropriately react to the change.

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

Our long-term growth strategy includes the continued acquisition of, or investment by us in, complementary businesses, products, services or technologies. We cannot assure that we will be able to identify suitable acquisitions or investment candidates. Even if we identify suitable candidates, we cannot assure that we will be able to make acquisitions or investments on commercially acceptable terms, if at all. If we acquire a company, we may have difficulty assimilating its businesses, products, services, technologies and personnel into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and adversely affect our operating results. In addition, we may incur debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of any equity securities could be dilutive to our stockholders. We may also need to make further investments to support the acquired company and may have difficulty identifying and acquiring the appropriate resources. We may also decide to dispose of or otherwise exit businesses which may result in the recording of accrued liabilities for special one-time charges,

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such as workforce reduction costs, closure of excess facilities and excess inventory write-offs. Furthermore, estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets, including goodwill and purchased intangible assets, could change as a result of such disposition.

We are subject to numerous and changing industry regulations and standards.

Our products must comply with a significant number of communications industry technological regulations and standards, which vary between U.S. and international markets, and must interoperate with other products. Testing to ensure compliance with technological standards and interoperability requires significant investments of time and money. If we fail to ensure compliance with evolving standards and regulations in a timely manner or fail to maintain interoperability with equipment from other companies, we could experience customer contract penalties or delayed or lost customer orders, decreased revenues and reduced net income that may adversely affect our business, financial condition and operating results. To remain competitive, we must also maintain compliance with industry certifications such as ISO, but we assure you that we will be able to do so.

We operate in an environment subject to changing governmental regulations.

The communications equipment industry is subject to governmental regulation in the U.S. and other countries. Our business is dependent upon the continued growth of the telecommunications industry in the U.S. and internationally. Federal and state regulatory agencies regulate most of our domestic customers, and foreign customers are also subject to regulation. In particular, there may be future changes in U.S. telecommunications regulations that could slow the expansion of the service providers’ network infrastructures and adversely affect our business, operating results and financial condition. Future changes in tariffs by regulatory agencies or application of tariff requirements to currently untariffed services could adversely affect the sales of our products for certain classes of customers. Moreover, uncertainty regarding future legislation and governmental policies combined with emerging competition may also affect the demand for our products. Competition could intensify as a result of future regulatory changes or new regulations in the U.S. or internationally, which could adversely affect our business, operating results and financial condition.

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