10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended April 1, 2005

OR

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

For the transition period from                   to                  

Commission file Number: 0-09692

TELLABS, INC.

(Exact name of registrant as specified in its charter)

Delaware	36-3831568
(State of Incorporation)	(I.R.S. Employer Identification No.)
One Tellabs Center, 1415 W. Diehl Road, Naperville, Illinois	60563
(Address of Principal Executive Offices)	(Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YES ý NO o

Common Shares, $0.01 Par Value - 448,280,559 shares outstanding on May 6, 2005.

TELLABS, INC.

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Operations
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Cash Flow
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits
SIGNATURE

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TELLABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
(In millions, except per share data)	4/1/05			4/2/04
Revenue
Products	$	400.5		$	232.1
Services	35.1			31.7
	435.6			263.8
Cost of Revenue
Products	226.6			89.0
Services	27.1			24.3
	253.7			113.3
Gross Profit	181.9			150.5
Gross profit as a percentage of revenue	41.8		%	57.1		%
Gross profit as a percentage of revenue – products	43.4		%	61.7		%
Gross profit as a percentage of revenue - services	22.8		%	23.3		%
Operating Expenses
Research and development	88.8			61.9
Sales and marketing	46.2			37.3
General and administrative	22.3			20.4
Restructuring and other charges	13.2			16.2
Amortization of purchased intangibles	11.0			3.9
	181.5			139.7
Operating Earnings	0.4			10.8
Other Income/(Expense)
Interest income, net	5.7			5.9
Other expense, net	(2.7		)	(1.0		)
	3.0			4.9
Earnings Before Income Tax	3.4			15.7
Income tax expense	(2.7		)	(2.3		)
Net Earnings	$	0.7		$	13.4
Net Earnings Per Share
Basic	$	0.00		$	0.03
Diluted	$	0.00		$	0.03
Weighted Average Shares Outstanding
Basic	455.8			415.2
Diluted	458.8			420.9

Amortization of deferred stock compensation is included in the following cost and expense categories by period:
Cost of revenue	$	0.1	$	—
Research and development	2.6		2.0
Sales and marketing	0.1		0.1
General and administrative	0.1		—
	$	2.9	$	2.1

The accompanying notes are an integral part of these statements.

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TELLABS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)	4/1/05			12/31/04
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	184.9		$	292.9
Investments in marketable securities	810.8			823.3
	995.7			1,116.2
Other marketable securities – Cisco stock	186.9			204.0
Accounts receivable, net	267.7			309.4
Inventories
Raw materials	38.7			39.2
Work in process	15.1			13.6
Finished goods	101.4			63.6
	155.2			116.4
Income taxes	64.3			62.5
Miscellaneous receivables and other current assets	50.3			50.0
Total Current Assets	1,720.1			1,858.5
Property, Plant and Equipment	613.1			619.1
Less: accumulated depreciation	(296.3		)	(290.3		)
	316.8			328.8
Goodwill	1,096.1			1,092.3
Intangible Assets, Net of Amortization	144.7			156.0
Other Assets	115.7			126.0
Total Assets	$	3,393.4		$	3,561.6
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	110.1		$	96.3
Accrued liabilities	179.4			206.4
Restructuring and other charges	18.7			13.4
Cisco stock loan	186.9			204.0
Income taxes	45.7			43.2
Total Current Liabilities	540.8			563.3
Long-Term Restructuring Liabilities	29.7			33.0
Income Taxes	115.1			117.1
Other Long-Term Liabilities	54.0			51.0
Stockholders’ Equity
Preferred stock: authorized 5,000,000 shares of $0.01 par value; no shares issued and outstanding	—			—
Common stock: authorized 1,000,000,000 shares of $0.01 par value; 467,608,736 and 466,910,981 shares issued, including treasury stock	4.7			4.7
Additional paid-in capital	1,146.9			1,145.9
Deferred compensation expense	(17.6		)	(21.8		)
Treasury stock, at cost: 19,705,000 and 3,250,000 shares	(248.3		)	(129.6		)
Accumulated other comprehensive income
Cumulative translation adjustment	101.1			129.0
Unrealized net losses on available-for-sale securities	(5.6		)	(3.1		)
Total accumulated other comprehensive income	95.5			125.9
Retained earnings	1,672.6			1,672.1
Total Stockholders’ Equity	2,653.8			2,797.2
Total Liabilities and Stockholders’ Equity	$	3,393.4		$	3,561.6

The accompanying notes are an integral part of these statements.

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TELLABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

	Three Months Ended
(in millions)	4/1/05			4/2/04
Operating Activities
Net Earnings	$	0.7		$	13.4
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of purchased intangibles and deferred compensation	35.6			24.0
Restructuring and other charges	13.2			7.0
Deferred taxes	(5.2		)	0.6
Net change in assets and liabilities, net of effects from acquisitions:
Accounts receivable	37.1			9.0
Inventories	(40.7		)	(1.1		)
Income tax receivable	0.3			11.0
Miscellaneous receivables and other current assets	(1.9		)	39.5
Other assets	(3.7		)	—
Accounts payable	11.7			(4.2		)
Restructuring and other charges	(7.4		)	(28.3		)
Other accrued liabilities	(36.4		)	(4.1		)
Income taxes	3.5			(2.1		)
Long-term liabilities	0.2			(5.3		)
Net Cash Provided by Operating Activities	7.0			59.4
Investing Activities
Capital expenditures	(8.9		)	(7.9		)
Disposals of property, plant and equipment	—			13.5
Payments for purchases of investments	(249.4		)	(584.5		)
Proceeds from sales and maturities of investments	269.6			537.6
Net Cash Provided by (Used for) Investing Activities	11.3			(41.3		)
Financing Activities
Proceeds from issuance of common stock under option plans	1.4			2.6
Repurchase of common stock	(118.7		)	—
Net Cash (Used for) Provided by Financing Activities	(117.3		)	2.6
Effect of Exchange Rate Changes on Cash	(9.0		)	(3.3		)
Net (Decrease) Increase in Cash and Cash Equivalents	(108.0		)	17.4
Cash and Cash Equivalents at Beginning of Year	292.9			245.9
Cash and Cash Equivalents at End of Period	$	184.9		$	263.3

The accompanying notes are an integral part of these statements.

5

TELLABS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Our accompanying unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles for interim financial statements and the requirements of Form 10-Q and applicable rules of Regulation S-X and accordingly do not include all disclosures normally required by generally accepted accounting principles for complete financial statements. Accordingly, the financial statements and notes herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2004.

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

2. New Accounting Pronouncement

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”).  Under this new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic value method in accordance with APB 25.  Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense over the service period.  SFAS 123R allows for several alternative transition methods, but we have not yet determined the transition method we will use.  On April 14, 2005, the Securities and Exchange Commission announced the adoption of a rule that defers the required effective date of SFAS 123R for registrants to the beginning of the first fiscal year beginning after June 15, 2005.  We expect to adopt this statement in the first quarter of our 2006 fiscal year.

3. Acquisition

In November 2004, we acquired 100% of the outstanding common stock of Advanced Fibre Communications (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).  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.  The operating results of AFC have been included in our consolidated results of operations since the acquisition. The purchase price allocation for AFC has not been finalized pending completion of appraisals and integration plans.

4. Restructuring and Other Charges

Over the past few years, management has implemented plans to restructure our operations due to difficult market conditions in the telecommunications industry.  One of those plans involved the outsourcing of our global manufacturing operations at the end of 2003 and beginning of 2004 in order to maintain a competitive cost structure.  Implementation of the plans resulted in workforce reductions of approximately 500 employees, facility closures, asset disposals and the sale of the majority of our inventory to the outsourcers.  Consequently, we recorded charges in 2003and 2004 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. In the fourth quarter of 2004, we initiated a plan to reorganize our operations in Denmark to improve profitability, and in the first quarter of 2005 we initiated a similar plan for our operations in Finland and certain smaller actions in other locations.  Actions under these plans are substantially complete. Restructuring charges for these plans include primarily severance and related costs as well as charges for certain asset disposals and are part of our plan to reduce costs by approximately $45 million during 2005.   For further discussion of restructuring and other activities, refer to our Annual Report on Form 10-K for the year ended December 31, 2004.

Below is an analysis of the restructuring and other charges recorded year-to-date through the first quarter of 2005 and 2004 by major income statement classification:

(in millions)
Income Statement Classification	Description	4/1/05			4/2/04
Cost of revenue	Inventory adjustments	$	—		$	2.3
	Disposal of property, plant and equipment	—			0.3
	Other obligations	—			0.2
	Sub-total in Cost of Revenue	—			2.8
	Reversal of excess purchase commitments accrual	—			(12.0		)
	Total in Cost of Revenue and Gross Profit	—			(9.2		)
Operating expenses	Severance and related expenses	11.0			4.1
	Consolidation of excess leased facilities	0.3			1.4
	Disposal of property, plant and equipment	3.4			12.6
	Other obligations	—			2.4
	Sub-total in Operating Expenses	14.7			20.5
	Proceeds from fixed asset disposals in excess of estimates	—			(4.3		)
	Reversal of excess leased facilities accrual	(1.5		)	—
	Total in Operating Expenses	13.2			16.2
	Total Restructuring and Other Charges	$	13.2		$	7.0

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Inventory adjustments and excess purchase commitments accrual

In the first quarter of 2004, we accrued $2.3 million for the revaluation of inventories related to international manufacturing outsourcing.  There was also a $12.0 million reduction to the reserve for excess purchase commitments due to a favorable settlement with a vendor.

Severance and related expenses

In the first three months of 2005, we recorded accruals for severance and related costs of $11.0 million for the reduction of staff by over 165 people primarily in Denmark, Finland and the U.S.

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

Consolidation of excess leased facilities

In the first quarter of 2005, we recorded $0.3 million in charges related to international facility consolidation related to the Denmark and Finland headcount reductions.  We also recorded $1.5 million to adjust reserves recorded in prior periods for U.S. excess facilities to reflect favorable subleasing activity.

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

Disposal of property, plant and equipment

During the first quarter of 2005, we recorded a $2.4 million charge for property, plant and equipment in Denmark that is held for sale.  We also recorded a loss on the sale of a facility in Finland of $0.8 million that has been held for sale since December 2003.  We also recorded $0.2 million to adjust reserves recorded in prior periods.

During the first quarter of 2004, we recorded impairment charges of $12.9 million for property, plant and equipment to be disposed of or held for sale.  This amount was approximately $6.0 million more than we anticipated at the end of fiscal 2003 for our estimate of restructuring and other charges in 2004.  The majority of the charges related to the closure of the Montreal research and development facility at the end of the first quarter of 2004, as most of the assets in the office will not be redeployed within the company as originally anticipated.  Other charges were recorded for U.S. research and development and manufacturing assets, as well as a small amount for fixed assets sold to Elcoteq due to the international manufacturing outsourcing activity.  Offsetting these new charges was $4.3 million related to the receipt of proceeds from the sale of property, plant and equipment in excess of our original estimate of restructuring and other charges for 2004.

7

Other obligations

During the first quarter of 2004, we charged $2.4 million for telecommunications contract buyout fees for not meeting minimum usage requirements under contracts due to workforce reductions.  In addition, we charged $0.2 million for international manufacturing transition costs that were incurred in the quarter.

Of the remaining $48.4 million of liabilities for restructuring and other charges as of April 1, 2005, $18.7 million were classified as current because we expect to pay them within the next 12 months.  We expect to pay the long-term balance of $29.7 million over the remaining lease terms of our excess facilities leases, which expire at various times through 2011.

The following table displays our restructuring and other charges activity during the first three months of 2005 and the status of the reserves at April 1, 2005:

(in millions)	Excess Purchase Commitments		Severance and Related Expenses			Consol. of Excess Leased Facilities			Disposal of Property, Plant and Equipment			Other Obligations			Total
Balance at 12/31/04	$	0.2	$	2.0		$	41.8		$	—		$	2.4		$	46.4
Additional reserves	—		11.0			0.3			3.4			—			14.7
Cash paid	—		(4.4		)	(2.5		)	—			(0.5		)	(7.4		)
Non-Cash activity (a)	—		(0.4		)	(1.5		)	(3.4		)	—			(5.3		)
Balance at 4/1/05	$	0.2	$	8.2		$	38.1		$	—		$	1.9		$	48.4

Note (a):  Non-Cash activity includes reversals of previously recorded reserves, effects of currency translation on balances, and other changes in the reserve balance that do not flow through the income statement, and the reduction of property plant and equipment to be disposed.

5. Stock Options

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

	Three Months Ended
(In millions, except per-share amounts)	4/1/05			4/2/04
Net earnings, as reported	$	0.7		$	13.4
Add: stock-based employee compensation expense included in reported net earnings, net of related tax effects	3.5			3.5
Less: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(30.5		)	(11.9		)
Pro forma net (loss)/earnings	$	(26.3	)	$	5.0
Net (loss)/earnings per share - Basic:
As reported	$	0.00		$	0.03
Pro forma	$	(0.06	)	$	0.01
Net (loss)/earnings per share – Diluted:
As reported	$	0.00		$	0.03
Pro forma	$	(0.06	)	$	0.01

8

The fair value of options was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 2005 and 2004:

	2005		2004
Expected volatility	67.0	%	72.2	%
Risk-free interest rate	3.6	%	3.4	%
Expected life	4.5 years		5.0 years
Expected dividend yield	0.0	%	0.0	%

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

6. Retiree Medical Plan

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

	Three Months Ended
(In millions)	4/1/05			4/2/04
Service cost	$	0.3		$	0.2
Interest cost	0.2			0.1
Expected return on plan assets	(0.1		)	(0.1		)
Amortization of prior service cost	—			—
Amortization of net (gain)loss	—			—
Net periodic benefit cost	$	0.4		$	0.2

At December 31, 2004, we estimated that we would contribute $0.8 million to our retiree medical plan in 2005, but have not yet contributed to the plan this year.

7. Comprehensive Income (Loss)

Comprehensive income (loss) is an expression of our net earnings (loss) in the condensed consolidated statements of operations, adjusted for foreign currency translation adjustments and net unrealized gains or losses on available-for-sale securities.  Our comprehensive (loss) income was as follows:

	Three Months Ended
(In millions)	4/1/05				4/2/04
Net earnings	$		0.7		$	13.4
Other comprehensive income (loss):
Cumulative translation adjustment	(27.9			)	(17.2			)
Unrealized net (loss) gain on available-for-sale securities	(2.5			)	5.2
Comprehensive (loss) income	$	(29.7		)	$		1.4

8. 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.

9

Factors that enter into our 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:

	Three Months Ended
(In millions)	4/1/05			4/2/04
Balance at beginning of the period	$	41.1		$	19.5
Accruals for product warranties issued	7.7			0.5
Settlements made during the period	(6.6		)	(1.1		)
Balance at end of period	$	42.2		$	18.9
Balance sheet classification at end of period
Other current liabilities	$	21.9		$	6.4
Other long-term liabilities	20.3			12.5
Total product warranty liabilities	$	42.2		$	18.9

9. Derivative Financial Instruments

To address currency risks, we have a policy that allows us to enter into foreign exchange forward and option contracts with maturities of less than 12 months to mitigate the impact of currency fluctuations on existing foreign currency asset and liability balances.  In January 2005, we expanded our foreign currency exposure management policy to use exchange forward and option contracts of less than 12 months to reduce the risk to earnings and cash flows associated with anticipated foreign currency expenditures.  In accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, all derivatives are recorded on the balance sheet at fair value.

In fiscal year 2005, we began utilizing foreign exchange forward and option contracts as cash flow hedges.  We calculate each hedge’s effectiveness quarterly, excluding time value.  A forward contract’s effectiveness is calculated by comparing the cumulative change in the fair value on a spot-to-spot rate basis to the spot-to-spot rate cumulative change in the anticipated transaction, with the effective portion recorded in other comprehensive income.  Similarly an option contract’s effectiveness is calculated by comparing cumulative changes in the contract’s intrinsic value on a spot rate basis to cumulative losses in value of the anticipated transaction measured on a spot rate basis.  Effective changes in value are accumulated in other comprehensive income and reclassified to operating margin when the hedged revenue transaction is recognized in income.  We record any ineffectiveness, along with the excluded time value of the forward and option contracts, in the Other expense, net caption in our Condensed Consolidated Statements of Operations.  In the event it becomes probable that a hedged anticipated transaction will not occur, the gains or losses on the related cash flow hedges will immediately be reclassified from Other Comprehensive Income (“OCI”) to Other expense, net. The impact of the net change in cash flow hedges on OCI for the quarter was 0.1 million of which none was reclassified.  We anticipate reclassifying the entire gain/loss in OCI to earnings within 12 months.

We also manage the foreign currency risk associated with foreign currency denominated assets and liabilities using foreign exchange forward contracts.  Changes in the fair value of these derivatives are recognized currently in the Other expense, net caption in our Condensed Consolidated Statements of Operations and substantially offset the remeasurement gains and losses associated with the foreign currency denominated assets and liabilities.

10. Income Taxes

For the first quarter of 2005, we recorded a tax expense of $2.7 million compared to a tax expense of $2.3 million in the first quarter of 2004.  Overall, our tax rate continues to be affected by changes in the mix of income from domestic and foreign sources and the impact of the reversal of a valuation allowance on domestic tax expense.

We continue to maintain a valuation allowance against our U.S. and certain non-U.S. deferred tax assets arising from the carry-forward of tax deductions, operating losses, and tax credits.  At April 1, 2005, the valuation allowance was $23.4 million.  We expect to reverse additional portions of our valuation allowance to the extent we continue to experience profitable results, although such future profitability cannot be assured. When we have achieved a sufficient history of profitability as determined under the rules of SFAS 109, we will be required to reverse all or most of our remaining valuation allowance, if a valuation allowance exists at that time.  We currently are unable to predict when we will attain a sufficient history of profitability, although such profitability could be achieved in 2005.

10

We continue to evaluate the potential benefit of electing the special one-time, dividend received deduction for qualifying cash distributions from our foreign subsidiaries as provided by the American Jobs Creation Act of 2004.  We expect to complete our evaluation subsequent to enactment of anticipated technical corrections legislation or similar regulatory guidance.

11. Repurchases of Common Stock

On February 2, 2005, our Board of Directors authorized the purchase of up to $300.0 million in shares of our outstanding common stock.  Purchases of common stock may be made from time-to-time on the open market or in private transactions and will be recorded as treasury stock.  As of April 1, 2005, we have purchased $118.7 million (approximately 16.5 million shares) of our common stock.

11

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

Introduction and Overview of Business

Tellabs designs, develops, deploys and supports products used in wireless and wireline networks in almost 100 countries. 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 licensing of software, both as stand-alone products and as elements of integrated systems, to many of the world’s largest 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 2005 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.

Fiscal 2005 began with continued broad-based revenue growth.  We have benefited from increasing wireless and data traffic by selectively enhancing our transport, managed access and voice-quality enhancement products with new features. In addition, we are addressing new, evolving growth opportunities with our broadband data networking and access products.  Our first quarter results include, for the first time, a full-quarter’s contribution from AFC, which we acquired in November 2004.  We continue to review our spending, asset utilization and product development roadmap opportunities to optimize revenue, improve asset utilization and contain spending.

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RESULTS OF OPERATIONS

For the first quarter of 2005, our revenue grew by 65% to $435.6 million.  The increase in revenue includes $127.8 million in product revenue from AFC, which we acquired in November 2004. Non-AFC revenue, driven by increasing demand for our transport, managed access and broadband data products, was up 17% compared to the first quarter of 2004. We earned $0.7 million, or less than one cent per share in the first quarter of 2005, compared with $13.4 million, or $0.03 per share in the first quarter of 2004. The decline in earnings is primarily attributable to a 15 percentage point decline in our overall gross margins as a result of the inclusion of products from the acquisition of AFC. These products typically carry lower gross margins than our other products.

Revenue

	First Quarter
	2005			2004		Change
Transport	$		158.0	$	136.1	16	%
Access	127.8			—		N/M
Managed Access	93.1			69.4		34	%
Voice Quality Enhancement	15.0			22.7		(34	)%
Broadband Data	6.6			3.9		69	%
Services	35.1			31.7		11	%
Total	$		435.6	$	263.8	65	%
North America	$		324.0	$	172.9	87	%
International	$	111.6		$	90.9	23	%

Revenue from Transport products improved on the continuing strength in shipments of our Tellabs 5500 digital cross-connect systems to wireless and wire-line customers. In particular, wireless customers in North American continue to remain a significant source of growth, accounting for 58% of all Transport product revenue, compared to 48% in the first quarter of 2004. As a measure of the 5500 business, more than 1.8 million T1 equivalents were shipped during the quarter.  By way of comparison, we shipped 1.4 million in the first quarter of 2004.  Revenue from our Tellabs 7100 optical transport systems also grew year-over-year as deployment of this equipment by a major customer continued into 2005.

Revenue from our first full quarter of Access product revenue amounted to $127.8 million.  This total is up over last year’s first quarter for AFC and more quarterly revenue than AFC ever reported.  We believe the acquisition of AFC gives us a strategic position in fiber-based access product applications that will benefit from residential access growth going forward.  We estimate that slightly more than 40% of this quarter’s Access revenue is related to fiber-based access product deployments, with the balance coming from copper-based access solutions.

Revenue from Managed Access products grew 34% year over year. The increase was due to strength in both our Tellabs 8100 managed access systems and Tellabs 6300 managed transport systems.  The increase comes from broad based demand, driven in part by the continuing release of new software and hardware enhancements.

Overall revenue from Voice Quality Enhancement products declined year-over-year.  The decline reflects a strong first quarter 2004 in which one large international order dominated our revenue in this category.  Within North America, however, we saw increased year-to-year demand from wireless customers for our voice-quality products.

Broadband Data revenue was up year-over-year, as our products continue to gain acceptance with customers.  We have now shipped our 8800 platform to 12 revenue generating customers of which eight are currently using the product to deliver live traffic.  That’s up from two live networks at this time last year.

Our revenue from services increased from the year-ago period primarily due to the inclusion of the Access products.

Gross Margin

	First Quarter
	2005		2004		Change
Consolidated Margin	41.8	%	57.1	%	(15.3	)%
Product Margin	43.4	%	61.7	%	(18.3	)%
Services Margin	22.8	%	23.3	%	(0.5	)%

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As a result of our merger with AFC, we have a multi-year agreement with a large customer to provide equipment for their FTTP build out.  Although the overall contract is expected to be profitable, gross margins are below our historical gross margins on other products, and one component–the optical networking terminal (ONT)–is sold substantially below our current cost.  Therefore, the impact of the agreement on our consolidated gross margin is dependent on the timing and mix of components purchased by the customer.  In addition, we are working to improve the overall margins on FTTP sales through product design changes, component price reduction and other actions. 

Our overall margins declined during the first quarter of 2005 compared to the same period in 2004 primarily due to the addition of AFC’s lower margin Access product line. The addition of the Access products reduced our first-quarter 2005 gross margin by approximately 14 percentage points, compared to the first quarter of 2004. This decrease was partially offset by 2 percentage points of improvement due to the full-quarter 2005 impact of outsourcing on our manufacturing costs.  Margins in the first quarter of 2004 were benefited by 4 percentage points due to a favorable settlement with a vendor.  The decline in product margins was due primarily to the same reasons noted above for the overall margin decline.  Services margins were down slightly as a result of the addition of Access services revenue and related margins.

Operating Expenses

	First Quarter
	2005		2004		Change
Total Operating Expenses	$	181.5	$	139.7	$	41.8
Items included in the total:
Restructuring and other charges	13.2		16.2		(3.0		)
Amortization of purchased intangibles	11.0		3.9		7.1
All other	$	157.3	$	119.6	$	37.7

Our operating expenses increased primarily due to the addition of AFC’s expenses, slightly offset by lower headcount and facility-related costs due to prior restructuring activities.  Restructuring and other charges for the first quarter of 2005 were primarily due to the previously disclosed reorganization of our Denmark and Finland based businesses.

The increase in the amortization of purchased intangibles and deferred stock compensation is due to the acquisitions of AFC and Vinci Systems, both in the fourth quarter of 2004.  This line item includes acquisition related amortization of both intangible assets, including developed technology, and deferred compensation.

In order to achieve our targeted synergies following our acquisitions in 2004, 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 actions could include closing facilities, reducing our 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.

Other Income/(Expense)

	First Quarter
	2005			2004			Change
Interest income, net	$	5.7		$	5.9		$	(0.2	)
Other expense, net	(2.7		)	(1.0		)	(1.7		)
Total	$	3.0		$	4.9		$	(1.9	)

Total other income declined as flat interest income was offset by losses on the sale of certain marketable securities.

Income Taxes

For the first quarter of 2005, we recorded a tax expense of $2.7 million compared to a tax expense of $2.3 million in the first quarter of 2004.  Overall, our tax rate continues to be affected by changes in the mix of income from domestic and foreign sources and the impact of the reversal of a valuation allowance on domestic tax expense.

Financial Condition, Liquidity & Capital Resources

Our principal source of liquidity remained our cash, cash equivalents and marketable securities, which decreased by approximately $120.5 million during the quarter to $995.7 million.  This decrease primarily reflects our previously announced stock repurchase program.  Through April 1, 2005, we repurchased $118.7 million (approximately 16.5 million shares) of our common stock, under a plan authorized by the board of directors that enables us to repurchase up to $300 million in shares of our common stock.

Inventories increased by $38.8 million from year-end levels primarily due to a build of fiber-based access product components and for buffer stock created to manage the consolidation of our manufacturing supply chain.  Accounts receivable declined by $41.7 million

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since year end, primarily due to the combination of more linear shipments in the first quarter of 2005 compared to that of the fourth quarter of last year and accelerated collections.  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 sources of working capital may be from cash-on-hand, cash generated from future operations, short-term or long-term financing, equity offerings or any combination of these sources.

Our current policy is to retain our earnings to provide funds to enhance shareholder value by expanding our business, repurchasing our common stock when we believe it to be undervalued and for operating activities.  We do not anticipate paying a cash dividend in the foreseeable future.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

There were no material changes in our critical accounting policies during the quarter.

Outlook

We expect that wireless carriers will remain an important part of our business for the foreseeable future, and we look for continuing strength in 2005 as more wireless carriers begin to build out their networks to support increased minutes of use and deliver new, data-oriented services.  However, we continue to have limited long-term visibility as to the amount and timing of wireless and wireline carrier spending as it relates to our products and services and the impact of future industry consolidation.  In the near term, we expect revenue to be up sequentially, between $450 million and $460 million for the second quarter of 2005 and margins to be around 42% for the quarter.

Forward-Looking Statements

This Management’s Discussion and Analysis and other sections of this Form 10-Q contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management’s expectations, estimates and assumptions, based on the information available at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words “anticipate,” “believe,” “estimate,” “target,” “expect,” “predict,” “plan,” “possible,” “intend,” “likely,” “will,” “would,” “should,” “could,” “may” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to: economic changes impacting the telecommunications industry; financial condition of telecommunication service providers and equipment vendors, including any impact of bankruptcies; the impact of customer and vendor consolidation; new product acceptance; product and end user demand, and industry capacity; competitive products and pricing; competitive pressures from new entrants to the telecommunications industry; research and new product development; protection and access to intellectual property, patents and technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment and capacity; foreign economic conditions, including currency rate fluctuations; the regulatory and trade environment; availability and terms of future acquisitions; uncertainties relating to synergies, charges, and expenses associated with business combinations and other transactions and restructurings; the ability to successfully integrate new businesses and technologies; various risks associated with our recent acquisitions and the impact on our business; and other risks and future factors that may be detailed from time to time in our filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.1 to Form 10-K for the fiscal year ended December 31, 2004, filed with the SEC on March 15, 2005.  Our actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors should not place undue reliance on the forward-looking statements in determining whether to buy, sell or hold any of our securities. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

To address currency risks, we have a policy that allows us to enter into foreign exchange forward and option contracts with maturities of less than 12 months to mitigate the impact of currency fluctuations on existing foreign currency asset and liability balances.  In January 2005, we expanded our foreign currency exposure management policy, and began entering into transactions to use exchange forward and option contracts of less than 12 months to reduce the risk to earnings and cash flows associated with anticipated foreign currency expenditures.

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Item 4. Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of April 1, 2005.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.  There were no changes during the period covered by this Form 10-Q in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

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

On January 17, 2003, Tellabs and the other named defendants filed a motion to dismiss the consolidated amended class action complaint in its entirety.  On May 19, 2003, the Court granted our motion and dismissed all counts of the consolidated amended complaint, while affording plaintiffs an opportunity to replead.  On July 11, 2003, plaintiffs filed a second consolidated amended class action complaint against Tellabs, Messrs. Birck and Notebaert, and many (although not all) of the other previously named individual defendants, realleging claims similar to those contained in the previously dismissed consolidated amended class action complaint.  We filed a second motion to dismiss on August 22, 2003, seeking the dismissal with prejudice of all claims alleged in the second consolidated amended class action complaint.  On February 19, 2004, the Court issued an order granting that motion and dismissed the action with prejudice.  On March 18, 2004, the plaintiffs filed a Notice of Appeal to the United States Federal Court of Appeal for the Seventh Circuit appealing the dismissal.  The appeal was fully briefed, oral argument was heard on January 21, 2005 and the parties are awaiting a decision.

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 structure[d] auction process by which AFC sought to obtain the best deal possible for its shareholders.” The plaintiff seeks to enjoin the merger, and in the alternative, to rescind the transaction, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Common Stock:

Period of Purchases	Total Number of Shares Purchased	Average Purchase Price of Shares		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Remaining Dollar Value of Shares Available to be Purchased Under the Plan
					(In Millions)
1/1/05 through 2/4/05	—	$	—	—	$	300.0
2/5/05 through 3/4/05	16,455,000	7.21		16,455,000	$	181.3
3/5/05 through 4/1/05	—	—		—	$	181.3
Total	16,455,000	$	7.21	16,455,000

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On February 2, 2005, the Company announced that its Board of Directors authorized the purchase of up to $300.0 million in shares of our outstanding common stock, with no expiration date to the authorization.  Purchases of common shares may be made from time-to-time on the open market or in private transactions and will be recorded as treasury stock.  As of April 1, 2005, we have purchased $118.7 million (approximately 16.5 million shares) of our common stock.

Item 6. Exhibits

10a	2005 Tellabs, Inc. Employee Stock Purchase Plan
10b	Tellabs, Inc. Executive Continuity and Protection Program
11	Computation of Per Share Earnings
31.1	CEO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	CFO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1	CEO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2	CFO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002

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SIGNATURE

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

TELLABS, INC.

(Registrant)

/s/ JAMES A. DITE

James A. Dite

Vice President and Controller

(Principal Accounting Officer
and duly authorized officer)

May 10, 2005

(Date)

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EXHIBIT INDEX

Exhibit	Description
10a	2005 Tellabs, Inc. Employee Stock Purchase Plan
10b	Tellabs, Inc. Executive Continuity and Protection Program
11	Computation of Per Share Earnings
31.1	CEO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	CFO Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1	CEO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2	CFO Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002

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EX-10.A

Exhibit 10.a

2005 TELLABS, INC.

EMPLOYEE STOCK PURCHASE PLAN

Effective June 1, 2005

Purpose.  The purpose of the Plan is to provide Employees of the Company and Participating Subsidiaries with an opportunity to purchase common stock of the Company through accumulated payroll deductions.  It is the intention of the Company to have the Plan qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986, as amended.  The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that Section of the Code.

Definitions.  As used herein, the terms set forth below have the meanings assigned to them in this Section 2 and shall include the plural as well as the singular.

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

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

Administrator means the brokerage firm or financial institution (if any) retained to perform administrative services described in Section 10(b).

Board of Directors or Board means the board of directors of Tellabs, Inc.

Business Day shall mean a day on which the NASDAQ Stock Market (“NASDAQ”) is open for trading.

Brokerage Account means the account in which the Purchased Shares are held.

Code means the Internal Revenue Code of 1986, as amended from time to time.

Committee means the Compensation Committee of the Board of Directors, or the designee of the Compensation Committee.

Company means Tellabs, Inc., a Delaware corporation.

Compensation means the base pay received by a Participant, including commissions, overtime and bonuses (including cash retention bonuses), but excluding stock option awards, stock grants, expense reimbursements, relocation-related payments and automobile allowances.  Forms of compensation not specifically listed herein shall be included or excluded from “Compensation” as determined in the sole discretion of the Committee.

Effective Date means June 1, 2005.

Employee means any individual who is an employee of the Company or Tellabs Operations, Inc. or any other Participating Subsidiary for tax purposes whose customary employment with such entity is at least twenty (20) hours per week and more than five (5) months in a calendar year.  For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company or the Participating Subsidiary, as appropriate.

Enrollment Date means the first Business Day of each Offering Period.

Exercise Date means the last Business Day of each Offering Period.

Fair Market Value on or as of any date means the “NASDAQ Official Closing Price” (as defined on www.nasdaq.com) (or such substantially similar successor price thereto) for Shares as reported on www.nasdaq.com (or a substantially similar successor website) on the relevant valuation date or, if no NASDAQ Official Closing Price is reported on such date, on the preceding day on which a NASDAQ Official Closing Price was reported; or, if the Shares are no longer listed on NASDAQ, the closing price for Shares as reported on the official website for such other exchange on which the Shares are listed.

Offering Period means a period of days as established by the Committee from time to time, which period shall not exceed six (6) months; provided, that the first Offering Period shall be the five (5)-month period beginning June 1, 2005 through October 31, 2005 and, until different Offering Periods are established by the Committee and communicated to Participants in accordance with Section 18(b); subsequent Offering Periods shall be six (6)-month periods beginning on each May 1 and November 1 thereafter, commencing November 1, 2005.

Participant means an Employee who satisfies the requirements of Sections 3 and 5 of the Plan.

Participating Subsidiary means a Subsidiary that has been authorized by the Committee or the Board to extend the benefits of the Plan to its Employees.  The Committee or the Board may extend the Plan to a Subsidiary in the future.

Plan means this 2005 Tellabs, Inc. Employee Stock Purchase Plan.

Purchase Account means the account used to purchase Shares through the exercise of Purchase Rights under the Plan.

Purchase Date means the last Business Day of each Offering Period, or such other date as shall be established by the Committee.

Purchase Price means an amount equal to 85% (or such other percent as determined by the Committee, which may not be less than 85%) of (i) the Fair Market Value of a Share on the Exercise Date or (ii) the lower of the Fair Market Value of a Share on either the Enrollment Date or on the Exercise Date; with such percent and the application of (i) or (ii) as determined by the Committee prior to the Offering Period and communicated to Participants in accord with Section 18(b) below; provided that until a different Purchase Price is established by the Committee and communicated to Participants in accordance with Section 18(b), the Purchase Price shall be 85% of the Fair Market Value of a Share on the Exercise Date.

Purchase Right means an option granted under this Plan that entitles a Participant to purchase Shares.

Purchased Shares means the full Shares issued pursuant to the exercise of Purchase Rights under the Plan.

Shares means the common stock of the Company.

Subsidiary means an entity, domestic or foreign, of which not less than 50% of the voting equity is held by the Company or a Subsidiary, whether or not such entity now exists or is hereafter organized or acquired by the Company or a Subsidiary.

Eligibility.

Only Employees of the Company or a Participating Subsidiary shall be eligible to be granted Purchase Rights under the Plan.

Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted a Purchase Right under the Plan if (i) immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding Purchase Rights or options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) such Purchase Right would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate that exceeds twenty-five thousand dollars ($25,000) of the Fair Market Value of such stock (determined at the time each such Purchase Right is granted) for each calendar year in which such Purchase Right is outstanding at any time.

Exercise of a Purchase Right.  Purchase Rights shall be exercised on behalf of Participants in the Plan every Purchase Date, using payroll deductions that have accumulated in the Participants’ Purchase Accounts during the preceding Offering Period.

Participation

An Employee, whose first date of employment with the Company or a Participating Subsidiary is on or before March 1, 2005, shall be eligible to participate on the Effective Date; provided, that such Employee properly completes and submits by the deadline prescribed by the Company the on-line enrollment form or, alternatively, the paper enrollment form, each as provided by the Company.

An Employee, whose first date of employment with the Company or a Participating Subsidiary is after March 1, 2005, shall be eligible to participate on the first Enrollment Date that occurs three (3) months after the Employee’s first day of employment with the Company or Participating Subsidiary; provided, that such Employee properly completes and submits by the deadline prescribed by the Company the on-line enrollment form or, alternatively, the paper enrollment form, each as provided by the Company.

An Employee who does not become a Participant on the first Enrollment Date on which he or she is eligible may thereafter become a Participant on any subsequent Enrollment Date by properly completing and submitting by the deadline prescribed by the Company the on-line enrollment form or, alternatively, the paper enrollment form, each as provided by the Company.

Payroll deductions for a Participant shall commence on the first payroll date following the Enrollment Date and shall end on the last payroll date in the Offering Period to which such authorization is applicable, unless sooner terminated by the Participant as provided in Section 11 hereof.

Payroll Deductions.

A Participant shall elect to have payroll deductions made during an Offering Period equal to no less than 1% of the Participant’s Compensation and no greater than a percentage of such Participant’s Compensation as established by the Committee from time to time, which shall not be greater than 20%.  As of the Effective Date, the maximum percentage of Compensation a Participant may deduct is ten percent (10%), until modified by the Committee per the terms of the Plan.  If the Committee modifies the maximum percentage of Compensation a Participant may deduct, such change will not be effective until communicated to the Participants per Section 18(b) below.  The amount of such payroll deductions shall be in whole percentages (for example, 3%, 12%, 20%).  All payroll deductions made by a Participant shall be

credited to his or her Purchase Account.  A Participant may not make any additional payments into his or her Purchase Account.

A Participant may change his or her payroll deduction percentage under subsection (a) above by properly completing and submitting by the deadline prescribed by the Company, the on-line change form or, alternatively, the paper change form, each as provided by the Company.  If the on-line or paper form is properly completed and submitted by the deadline prescribed by the Company, the change in amount shall be effective as of the first Enrollment Date following the date of filing; if the on-line or paper form is not properly completed and submitted by such deadline, the change in amount shall be effective as of the next Enrollment Date.

Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a Participant’s payroll deductions may be decreased to zero percent (0%) at any time during an Offering Period.  Payroll deductions shall recommence at the rate provided in such Participant’s election form at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the Participant as provided in Section 11 hereof.

Grant of Purchase Right.  On the applicable Enrollment Date, each Participant in an Offering Period shall be granted a Purchase Right to purchase on the next following Purchase Date a number of full Shares determined by dividing such Participant’s payroll deductions accumulated prior to such Purchase Date and retained in the Participant’s Purchase Account as of the Purchase Date by the applicable Purchase Price; provided, however, that such purchase shall be subject to the limitations set forth in Section 3 and 14 and subject to decrease per Section 6(c).

Exercise of Purchase Right.  A Participant’s Purchase Right for the purchase of Shares shall be exercised automatically on the Exercise Date, and the maximum number of Shares subject to the Purchase Right shall be purchased for such Participant at the applicable Purchase Price with the accumulated payroll deductions in his or her Purchase Account.  No fractional Shares shall be purchased; any payroll deductions accumulated in a Participant’s Purchase Account which are not sufficient to purchase a full Share shall be retained in the Purchase Account for the next subsequent Offering Period, subject to earlier withdrawal by the Participant as provided in Section 11 hereof.  During a Participant’s lifetime, a Participant’s Purchase Right is exercisable only by him or her.

Approval by Shareholders.  The effectiveness of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board.  Such shareholder approval may be obtained at a duly held shareholders’ meeting by the affirmative vote of the holders of a majority of the Shares of the Company present at the meeting or represented and entitled to vote thereon.

Administration.

Powers and Duties of the Committee.  The Plan shall be administered by the Committee.  Subject to the provisions of the Plan, Section 423 of the Code and the regulations thereunder, the Committee shall have the discretionary authority to determine the time and frequency of granting Purchase Rights, the terms and conditions of the Purchase Rights and the number of Shares subject to each Purchase Right.  The Committee shall also have the discretionary authority to do everything necessary and appropriate to administer the Plan, including, without limitation, interpreting the provisions of the Plan (but any such interpretation shall not be inconsistent with the provisions of Section 423 of the Code).  All actions, decisions and determinations of, and interpretations by the Committee with respect to the Plan shall be final and binding upon all Participants and upon their executors, administrators, personal representatives, heirs and legatees.  No member of the Board of Directors or the Committee shall be liable for any action, decision, determination or interpretation made in good faith with respect to the Plan or any Purchase Right granted hereunder.

Administrator.  The Company, Board or the Committee may engage the services of a brokerage firm or financial institution (the “Administrator”) to perform certain ministerial and procedural duties under the Plan including, but not limited to, mailing and receiving notices contemplated under the Plan, determining the number of Purchased Shares for each Participant, maintaining or causing to be maintained the Purchase Account and the Brokerage Account, disbursing funds maintained in the Purchase Account or proceeds from the sale of Shares through the Brokerage Account, and filing with the appropriate tax authorities proper tax returns and forms (including information returns) and providing to each Participant statements as required by law or regulation.

Indemnification.  Each person who is or shall have been (a) a member of the Board, (b) a member of the Committee, or (c) an officer or employee of the Company to whom authority was delegated in relation to this Plan, shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit or proceeding against him or her; provided, however, that he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf, unless such loss, cost, liability or expense is a result of his or her own willful misconduct or except as expressly provided by statute.

The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s certificate of incorporation or bylaws, any contract with the Company, as a matter of law, or otherwise, or of any power that the Company may have to indemnify them or hold them harmless.

Withdrawal.  A Participant may withdraw from the Plan by properly completing and submitting to the Company the on-line tool for withdrawal or the withdrawal form supplied by the Company.  Upon withdrawal, any payroll deductions credited to the Participant’s Purchase Account prior to the effective date of the Participant’s withdrawal from the Plan will be returned to the Participant.  No further payroll deductions for the purchase of Shares will be made during subsequent Offering Periods, unless the Participant properly completes and submits the on-line enrollment tool provided by the Company or, alternatively, an election form, by the deadline prescribed by the Company.  A Participant’s withdrawal from an offering will not have any effect upon his or her eligibility to participate in the Plan or in any similar plan that may hereafter be adopted by the Company.

Termination of Employment.  Upon termination of a Participant’s employment for any reason prior to the Purchase Date, whether voluntary or involuntary, including retirement, death or as a result of liquidation, dissolution, sale, merger or a similar event affecting the Company or a Participating Subsidiary, the payroll deductions credited to his or her Purchase Account will be returned to him or her or, in the case of the Participant’s death, to the person or persons entitled thereto under Section 15, and his or her Purchase Right will be automatically terminated.

Interest.  No interest shall accrue on the payroll deductions of a Participant in the Plan.

Stock.

The stock subject to Purchase Rights shall be: (i) common stock of the Company; (ii) registered securities as required under the 1933 Act and 1934 Act; (iii) listed on the NASDAQ or on such other exchange as the Shares may be listed; and (iv) either authorized but unissued shares or treasury shares.

Subject to adjustment upon changes in capitalization of the Company as provided in Section 17 hereof, the maximum number of Shares which shall be made available for sale under the Plan shall be ten million (10,000,000) Shares.  If, on a given Exercise Date, the number of Shares

with respect to which Purchase Rights are to be exercised exceeds the number of Shares then available under the Plan, the Committee shall make a pro rata allocation of the Shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable.

A Participant shall have no interest or voting right in Shares covered by his or her Purchase Right until such Purchase Right has been exercised.

Designation of Beneficiary.  A Participant may designate a beneficiary who is to receive payroll deductions, if any, in the Participant’s account under the Plan in the event of such Participant’s death.  If the Participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such a designation to be effective.  Beneficiary designations shall be made in accordance with procedures prescribed by the Company.  If no properly designated beneficiary survives the Participant, the payroll deductions will be distributed in accordance with the applicable laws of descent and distribution.

Assignability of Purchase Rights.  Neither payroll deductions credited to a Participant’s Purchase Account nor any rights with regard to the exercise of a Purchase Right or to receive Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the Participant.  Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw from an Offering Period in accordance with Section 11 hereof.

Adjustment of Number of Shares Subject to Purchase Rights.

Adjustment.  Subject to any required action by the stockholders of the Company, the maximum number of Shares each Participant may purchase per Offering Period, as well as the price per Share and the number of Shares covered by each Purchase Right under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the common stock of the Company, or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration”.  Such adjustment shall be made by the Board or the Committee, whose determination in that respect shall be final, binding and conclusive.  Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to a Purchase Right.  The Purchase Rights granted pursuant to the Plan shall not be adjusted in a manner that causes the Purchase Rights to fail to qualify as options issued pursuant to an “employee stock purchase plan” within the meaning of Section 423.

Dissolution or Liquidation.  In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the “New Exercise Date”), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board.  The New Exercise Date shall be before the date of the Company’s proposed dissolution or liquidation.  The Board will notify each Participant in writing, as soon as administratively practicable prior to the New Exercise Date, that the Purchase Date for the Participant’s Purchase Right has been changed to the New Exercise Date and that the Participant’s Purchase Right shall be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offering Period as provided in Section 11 hereof.

Merger or Asset Sale.  In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Purchase Right shall be assumed or an equivalent option substituted by the successor corporation or a parent or subsidiary of the successor corporation.  In the event that the successor corporation refuses to assume or substitute for the Purchase Right, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the “New Exercise Date”).  The New Exercise Date

shall be before the date of the Company’s proposed sale or merger.  The Board will notify each Participant in writing, as soon as administratively practicable prior to the New Exercise Date, that the Purchase Date for the Participant’s Purchase Right has been changed to the New Exercise Date and that the Participant’s Purchase Right shall be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offering Period as provided in Section 11 hereof.

Amendments or Termination of the Plan.

The Board of Directors or the Committee may at any time and for any reason amend, modify, suspend, discontinue or terminate the Plan without notice; provided that no Participant’s existing rights in respect of existing Purchase Rights are adversely affected thereby; provided, further, upon any such amendment or modification, all Participants shall continue to have the same rights and privileges in respect of existing Purchase Rights.  To the extent necessary to comply with Section 423 of the Code (or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approved in such a manner and to such a degree as required.

Without shareholder consent and without regard to whether any Participant rights may be considered to have been “adversely affected,” the Board or the Committee shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company’s processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Shares for each Participant properly correspond with amounts withheld from the Participant’s Compensation, and establish such other limitations or procedures as the Board or the Committee determines in its sole discretion advisable which are consistent with the Plan; provided, however, that changes to (i) the Purchase Price, (ii) the Offering Period, or (iii) the maximum of percentage of Compensation that may be deducted pursuant to Section 6(a), shall not be effective until communicated to Participants in a reasonable manner, with the determination of such reasonable manner in the sole discretion of the Board or the Committee.

No Other Obligations.  The receipt of a Purchase Right pursuant to the Plan shall impose no obligation upon the Participant to purchase any Shares covered by such Purchase Right.  Nor shall the granting of a Purchase Right pursuant to the Plan constitute an agreement or an understanding, express or implied, on the part of the Company to employ the Participant for any specified period.

Notices.  Any notice which the Company or any Participant may be required or permitted to give to the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed:  if to the Company, to such address as the Company, by notice to such Participant, may designate in writing from time to time; and, if to the Participant, at his or her address as shown on the payroll records of the Company.

Condition Upon Issuance of Shares.

Shares shall not be issued with respect to a Purchase Right unless the exercise of such Purchase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the 1933 Act and the 1934 Act and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

As a condition to the exercise of a Purchase Right, the Company may require the person exercising such Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law.

General Compliance.  The Plan will be administered and Purchase Rights will be exercised in compliance with the 1933 Act, 1934 Act and all other applicable securities laws and Company policies, including without limitation, the Company’s Insider Trading Policy.

Term of the Plan.  The Plan shall continue in effect for a term of ten (10) years unless sooner terminated under Section 18.

Governing Law.  The Plan and all Purchase Rights granted hereunder shall be construed in accordance with and governed by the laws of the State of Delaware without reference to choice of law principles and subject in all cases to the Code and the regulations thereunder.

EX-10.B

Exhibit 10.b

TELLABS, INC.

EXECUTIVE CONTINUITY AND PROTECTION PROGRAM

1.PURPOSE OF PROGRAM.  The purpose of the Tellabs, Inc. Executive Continuity and Protection Program (the “Program”) is to attract and retain well-qualified individuals as executives and key personnel of Tellabs, Inc. and/or its Subsidiaries, and to provide a benefit to each such individual if his/her employment is terminated in connection with a Change in Control (as defined below).  The Program is intended to qualify as a “top-hat” plan under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), in that it is intended to be an “employee benefit plan” (as such term is defined under Section 3(3) of ERISA) which is unfunded and provides benefits only to a select group of management or highly compensated employees of the Company and/or its Subsidiaries.

2.DEFINITIONS.  The following terms shall have the following meanings unless the context indicates otherwise:

(a)“AAA” shall have the meaning ascribed to such term in Section 12(k).

(b)“Applicable Benefits Schedule” with respect to a Participant shall mean the Benefits Schedule designated by the Committee as applicable to the Participant.

(c)“Applicable Rate” shall have the meaning ascribed to such term on the Applicable Benefits Schedule.

(d)“Beneficiary” shall mean a beneficiary designated in writing by a Participant to receive Change in Control Severance Benefits in accordance with Section 6(d) below, and if no beneficiary is designated by the Participant, then the Participant’s estate shall be deemed to be the Participant’s designated beneficiary.

(e)“Benefits Schedule” shall mean a separate Benefits Schedule adopted as part of the Program, which Schedule sets forth certain provisions relating to the determination of eligibility for and/or the amount of Change in Control Severance Benefits payable under the Program.

(f)“Board” shall mean the Board of Directors of the Company.

(g)“Change in Control” means the first of the following events to occur:

(i)Any “person” (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), excluding for this purpose, the Company or any Subsidiary of the Company, or any employee benefit plan of the Company or any Subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan which acquires beneficial ownership of voting securities of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company’s then outstanding securities; provided,

however, that no Change in Control will be deemed to have occurred as a result of a change in ownership percentage resulting solely from an acquisition of securities by the Company; and provided further that no Change in Control will be deemed to have occurred if a person inadvertently acquires an ownership interest of twenty percent (20%) or more but then promptly reduces that ownership interest below twenty percent (20%);

(ii)During any two (2) consecutive years, individuals who at the beginning of such two (2)-year period constitute the Board and any new director (except for a director designated by a person who has entered into an agreement with the Company to effect a transaction described elsewhere in this definition of Change in Control) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (such individuals and any such new director, the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board;

(iii)Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination,

(A)all or substantially all of the individuals and entities who were the beneficial owners of outstanding voting securities of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more Subsidiaries) (the “Resulting Corporation”) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Company;

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

(C)at least a majority of the members of the board of directors of the Resulting Corporation were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

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

(h)“Change in Control Date” shall mean the date that a Change in Control first occurs.

(i)“Change in Control Severance Benefits” shall mean the compensation and benefits provided to a Terminated Participant pursuant to Section 6 of the Program.

(j)“Change in Control Severance Multiplier” shall mean the multiplier used to determine cash Change in Control Severance Benefits paid to a specific Terminated Participant as determined by the Committee and set forth on the Applicable Benefits Schedule.

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

(l)“Committee” shall mean (i) the Board or (ii) a committee or subcommittee of the Board as from time to time appointed by the Board from among its members.  The initial Committee shall be the Board’s Compensation Committee.  In the absence of an appointed Committee, the Board shall function as the Committee under the Program.  On a Change in Control Date, and during the twenty-four (24)-month period following such Change in Control Date, the Committee shall be comprised of such persons, whether or not such persons are members of the Board, as appointed by the Board prior to the Change in Control Date, with any additions or changes to the Committee following such Change in Control Date to be made and/or approved by all Committee members then in office.

(m)“Company” shall mean Tellabs, Inc., a Delaware corporation, including any successor entity or any successor to the assets of the Company.

(n)“Confidential Information” shall have the meaning ascribed to such term in Section 7(a).

(o)“Effective Date” shall mean May 6, 2005.

(p)“ERISA” shall have the meaning ascribed to such term in Section 1.

(q)“Excise Tax” shall have the meaning ascribed to such term on the Applicable Benefits Schedule.

(r)“Participant(s)” shall have the meaning set forth in Section 3(b).

(s)“Payments” shall have the meaning ascribed to such term on the Applicable Benefits Schedule.

(t)“Program” shall have the meaning ascribed to such term in Section 1.

(u)“Protection Period” shall mean the period after a Change in Control Date set forth in the Applicable Benefits Schedule.

(v)“Qualifying Termination” of a Participant’s employment shall have the meaning ascribed to such term on the Applicable Benefits Schedule.

(w)“Reference Base Salary” with respect to a Participant means the annual base salary of such Participant as in effect immediately prior to the Termination Date (determined without regard to any reduction which would constitute a basis for a Participant’s resignation for Good Reason, if such Participant’s Applicable Benefits Schedule contains a right to terminate for Good Reason), or, if greater, the highest annual base salary of such Participant as in effect during the period beginning on the Change in Control Date and ending on the Termination Date.

(x)“Restriction Period” means the post-employment period set forth on the Applicable Benefits Schedule during which the covenants set forth in Section 7(b) shall apply to a Participant.

(y)“Subsidiary” shall mean a corporation of which the Company directly or indirectly owns more than fifty percent (50%) of the “voting stock” (meaning the capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation) or any other business entity in which the Company directly or indirectly has an ownership interest of more than fifty percent (50%).

(z)“Terminated Participant” shall mean a Participant whose employment with the Company and/or a Subsidiary has been terminated as described in Section 5 below.

(aa)“Termination Date” shall mean the date a Terminated Participant’s employment with the Company and/or a Subsidiary is terminated as described in Section 5 below.

3.PARTICIPATION.  Only those executives and key personnel as the Committee in its sole discretion may designate, from time to time, shall participate in the Program.  At the time the Committee designates an individual as a Participant, the Committee shall also designate the Applicable Benefits Schedule for such Participant’s participation in the Program.

4.ADMINISTRATION.

(a)Responsibility.  The Committee shall have the responsibility, in its sole discretion, to control, operate, manage and administer the Program in accordance with its terms.

(b)Authority of the Committee.  The Committee shall have the maximum discretionary authority permitted by law that may be necessary to enable it to discharge its responsibilities with respect to the Program, including but not limited to the following:

(i)to determine eligibility for participation in the Program;

(ii)to designate Participants and the Applicable Benefits Schedule;

(iii)to establish the terms and provisions of, and to adopt as part of the Program, one or more Benefits Schedules setting forth, among other things, the Change

in Control Severance Multiplier, Protection Period and Restriction Period, and such other terms and provisions as the Committee shall determine;

(iv)to calculate a Participant’s Change in Control Severance Benefits;

(v)to correct any defect, supply any omission, or reconcile any inconsistency in the Program in such manner and to such extent as it shall deem appropriate in its sole discretion to carry the same into effect;

(vi)to issue administrative guidelines as an aid to administer the Program and make changes in such guidelines as it from time to time deems proper;

(vii)to make rules for carrying out and administering the Program and make changes in such rules as it from time to time deems proper;

(viii)to the extent permitted under the Program, grant waivers of Program terms, conditions, restrictions, and limitations;

(ix)to construe and interpret the Program and make reasonable determinations as to a Participant’s eligibility for benefits under the Program, including determinations as to Change in Control of the Company, Qualifying Termination and disability; and

(x)to take any and all other actions it deems necessary or advisable for the proper operation or administration of the Program.

(c)Action by the Committee.  Except as may otherwise be required or permitted under an applicable charter, the Committee may (i) act only by a majority of its members (provided that any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee), and (ii) may authorize any one or more of its members to execute and deliver documents on behalf of the Committee.

(d)Delegation of Authority.  The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem advisable; provided, however, that any such delegation shall be in writing.  In addition, the Committee, or any person to whom it has delegated duties as aforesaid, may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Program.  The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Program and may rely upon any opinion or computation received from any such counsel, consultant or agent.  Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company, or the Subsidiary whose employees have benefited from the Program, as determined by the Committee.

(e)Determinations and Interpretations by the Committee.  All determinations and interpretations made by the Committee shall be binding and conclusive to the maximum extent permitted by law on all Participants and their heirs, successors, and legal representatives.

(f)Information.  The Company shall furnish to the Committee in writing all information the Committee may deem appropriate for the exercise of its powers and duties in the administration of the Program.  Such information may include, but shall not be limited to, the full names of all Participants, their earnings and their dates of birth, employment, retirement, death or other termination of employment.  Such information shall be conclusive for all purposes of the Program, and the Committee shall be entitled to rely thereon without any investigation thereof.

(g)Self-Interest.  No member of the Committee may act, vote or otherwise influence a decision of the Committee specifically relating to his/her benefits, if any, under the Program.

5.TERMINATION OF EMPLOYMENT ON OR AFTER A CHANGE IN CONTROL DATE.  If, during the period commencing on a Change in Control Date and ending on the last day of the Protection Period following such Change in Control Date, a Participant’s employment is terminated under circumstances constituting a Qualifying Termination, such Terminated Participant shall be entitled to receive the Change in Control Severance Benefits on or after the Termination Date.

6.CHANGE IN CONTROL SEVERANCE BENEFITS.

(a)Cash Payment.  In the event of termination of the Participant due to a Qualifying Termination within the Protection Period following the Change in Control Date, the Terminated Participant shall be entitled to receive a lump sum severance allowance within fifteen (15) business days of such termination, in an amount which is equal to the product of the Change in Control Severance Multiplier (as set forth on the Applicable Benefits Schedule) times the sum of:

(i)The Participant’s Reference Base Salary; and

(ii)The Participant’s target bonus for the year which includes his/her Termination Date.

(b)Pro Rata Annual Bonus.  Following the Termination Date, the Terminated Participant shall be entitled to receive a pro-rated annual bonus at target for the year which includes his/her Termination Date, based on the number of days which have elapsed during such year as of the Termination Date.  Such payment shall be paid at the same time as the lump sum payment is made under Section 6(a).

(c)Payment in Lieu of Benefit Continuation.  In lieu of continuing the provision of medical and all other employee benefits and perquisites, including but not limited to executive allowance, retirement and any deferred compensation, to a Terminated Participant and his/her eligible dependents, the Company or its Subsidiary who employed the Terminated Participant shall also pay to the Terminated Participant as a lump sum payment payable with the lump sum payable under Section 6(a) an amount equal to ten percent (10%) of his/her Reference Base Salary multiplied by the Change in Control Severance Multiplier.  Such payment shall be in addition to such Participant’s rights under the Consolidated Omnibus Budget Reconciliation Act of 1985 (commonly known as COBRA).

(d)Payment of Change in Control Severance Benefits to Beneficiaries.  In the event of a Terminated Participant’s death, all Change in Control Severance Benefits that would have been paid to the Terminated Participant under this Section 6 but for his/her death, shall be paid to the Participant’s Beneficiary.

(e)Right to Earned or Accrued Compensation and Benefits.  Notwithstanding anything contained in the Program to the contrary, the Company shall pay to a Terminated Participant within fifteen (15) business days following the later of the Termination Date or the Change in Control Date all compensation (such as salary, bonus and/or accrued but untaken vacation) earned prior to the Termination Date.  In addition, all accrued compensation and benefits with respect to such Terminated Participant shall not be forfeited (except to the extent such forfeiture occurs under the terms of an applicable plan).

(f)Other Benefits.  Notwithstanding anything contained in the Program to the contrary, the Company or the Committee may, in its sole discretion provide benefits in addition to the benefits described under this Section 6, which benefits may, but are not required to be, uniform among Participants.

7.PARTICIPANT COVENANTS.

(a)Non-Use and Non-Disclosure of Confidential Information.

(i)As a condition to receiving the right to participate in the Program and any benefits hereunder, each Participant agrees that he/she shall not, at any time during employment or thereafter, make use of or disclose, directly or indirectly, any (A) trade secret or other confidential secret information of the Company, or any of its Subsidiaries or (B) other technical, business, proprietary or financial information of the Company or any of its Subsidiaries not available to the public generally or to the competitors of the Company or any of its Subsidiaries (“Confidential Information”), except to the extent that such Confidential Information (I) becomes a matter of public record or is published in a newspaper, magazine or other periodical or on electronic or other media available to the general public, other than as a result of any act or omission of him/her, (II) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, provided that he/she gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order, or (III) is required to be used or disclosed by him/her to perform properly his/her duties to the Company or any of its Subsidiaries.  Each Participant further agrees that on or before the Termination Date he/she shall return to the Company all Company property, including but not limited to all records, memoranda, notes, plans, reports, computer tapes and software and other documents and data which constitute Confidential Information which he/she may possess or have under his/her control (together with all copies thereof).

(ii)Each Participant agrees that he/she will assign to the Company (or a Subsidiary of the Company), his/her entire right, title and interest in and to all discoveries and improvements, patentable or otherwise, trade secrets and ideas, writing and copyrightable material, which may have been conceived by him/her or developed or

acquired by him/her while he/she was employed by the Company, which may pertain directly or indirectly to the business of the Company or any Subsidiary.  Participants agree to promptly and fully disclose in writing all such developments to the Company. Participants, during employment and thereafter, shall without charge to Company, but at its expense, upon the Company’s request, execute, acknowledge and deliver to the Company all instruments and do all other acts which are necessary or desirable to enable the Company or any of its Subsidiaries to file and prosecute applications for, and to acquire, maintain and enforce, all patents, trademarks and copyrights in all countries.  Notwithstanding anything contained in the foregoing, pursuant to Employee Patent Act, 765 ILCS 1060/1 et seq. (1996), this Section 7(a)(ii) does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company (or a Subsidiary of the Company) was used and which was developed entirely on the Participant’s own time, unless (a) the invention relates (i) to the business of the Company (or a Subsidiary of the Company) or (ii) to the Company’s (or a Subsidiary of the Company) actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the Participant for the Company (or a Subsidiary of the Company).

(b)Non-Solicitation; Non-Competition.  As a further condition to receiving the right to participate in the Program and any benefits hereunder, each Participant agrees that during his/her employment and for the Restriction Period set forth on the Applicable Benefits Schedule, he/she will not, without the written consent of the Company, directly or indirectly, on his/her own behalf or on behalf of any other person or entity:

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

(ii)solicit for employment, or employ or retain, any person who was employed by the Company or any of its Subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six (6)-month period preceding the date of such hiring; or

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

The Participant is prohibited from engaging in the above activities in any state of the United States and in any country outside the United States in which the Company does business.  Nothing in subparagraph (i) above will prohibit a Participant from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle such Participant to no more than one percent (1%) of the total outstanding

votes entitled to be cast by security holders of such business in matters on which such security holders are entitled to vote.

(c)Remedies; Injunctive Relief; Blue Pencil.  Participants agree that the protective covenants set forth in this Section 7 are reasonable and necessary to protect the legal interests of the Company and its Subsidiaries.  The Participant acknowledges and agrees that (i) a threatened or actual breach of any of the covenants and provisions contained in this Section 7 will result in irreparable harm to the business of the Company or its Subsidiaries and affiliates, (ii) a remedy at law in the form of monetary damages for any threatened or actual breach by the Participant of any of the covenants and provisions contained in this Section 7 is inadequate, (iii) in addition to any remedy at law or equity for such breach, the Company shall be entitled to institute and maintain appropriate proceedings in equity, including a suit for injunction to enforce the specific performance by the Participant of the obligations hereunder and to enjoin the Participant from engaging in any activity in violation hereof and (iv) the covenants on the Participant’s part contained in this Section 7 shall be construed as agreements independent of any other provisions in the Program, and the existence of any claim, setoff or cause of action by the Participant against the Company, whether predicated on the Program or otherwise, shall not constitute a defense or bar to the specific enforcement by the Company of said covenants.  In the event of a breach or a violation by the Participant of any of the covenants and provisions of the Program, (1) the running of the Restriction Period (but not of Participant’s obligation thereunder) shall be tolled during the period of the continuance of any actual breach or violation and (2) the Participant shall be obligated to pay to the Company the amount of any Severance Benefits or Change in Control Benefits theretofore paid to the Participant (or if not yet paid, the Company shall not be obligated to make such payments).  If a court of competent jurisdiction (or an arbitrator in accordance with Section 12(k)) would otherwise declare any portions of this Section 7 void or unenforceable in the circumstances, such portions of this Section shall be reduced in scope and/or duration of time to such an extent that such court (or arbitrator) would hold the same to be enforceable in the circumstances.  The portions of this Section with respect to scope and duration shall be separate and distinct and fully severable without affecting the enforceability of the entire Section.

(d)Not Exclusive Covenants.  Nothing contained in this Section 7 shall invalidate or affect any non-disclosure, assignment of intellectual property, non-competition, non-solicitation or other similar covenant or agreement that currently exists or may exist in the future between a Participant and the Company or a Subsidiary and any such covenants and agreement shall continue in full force and effect.

8.CLAIMS.

(a)Claims Procedure.  If any Participant or Beneficiary, or their legal representative, has a claim for benefits which is not being paid, such claimant may file a written claim with the Committee setting forth the amount and nature of the claim, supporting facts, and the claimant’s address.  A claimant must file any such claim within sixty (60) days after a Participant’s Termination Date.  Written notice of the disposition of a claim by the Committee shall be furnished to the claimant within ninety (90) days after the claim is filed.  In the event of special circumstances, the Committee may extend the period for determination for up to an additional ninety (90) days, in which case it shall so advise the claimant.  If the claim is denied,

the reasons for the denial shall be specifically set forth in writing, pertinent provisions of the Program shall be cited, including an explanation of the Program’s claim review procedure, and, if the claim is perfectible, an explanation as to how the claimant can perfect the claim shall be provided.

(b)Claims Review Procedure.  If a claimant whose claim has been denied wishes further consideration of his/her claim, he/she may request the Committee to review his/her claim in a written statement of the claimant’s position filed with the Committee no later than sixty (60) days after receipt of the written notification provided for in Section 8(a) above.  The Committee shall fully and fairly review the matter and shall promptly advise the claimant, in writing, of its decision within the next sixty (60) days.  Due to special circumstances, the Committee may extend the period for determination for up to an additional sixty (60) days.

9.TAXES.

(a)Withholding Taxes.  The Company shall be entitled to withhold from any and all payments made to a Participant under the Program all federal, state, local and/or other taxes or imposts which the Company determines are required to be so withheld from such payments or by reason of any other payments made to or on behalf of the Participant or for his/her benefit hereunder.

(b)Excise Tax.  In the event payments paid to a Participant under the Program are deemed to be excess parachute payments under Section 280G of the Code, the Change in Control Severance Benefits payable to the Participant shall be subject to reduction or the Participant shall be entitled to receive a Gross-Up Payment (as defined in the Applicable Benefits Schedule) to the extent provided under the Applicable Benefits Schedule.

(c)No Guarantee of Tax Consequences.  No person connected with the Program in any capacity, including, but not limited to, the Company and any Subsidiary and their directors, officers, agents and employees makes any representation, commitment, or guarantee that any tax treatment, including, but not limited to, federal, state and local income, estate and gift tax treatment, will be applicable with respect to amounts deferred under the Program, or paid to or for the benefit of a Participant under the Program, or that such tax treatment will apply to or be available to a Participant on account of participation in the Program.

10.TERM OF PROGRAM.  The Program shall be effective as of the Effective Date and shall remain in effect until the Board terminates the Program in accordance with Section 11(b) below.

11.AMENDMENT AND TERMINATION.

(a)Amendment of Program.  The Program may be amended by the Board at any time with or without prior notice; provided, however, that the Program shall not be amended during the twenty-four (24)-month period immediately following a Change in Control Date.  In the event the Program was amended within the six (6)-month period immediately preceding a Change in Control Date, to the extent such amendments were less favorable to Participants generally, such amendment shall automatically become of no further force and effect without further action by the Company upon such Change in Control.

(b)Termination of Program.  The Program may be terminated or suspended by the Board at any time with or without prior notice; provided, however, that the Program shall not be terminated or suspended during the twenty-four (24)-month period immediately following a Change in Control Date.  In the event the Program was terminated within the six (6)-month period immediately preceding a Change in Control Date, the Program shall automatically become effective without further action by the Company upon such Change in Control.

(c)No Adverse Affect.  If the Program is amended, terminated, or suspended in accordance with Section 11(a) or 11(b) above, such action shall not adversely affect the benefits under the Program to which any Terminated Participant (as of the date of amendment, termination or suspension) is entitled.

12.MISCELLANEOUS.

(a)Offset.  Change in Control Severance Benefits shall be reduced by any payment or benefit made or provided by the Company or any Subsidiary to the Participant pursuant to (i) any severance plan, program, policy or arrangement of the Company or any Subsidiary of the Company not otherwise referred to in the Program, (ii) any employment agreement between the Company or any Subsidiary and the Participant, and (iii) any federal, state or local statute, rule, regulation or ordinance.

(b)No Right, Title, or Interest in Company Assets.  Participants shall have no right, title, or interest whatsoever in or to any assets of the Company or any investments that the Company may make to aid it in meeting its obligations under the Program.  Nothing contained in the Program, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, Beneficiary, legal representative or any other person.  To the extent that any person acquires a right to receive payments from the Company under the Program, such right shall be no greater than the right of an unsecured general creditor of the Company.  Subject to this Section 12(b), all payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts.

(c)No Right to Continued Employment.  The Participant’s rights, if any, to continue to serve the Company as an employee shall not be enlarged or otherwise affected by his/her designation as a Participant under the Program, and the Company or the applicable Subsidiary reserves the right to terminate the employment of any employee at any time.  The adoption of the Program shall not be deemed to give any employee, or any other individual, any right to be selected as a Participant or to continued employment with the Company or any Subsidiary.

(d)Other Rights.  The Program shall not affect or impair the rights or obligations of the Company or a Participant under any other written plan, contract, arrangement, or pension, profit sharing or other compensation plan; provided, however, that each Participant must agree in writing, as a condition to his/her participation in the Program and the receipt of any benefits hereunder, that any previously existing change in control and/or change in management

agreement between such Participant and the Company and/or a Subsidiary shall be superseded in its entirety by the Program and be of no further force and effect.

(e)Governing Law.  The Program shall be governed by and construed in accordance with the laws of the State of Illinois without reference to principles of conflict of laws, except as superseded by applicable federal law (including, without limitation, ERISA).

(f)Severability.  If any term or condition of the Program shall be invalid or unenforceable to any extent or in any application, then the remainder of the Program, with the exception of such invalid or unenforceable provision (but only to the extent that such term or condition cannot be appropriately reformed or modified), shall not be affected thereby and shall continue in effect and application to its fullest extent.

(g)Incapacity.  If the Committee determines that a Participant or a Beneficiary is unable to care for his/her affairs because of illness or accident or because he or she is a minor, any benefit due the Participant or Beneficiary may be paid to the Participant’s spouse or to any other person deemed by the Committee to have incurred expense for such Participant (including a duly appointed guardian, committee or other legal representative), and any such payment shall be a complete discharge of the Company’s obligation hereunder.

(h)Transferability of Rights.  The Company shall have the unrestricted right to transfer its obligations under the Program with respect to one or more Participants to any person, including, but not limited to, any purchaser of all or any part of the Company’s business.  No Participant or Beneficiary shall have any right to commute, encumber, transfer or otherwise dispose of or alienate any present or future right or expectancy which the Participant or Beneficiary may have at any time to receive payments of benefits hereunder, which benefits and the right thereto are expressly declared to be non-assignable and nontransferable, except to the extent required by law.  Any attempt to transfer or assign a benefit, or any rights granted hereunder, by a Participant or the spouse of a Participant shall, in the sole discretion of the Committee (after consideration of such facts as it deems pertinent), be grounds for terminating any rights of the Participant or Beneficiary to any portion of the Program benefits not previously paid.

(i)Interest.  In the event any payment to a Participant under the Program is not paid within thirty (30) days after it is due and Participant notifies the Company and the Company fails to make such payment (to the extent such payment is undisputed), such payment shall thereafter bear interest at the prime rate from time to time as published in The Wall Street Journal, Midwest Edition.

(j)No Obligation to Mitigate Damages.  The Participants shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of the Program and the obtaining of any such other employment shall in no event effect any reduction of the Company’s obligations under the Program.

(k)Arbitration of Disputes and Reimbursement of Legal Costs.  In the event of any dispute between the Company and the Participant, whether arising out of or relating to the Program, or otherwise, the Participant and the Company hereby agree that such dispute shall be

resolved by binding arbitration administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  Any arbitration shall be held before a single arbitrator who shall be selected by the mutual agreement of the Company and the Participant, unless the parties are unable to agree to an arbitrator, in which case, the arbitrator will be selected under the procedures of the AAA.  The arbitrator shall be experienced in the resolution of disputes under employment agreements or plans or programs similar to the Program maintained by major corporations and shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction, and the parties hereby agree to the emergency procedures of the AAA.  However, either party may, without inconsistency with this arbitration provision, apply to any court having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved.  Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Company and the Participant.  The arbitration proceeding shall be conducted in the Chicago, Illinois metropolitan area.  In the event of any such proceeding, the losing party shall reimburse the prevailing party upon entry of a final award resolving the subject of the dispute for all reasonable legal expenses incurred, unless the arbitrator determines that to do so would be unjust.  Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys’ fees and expenses) and shall share the fees of the AAA equally.  Notwithstanding the foregoing, the Participant shall be required to exhaust his/her rights under Section 8 prior to proceeding with any arbitration hereunder.

(l)Condition Precedent to Receipt of Payments or Benefits under the Program.  A Terminated Participant will not be eligible to receive Change in Control Severance Benefits or any other payments or benefits under the Program until (i) such Terminated Participant executes a general release of all claims arising out of said Participant’s employment with, and termination of employment from, the Company in substantially the form attached hereto as Exhibit A (adjusted as necessary to conform to then existing legal requirements) (the “General Release”); and (ii) the revocation period specified in such General Release expires without such Terminated Participant exercising his/her right of revocation as set forth in the General Release.

(m)Assumption by Successor to the Company.  The Company shall cause any successor to its business or assets to assume this Program and the obligations arising hereunder and to maintain this Program without modification or alteration for the period required herein.

BENEFITS SCHEDULE –I

Change in Control Severance Multiplier	2.0
Protection Period	24 months
Restriction Period	24 months

With respect to Participants to which this Benefits Schedule is applicable, the following shall apply:

“Qualifying Termination” shall mean (i) termination by the Company of the employment of the Participant with the Company and all of its Subsidiaries for any reason other than death, disability or Cause, or (ii) resignation of the Participant for Good Reason.

The term “Cause” means (i) the Participant is convicted of a felony or of any crime involving moral turpitude, dishonesty, fraud, theft or financial impropriety; or (ii) a reasonable determination by the Company that, (A) the Participant has willfully and continuously failed to perform substantially his/her duties (other than such failure resulting from incapacity due to physical or mental illness), after a written demand for corrected performance is delivered to the Participant which specifically identifies the manners in which the Participant has not substantially performed his/her duties, (B) the Participant has engaged in gross neglect or gross misconduct, or (C) the Participant has knowingly violated a material requirement of the Company’s Integrity Policy, code of conduct, the Sarbanes Oxley Act of 2002 or other material provision of federal or state securities law.

The term “Good Reason” shall mean:

(i)the material reduction or material adverse modification of the Participant’s authority or duties on or after a Change in Control Date, such as a substantial diminution or adverse modification in the Participant’s title, status, or responsibilities, from his/her authorities being exercised and duties being performed by the Participant immediately prior to the Change in Control Date (and as such authorities and duties may be increased due to promotions from time to time after the Change in Control Date);

(ii)any reduction in the Participant’s base salary from the base salary which is in effect immediately prior to a Change in Control Date or as may be increased from time to time thereafter;

(iii)any failure to provide to the Participant the opportunities to participate on a reasonable basis in the Company’s stock option plans, the annual bonus program and any other bonus and incentive compensation plans (whether in effect on or after the Change in Control Date) in which executives with comparable duties are eligible to participate; or

(iv)any requirement, which occurs on or after a Change in Control Date, that the Participant relocate his principal place of employment by more than a fifty (50)-mile radius from its location immediately prior to the Change in Control Date.

Notwithstanding the foregoing, any of the circumstances described above may not serve as a basis for resignation for “Good Reason” by the Participant unless the Participant has provided written notice to the Company that such circumstance exists within thirty (30) days of the Participant’s learning of such circumstance and the Company has failed to cure such circumstance within thirty (30) days following such notice; and provided further, the Participant did not previously consent to the action leading to their claim of resignation for “Good Reason.”

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

applicable, within five (5) days of such determination that the Excise Tax is greater or less than initially calculated but, in no event, later than thirty (30) days after the Participant’s receipt of the Payments resulting in such Excise Tax.

Notwithstanding anything in the foregoing paragraph to the contrary, the foregoing provision shall not apply (therefore no Gross-Up Payment will be made) and any Change in Control Severance Benefits (other than those described in Section 6(e)) otherwise payable to the Terminated Participant shall be reduced (but not below zero) such that no amounts paid or payable to the Terminated Participant as Change in Control Severance Benefits (other than those described in Section 6(e)) shall be deemed excess parachute payments subject to Excise Tax, in the event the amount of such reduction does not exceed ten percent (10%) of such Change in Control Severance Benefits (other than those described in Section 6(e)).  Unless the Participant shall have given prior written notice specifying a different order to the Company to effectuate the foregoing, the Company shall reduce or eliminate the Change in Control Severance Benefits (other than those described in Section 6(e)), by first reducing or eliminating the portion of such benefits which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the determination made by the independent public accountants selected under the preceding paragraph.  Any notice given by the Participant pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Participant’s rights and entitlements to any benefits or compensation.

EXHIBIT A

FORM OF RELEASE

GENERAL RELEASE

1.  For valuable consideration, the adequacy of which is hereby acknowledged, the undersigned (“Participant”), for himself, his spouse, heirs, administrators, children, representatives, executors, successors, assigns, and all other persons claiming through Participant, if any (collectively, “Releasers”), knowingly and voluntarily releases and forever discharges Tellabs, Inc., its affiliates, subsidiaries, divisions, successors and assigns and the current, future and former employees, officers, directors, trustees and agents thereof (collectively referred to throughout this General Release as “Company”) from any and all claims, causes of action, demands, fees and liabilities of any kind whatsoever, whether known or unknown, against Company, Participant has, has ever had or may have as of the date of execution of this General Release, including, but not limited to, any alleged violation of:

•The National Labor Relations Act, as amended;

•Title VII of the Civil Rights Act of 1964, as amended;

•The Civil Rights Act of 1991, as amended;

•Sections 1981 through 1988 of Title 42 of the United States Code, as amended;

•The Employee Retirement Income Security Act of 1974, as amended;

•The Immigration Reform and Control Act, as amended;

•The Americans with Disabilities Act of 1990, as amended;

•The Age Discrimination in Employment Act of 1967, as amended;

•The Older Workers Benefit Protection Act of 1990, as amended;

•The Worker Adjustment and Retraining Notification Act, as amended;

•The Occupational Safety and Health Act, as amended;

•The Family and Medical Leave Act of 1993, as amended;

•Any other federal, state or local civil or human rights law or any other local, state or federal law, regulation or ordinance; or

•Any public policy, contract, tort, or common law.

Notwithstanding anything herein to the contrary, this General Release shall not apply to: (i) Participant’s rights of indemnification and directors and officers liability insurance coverage to which he was entitled immediately prior to [INSERT DATE] with regard to his service as an

officer of Company; (ii) Participant’s rights under any tax-qualified pension or claims for accrued vested benefits under any other employee benefit plan, policy or arrangement maintained by Company or under COBRA; (iii) Participant’s rights under the provisions of the Company’s Executive Continuity and Protection Program which are intended to survive termination of employment; or (iv) Participant’s rights as a stockholder.  Excluded from this General Release are any claims which cannot be waived by law.

[For Current/Former California Residents Only:]  This General Release is intended to constitute a release of all of the claims referenced herein, known or unknown, suspected or unsuspected.  Participant hereby expressly waives any rights and benefits conferred by Section 1542 of the California Civil Code which provides:  “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”

2.Participant acknowledges and recites that:

(a)Participant has executed this General Release knowingly and voluntarily;

(b)Participant has read and understands this General Release in its entirety, including the waiver of rights under the Age Discrimination in Employment Act;

(c)Participant has been advised and directed orally and in writing (and this subparagraph (c) constitutes such written direction) to seek legal counsel and any other advice he wishes with respect to the terms of this General Release before executing it;

(d)Participant has sought such counsel, or freely and voluntarily waives the right to consult with counsel, and Participant has had an opportunity, if he so desires, to discuss with counsel the terms of this General Release and their meaning;

(e)Participant enters into this General Release knowingly and voluntarily, without duress or reservation of any kind, and after having given the matter full and careful consideration; and

(f)Participant has been offered 21 calendar days after receipt of this General Release to consider its terms before executing it.

3.This General Release shall be governed by the internal laws (and not the choice of law principles) of the State of Illinois, except for the application of pre-emptive federal law.

4.Participant shall have 7 days from the date hereof to revoke this General Release by providing written notice of the revocation to Company’s General Counsel, in which event this General Release shall be unenforceable and null and void.

Date:
	[Participant’s Name]

EX-11

EXHIBIT 11

TELLABS, INC.

COMPUTATION OF PER SHARE EARNINGS

(In millions, except per share amounts)

	Three Months Ended
	4/1/05		4/2/04
Numerator:
Net earnings	$	0.7	$	13.4
Denominator:
Denominator for basic earnings per share-
Weighted-average shares outstanding	455.8		415.2
Effect of dilutive securities:
Employee stock options and awards	3.0		5.7
Denominator for diluted earnings per share-
Adjusted weighted-average shares outstanding and assumed conversions	458.8		420.9
Net earnings per share - basic	$	0.00	$	0.03
Net earnings per share - diluted	$	0.00	$	0.03

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 quarterly report on Form 10-Q of Tellabs, Inc.;

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

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

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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: May 10, 2005
	/s/ Krish Prabhu
	Krish 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 quarterly report on Form 10-Q of Tellabs, Inc.;

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

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

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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: May 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 Quarterly Report of Tellabs, Inc. (the “Company”) on Form 10-Q for the quarter ended April 1, 2005, 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 Prabhu

Krish Prabhu

Chief Executive Officer

Date: May 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 Quarterly Report of Tellabs, Inc. (the “Company”) on Form 10-Q for the quarter ended April 1, 2005, 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: May 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.