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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

|           |  |                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                        
|           |  |                                                                                        
|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2003

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to

Commission file Number: 0-9692

TELLABS, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Common Shares, $.01 Par Value   412,895,751 shares outstanding on June 27,
2003.





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TABLE OF CONTENTS



|                                                |                                                                                               |                                                             |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                  
|                                                | Item 1. Financial Statements                                                                 
|                                                |                                                                                               | CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF OPERATIONS
|                                                |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                      
|                                                |                                                                                               | CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW 
|                                                |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS       
|                                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                | Item 4. Disclosure Controls and Procedures                                                   
|PART II. OTHER INFORMATION                     
|                                                | Item 1. Legal Proceedings                                                                    
|                                                | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                      
|Certification                                  
|Certification                                  
|Agreement and Plan of Merger and Reorganization
|Amend. to Agreement & Plan of Merger & Reorgan.



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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 Financial Condition and Results of Operations |  |  |  | 
|Item 3         |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |  |  | 
|Item 4         |  | Disclosure Controls and Procedures                                                    |  |  |  | 
|PART II        |  | OTHER INFORMATION                                                                     |  |  |  | 
|Item 1         |  | Legal Proceedings                                                                     |  |  |  | 
|Item 4         |  | Submission of Matters to a Vote of Security Holders                                   |  |  |  | 
|Item 6         |  | Exhibits and Reports on Form 8-K                                                      |  |  |  | 
|SIGNATURE      |  |                                                                                       |  |  |  |  |  | 
|CERTIFICATIONS |  |                                                                                       |  |  |  |  |  | 

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##### Table of Contents









PART I. FINANCIAL INFORMATION

Item 1. Financial Statements




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

|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |       |  
|------------------------------------------- | --------------------------------------------- | ------- | ------------------ | ------- | ---------------- | ------- | ------ | ------- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                            |                                               |         | Three Months Ended |         | Six Months Ended
|(In millions, except per-share data)        |                                               | 6/27/03 |                    | 6/28/02 |                  | 6/27/03 |        | 6/28/02
|                                            |                                               |         |                    |         |                  |         |        |        
|Net Sales                                   |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |      
|                                            | Product and other                             |         | $                  | 195.1   |                  |         | $      | 300.5   |   |   | $      | 381.8 |   |   | $      | 620.3 |  
|                                            | Services                                      |         |                    | 39.0    |                  |         |        | 44.1    |   |   |        | 74.8  |   |   |        | 95.8  |  
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |       |  
|                                            |                                               |         | 234.1              |         |                  |         | 344.6  |         |   |   | 456.6  |       |   |   | 716.1  |      
|Cost of Sales                               |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |      
|                                            | Product and other                             |         |                    | 160.9   |                  |         |        | 260.3   |   |   |        | 259.6 |   |   |        | 423.4 |  
|                                            | Services                                      |         |                    | 28.7    |                  |         |        | 34.9    |   |   |        | 59.0  |   |   |        | 68.3  |  
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |       |  
|                                            |                                               |         | 189.6              |         |                  |         | 295.2  |         |   |   | 318.6  |       |   |   | 491.7  |      
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |      
|Gross Profit                                |                                               |         | 44.5               |         |                  |         | 49.4   |         |   |   | 138.0  |       |   |   | 224.4  |      
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |      
|Operating expenses                          |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |      
|                                            | Selling, general and administrative           |         |                    | 58.7    |                  |         |        | 78.8    |   |   |        | 123.4 |   |   |        | 156.0 |  
|                                            | Research and development                      |         |                    | 74.6    |                  |         |        | 86.3    |   |   |        | 151.5 |   |   |        | 176.9 |  
|                                            | Purchased in-process research and development |         |                    |        |                  |         |        |        |   |   |        |      |   |   |        | 5.4   |  
|                                            | Intangible asset amortization                 |         |                    | 2.5     |                  |         |        | 2.3     |   |   |        | 4.9   |   |   |        | 4.0   |  
|                                            | Restructuring & other charges                 |         |                    | 26.1    |                  |         |        | 107.9   |   |   |        | 26.1  |   |   |        | 107.9 |  
|                                            |                                               |         | 161.9              |         |                  |         | 275.3  |         |   |   | 305.9  |       |   |   | 450.2  |      
|Operating Loss                              |                                               |         | (117.4             | )       |                  |         | (225.9 | )       |   |   | (167.9 | )     |   |   | (225.8 | )    
|Other Income (Expense)                      |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |      
|                                            | Interest income                               |         |                    | 9.2     |                  |         |        | 8.5     |   |   |        | 17.9  |   |   |        | 16.0  |  
|                                            | Interest expense                              |         |                    | (0.2    | )                |         |        | (0.3    | ) |   |        | (0.2  | ) |   |        | (0.8  | )
|                                            | Other                                         |         |                    | (1.9    | )                |         |        | (.4     | ) |   |        | (3.5  | ) |   |        | .9    |  
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |       |  
|                                            |                                               |         | 7.1                |         |                  |         | 7.8    |         |   |   | 14.2   |       |   |   | 16.1   |      
|Loss Before Income Tax                      |                                               |         | (110.3             | )       |                  |         | (218.1 | )       |   |   | (153.7 | )     |   |   | (209.7 | )    
|                                            | Income tax expense (benefit)                  |         |                    | .4      |                  |         |        | (75.3   | ) |   |        | (.1   | ) |   |        | (72.2 | )
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |      
|Net Loss                                    |                                               | $       | (110.7             | )       |                  | $       | (142.8 | )       |   | $ | (153.6 | )     |   | $ | (137.5 | )    
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |      
|Loss per Share                              |                                               | $       | (0.27              | )       |                  | $       | (0.35  | )       |   | $ | (0.37  | )     |   | $ | (0.33  | )    
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |       |  
|Average number of common shares outstanding |                                               |         | 412.5              |         |                  |         | 411.2  |         |   |   | 412.4  |       |   |   | 410.9  |      
|                                            |                                               |         |                    |         |                  |         |        |         |   |   |        |       |   |   |        |       |  

The accompanying notes are an integral part of these statements.

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TELLABS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |         |      |     | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------- | --------------- | ----------------------------------------------------- | ------- | ------- | --- | -------- | ------- | ---- | --- | 
|                                           |                                                                                                                 |                 |                                                       |         | 6/27/03 |     | 12/27/02
|                                           |                                                                                                                 |                 |                                                       |         |         |     |         
|(In millions, except share amounts)        |                                                                                                                 | (Unaudited)     |                                                       |         |         |    
|Assets                                     |                                                                                                                 |                 |                                                       |         |         |     |          |        
|Current Assets                             |                                                                                                                 |                 |                                                       |         |         |     |          |        
|                                           | Cash and cash equivalents                                                                                       |                 | $                                                     | 247.3   |         |     | $        | 453.6   |     
|                                           | Investments in marketable securities                                                                            |                 |                                                       | 803.4   |         |     |          | 565.6   |     
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |         |     
|                                           |                                                                                                                 |                 | 1,050.7                                               |         |         |     | 1,019.2  |        
|                                           | Accounts receivable, net                                                                                        |                 |                                                       | 165.9   |         |     |          | 216.8   |     
|                                           | Inventories
Raw materials                                                                                       |                 |                                                       | 59.6    |         |     |          | 92.4    |     
|                                           |                                                                                                                 | Work in process |                                                       |         | 17.0    |     |          |         | 15.5 |    
|                                           |                                                                                                                 | Finished goods  |                                                       |         | 52.2    |     |          |         | 66.6 |    
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        
|                                           |                                                                                                                 |                 | 128.8                                                 |         |         |     | 174.5    |        
|                                           | Income taxes receivable                                                                                         |                 |                                                       | 30.6    |         |     |          | 174.8   |     
|                                           | Miscellaneous receivables and other current assets                                                              |                 |                                                       | 59.3    |         |     |          | 31.2    |     
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        
|Total Current Assets                       |                                                                                                                 |                 | 1,435.3                                               |         |         |     | 1,616.5  |        
|Property, plant and equipment              |                                                                                                                 |                 | 746.0                                                 |         |         |     | 770.2    |        
|Less: accumulated depreciation             |                                                                                                                 |                 | 353.3                                                 |         |         |     | 349.3    |        
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        
|                                           |                                                                                                                 |                 | 392.7                                                 |         |         |     | 420.9    |        
|Goodwill                                   |                                                                                                                 |                 | 589.5                                                 |         |         |     | 455.7    |        
|Intangible assets, net                     |                                                                                                                 |                 | 72.5                                                  |         |         |     | 70.1     |        
|Other Assets                               |                                                                                                                 |                 | 134.9                                                 |         |         |     | 142.5    |        
|Total Assets                               |                                                                                                                 | $               | 2,624.9                                               |         |         | $   | 2,705.7  |        
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        
|Liabilities                                |                                                                                                                 |                 |                                                       |         |         |     |          |        
|Current Liabilities                        |                                                                                                                 |                 |                                                       |         |         |     |          |        
|                                           | Accounts payable                                                                                                |                 | $                                                     | 59.3    |         |     | $        | 77.4    |     
|                                           | Accrued liabilities                                                                                             |                 |                                                       | 83.4    |         |     |          | 94.5    |     
|                                           | Accrued restructuring and other charges                                                                         |                 |                                                       | 72.3    |         |     |          | 85.4    |     
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        
|Total Current Liabilities                  |                                                                                                                 |                 | 215.0                                                 |         |         |     | 257.3    |        
|Accrued long-term restructuring charges    |                                                                                                                 |                 | 53.7                                                  |         |         |     | 45.5     |        
|Income Taxes                               |                                                                                                                 |                 | 87.4                                                  |         |         |     | 82.9     |        
|Other long-term liabilities                |                                                                                                                 |                 | 31.4                                                  |         |         |     | 29.7     |        
|Stockholders Equity                       |                                                                                                                 |                 |                                                       |         |         |     |          |        
|                                           | Preferred stock: authorized 5,000,000 shares of $.01 par
value;
no shares issued and outstanding                |                 |                                                       |        |         |     |          |        |     
|                                           | Common stock: 1,000,000,000 shares of $.01 par value;
416,145,751 and 415,440,414 shares issued and outstanding |                 |                                                       | 4.2     |         |     |          | 4.1     |     
|                                           | Additional paid-in capital                                                                                      |                 |                                                       | 549.9   |         |     |          | 543.6   |     
|                                           | Treasury stock, at cost: 3,250,000 shares                                                                       |                 |                                                       | (129.6  | )       |     |          | (129.6  | )   
|                                           | Deferred compensation expense                                                                                   |                 |                                                       | (15.3   | )       |     |          | (19.3   | )   
|                                           | Accumulated other comprehensive income (loss)
Cumulative translation adjustment                                 |                 |                                                       | 32.9    |         |     |          | (57.4   | )   
|                                           |                                                                                                                 |                 | Unrealized net gains on available-for-sale securities |         |         | 5.3 |          |         |      | 5.4 | 
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        
|                                           | Total accumulated other comprehensive income (loss)                                                             |                 |                                                       | 38.2    |         |     |          | (52.0   | )   
|                                           | Retained earnings                                                                                               |                 |                                                       | 1,790.0 |         |     |          | 1,943.5 |     
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        
|Total Stockholders Equity                 |                                                                                                                 |                 | 2,237.4                                               |         |         |     | 2,290.3  |        
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        
|Total Liabilities and Stockholders Equity |                                                                                                                 | $               | 2,624.9                                               |         |         | $   | 2,705.7  |        
|                                           |                                                                                                                 |                 |                                                       |         |         |     |          |        

The accompanying notes are an integral part of these statements.

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

|                                                     |                                                                                 |                                 |        |                  |       |   |        |        |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------- | ------ | ---------------- | ----- | - | ------ | ------ | ------ | -
|                                                     |                                                                                 |                                 |        | Six Months Ended
|(In millions)                                        |                                                                                 | 06/27/03                        |        | 06/28/02        
|                                                     |                                                                                 |                                 |        |                 
|Operating Activities                                 |                                                                                 |                                 |        |                  |       |   |        |       
|                                                     | Net Loss                                                                        |                                 | $      | (153.6           | )     |   | $      | (137.5 | )     
|                                                     | Adjustments to reconcile net loss to net cash
provided by operating activities: |                                 |        |                  |       |   |        |        |       
|                                                     |                                                                                 | Restructuring and other charges |        |                  | 80.4  |   |        |        | 219.1  |  
|                                                     |                                                                                 | Depreciation and amortization   |        |                  | 60.6  |   |        |        | 72.1   |  
|                                                     | Other                                                                           |                                 |        | 3.7              |       |   |        | (12.0  | )     
|                                                     | Net change in assets and liabilities, net of effects
from acquisitions:         |                                 |        |                  |       |   |        |        |       
|                                                     |                                                                                 | Accounts receivable             |        |                  | 60.7  |   |        |        | 138.1  |  
|                                                     |                                                                                 | Inventories                     |        |                  | 23.9  |   |        |        | 78.1   |  
|                                                     |                                                                                 | Other current assets            |        |                  | (26.2 | ) |        |        |       |  
|                                                     |                                                                                 | Long-term assets                |        |                  | 8.1   |   |        |        | (23.6  | )
|                                                     |                                                                                 | Accounts payable                |        |                  | (31.0 | ) |        |        | (11.1  | )
|                                                     |                                                                                 | Accrued liabilities             |        |                  | (5.9  | ) |        |        | (28.7  | )
|                                                     |                                                                                 | Restructuring liabilities       |        |                  | (45.5 | ) |        |        | (107.1 | )
|                                                     |                                                                                 | Income taxes                    |        |                  | 149.1 |   |        |        | (19.0  | )
|                                                     |                                                                                 | Other, net                      |        |                  | (.1   | ) |        |        | (2.8   | )
|                                                     |                                                                                 |                                 |        |                  |       |   |        |       
|Net Cash Provided by Operating Activities            |                                                                                 |                                 | 124.2  |                  |       |   | 165.6  |       
|Investing Activities                                 |                                                                                 |                                 |        |                  |       |   |        |       
|                                                     | Acquisition of property, plant and equipment, net                               |                                 |        | (7.5             | )     |   |        | (26.0  | )     
|                                                     | Proceeds from sales and maturities of investments                               |                                 |        | 1,003.9          |       |   |        | 303.2  |       
|                                                     | Payments for purchases of investments                                           |                                 |        | (1,226.8         | )     |   |        | (461.7 | )     
|                                                     | Payments for acquisitions, net of cash acquired                                 |                                 |        | (136.6           | )     |   |        | (286.1 | )     
|                                                     |                                                                                 |                                 |        |                  |       |   |        |       
|Net Cash Used for Investing Activities               |                                                                                 |                                 | (367.0 | )                |       |   | (470.6 | )     
|Financing Activities                                 |                                                                                 |                                 |        |                  |       |   |        |       
|                                                     | Payments of notes payable and capital leases                                    |                                 |        |                 |       |   |        | (8.2   | )     
|                                                     | Proceeds from issuance of common stock                                          |                                 |        | 1.2              |       |   |        | 1.7    |       
|                                                     |                                                                                 |                                 |        |                  |       |   |        |       
|Net Cash Provided by (Used for) Financing Activities |                                                                                 |                                 | 1.2    |                  |       |   | (6.5   | )     
|Effect of Exchange Rate Changes on Cash              |                                                                                 |                                 | 35.4   |                  |       |   | 45.5   |       
|                                                     |                                                                                 |                                 |        |                  |       |   |        |       
|Net Increase (Decrease) in Cash and Cash Equivalents |                                                                                 |                                 | (206.2 | )                |       |   | (266.0 | )     
|Cash and Cash Equivalents at Beginning of Year       |                                                                                 |                                 | 453.5  |                  |       |   | 701.9  |       
|                                                     |                                                                                 |                                 |        |                  |       |   |        |       
|Cash and Cash Equivalents at End of Quarter          |                                                                                 | $                               | 247.3  |                  |       | $ | 435.9  |       
|                                                     |                                                                                 |                                 |        |                  |       |   |        |       
|Other Information                                    |                                                                                 |                                 |        |                  |       |   |        |       
|                                                     | Interest paid                                                                   |                                 | $      | 0.0              |       |   | $      | 0.5    |       
|                                                     | Income taxes paid                                                               |                                 | $      | 19.4             |       |   | $      | 21.1   |       
|                                                     |                                                                                 |                                 |        |                  |       |   |        |       

The accompanying notes are an integral part of these statements.

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TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of
Tellabs, Inc. (Tellabs or the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and the requirements of Form 10-Q and applicable rules of Regulation S-X and
accordingly do not include all disclosures normally required by generally
accepted accounting principles for complete financial statements. Accordingly,
the financial statements and notes herein should be read in conjunction with
the Companys Annual Report on Form 10-K for the year ended December 27, 2002.

In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting of normal recurring
accruals) that are necessary for a fair presentation. Operating results for
interim periods are not necessarily indicative of operating results for the
full year.

Certain amounts from prior periods have been reclassified to conform to the
current period presentation. These reclassifications had no impact on net
earnings or stockholders equity as previously reported.

2. New Accounting Pronouncements

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities, is entitled to receive a majority of the
entitys residual returns, or both. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning
after June 15, 2003. The Company will adopt FIN 46 in the third quarter of
2003 and is currently evaluating the effect, if any, that the adoption of FIN
46 will have on its consolidated financial statements.

In June 2003, the FASB issued SFAS 149, an Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.This Statement amends and
clarifies financial accounting and reporting for hedging activities and
derivative instruments, including certain derivative instruments embedded in
other contracts. This Statement is effective for contracts entered into or
modified after June 30, 2003. The Company will adopt SFAS 149 in the third
quarter of 2003 and is currently evaluating the effect, if any, that its
adoption will have on its consolidated financial statements.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, this Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
Statement is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company will adopt SFAS 150 in the third quarter of
2003 and is currently evaluating the effect, if any, that its adoption will
have on its consolidated financial statements.

3. Restructuring and Other Charges

In April 2003, the Companys management approved a plan to further restructure
its operations due to the difficult market conditions in the telecommunications
industry. The Company is taking these actions to align its spending levels
with its levels of revenues in order to return to profitability. The major
components of the restructuring efforts included workforce reductions and the
closure and consolidation of excess facilities. Other charges included the
write-off of excess inventories, an accrual for excess inventory purchase
commitments, and the write-off of related fixed assets. Total charges
associated with this plan were $86.7 million. This was partially offset by a
reversal of $6.4 million of previously recorded restructuring costs relating to
severance and the receipt of greater than expected proceeds on the disposal of
fixed assets. The net charge during the second quarter of 2003 was $80.3
million.

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In April 2002, the Companys management approved a plan to restructure its
operations. The major components of the restructuring efforts included
workforce reductions, the closure and consolidation of excess facilities, and a
review of the sufficiency of the reserves for excess leased facilities from the
Companys 2001 restructuring programs. Other charges included the write-off of
excess inventories, an accrual for excess inventory purchase commitments, and
the write-off of related fixed assets. Total charges associated with this plan
were $219.1 million.

The Company underwent a total of two restructuring activities during 2002.
Total charges associated with these plans in 2002 were $287.1 million. For
further discussion of the Companys 2002 restructuring activities, refer to the
Companys Annual Report on Form 10-K for the year ended December 27, 2002. The
remaining balance of these restructuring reserves as of December 27, 2002,
amounted to $130.9 million.

Below is an analysis of the restructuring and other charges recorded during the
second quarter of 2003 and 2002 by major income statement classification:

|                                             |  |                                           |  |          |      |          |      |   |      |   |       | 
|-------------------------------------------- |  | ----------------------------------------- |  | -------- | ---- | -------- | ---- | - | ---- | - | ----- | 
|(in millions)                                |  |                                           |  |          |      |          |      |   |      |   |       | 
|Income Statement Classification              |  | Description                               |  | 06/27/03 |      | 06/28/02
|                                             |  |                                           |  |          |      |         
|Product Cost of Sales                        |  | Inventory write-offs                      |  | $        | 33.4 |          |      | $ | 53.2 |  
|                                             |  | Excess purchase commitments               |  |          | 20.9 |          |      |   | 58.0 |  
|Restructuring and other charges              |  | Severance and related expenses            |  |          | 15.0 |          |      |   | 28.7 |  
|                                             |  | Consolidation of excess leased facilities |  |          | 0.5  |          |      |   | 34.2 |  
|                                             |  | Disposal of property, plant and equipment |  |          | 14.7 |          |      |   | 41.9 |  
|                                             |  | Other obligations                         |  |          | 2.2  |          |      |   | 3.1  |  
|                                             |  |                                           |  |          |      |          |      |   |      |   |       | 
|                                             |  |                                           |  |          |      | $        | 86.7 |   |      | $ | 219.1 | 
|                                             |  |                                           |  |          |      |          |      |   |      |   |       | 
|Adjustments to prior Restructuring
Reserves: |  | Reversal of excess severance              |  |          | (1.4 | )        |      |   |     |  
|                                             |  | Proceeds from fixed asset disposals       |  |          | (5.0 | )        |      |   |      |  
|                                             |  |                                           |  |          |      |          |      |   |      |   |       | 
|Total Adjustments                            |  |                                           |  |          |      |          | (6.4 | ) |      |   |       | 
|                                             |  |                                           |  |          |      |          |      |   |      |   |       | 
|Net Restructuring charge                     |  |                                           |  |          |      | $        | 80.3 |   |      | $ | 219.1 | 
|                                             |  |                                           |  |          |      |          |      |   |      |   |       | 

The following table displays the Companys restructuring activity during the
first six months of 2003 and the status of the reserves at June 27, 2003:

|                                          |  |          |       |          |  |          |       |          |  |            |     |          |  |          |       |          |  |   |      |  |  |   |       |   |  |   |       |   |  |   |       | 
|----------------------------------------- |  | -------- | ----- | -------- |  | -------- | ----- | -------- |  | ---------- | --- | -------- |  | -------- | ----- | -------- |  | - | ---- |  |  | - | ----- | - |  | - | ----- | - |  | - | ----- | 
|Description of                            |  | Balance  |       | Cash     |  | Non-Cash |       | Balance  |  | Additional |     | Cash     |  | Non-Cash |       | Balance 
|reserve (in millions)                     |  | 12/27/02 |       | Activity |  | Activity |       | 03/28/03 |  | Reserves   |     | Activity |  | Activity |       | 06/27/03
|                                          |  |          |       |          |  |          |       |          |  |            |     |          |  |          |       |         
|Inventory write-offs                      |  | $        | 0.0   |          |  | $        | 0.0   |          |  | $          | 0.0 |          |  | $        | 0.0   |          |  | $ | 33.4 |  |  | $ | 0.0   |   |  | $ | (33.4 | ) |  | $ | 0.0   | 
|Excess purchase
commitments               |  |          | 30.0  |          |  |          | (0.2  | )        |  |            | 0.8 |          |  |          | 30.6  |          |  |   | 20.9 |  |  |   | (2.0  | ) |  |   | 0.8   |   |  |   | 50.3  | 
|Severance and
related expenses            |  |          | 9.5   |          |  |          | (6.4  | )        |  |            | 0.7 |          |  |          | 3.8   |          |  |   | 15.0 |  |  |   | (9.8  | ) |  |   | (1.6  | ) |  |   | 7.4   | 
|Consolidation of
excess leased
facilities |  |          | 81.8  |          |  |          | (10.7 | )        |  |            | 0.3 |          |  |          | 71.4  |          |  |   | 0.5  |  |  |   | (6.7  | ) |  |   | 0.4   |   |  |   | 65.6  | 
|Disposal of
property, plant and
equipment |  |          |      |          |  |          |      |          |  |            |    |          |  |          |      |          |  |   | 14.7 |  |  |   |      |   |  |   | (14.7 | ) |  |   |      | 
|Other obligations                         |  |          | 9.6   |          |  |          | (7.5  | )        |  |            | 0.3 |          |  |          | 2.4   |          |  |   | 2.2  |  |  |   | (2.2  | ) |  |   | 0.3   |   |  |   | 2.7   | 
|                                          |  |          |       |          |  |          |       |          |  |            |     |          |  |          |       |          |  |   |      |  |  |   |       |   |  |   |       |   |  |   |       | 
|                                          |  | $        | 130.9 |          |  | $        | (24.8 | )        |  | $          | 2.1 |          |  | $        | 108.2 |          |  | $ | 86.7 |  |  | $ | (20.7 | ) |  | $ | (48.2 | ) |  | $ | 126.0 | 
|                                          |  |          |       |          |  |          |       |          |  |            |     |          |  |          |       |          |  |   |      |  |  |   |       |   |  |   |       |   |  |   |       | 

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Inventory write-offs and excess purchase commitment accrual

Included in product cost of sales during the second quarter of 2003 were
charges of $54.3 million related to the write-off of inventories and accrual
for non-cancelable inventory purchase commitments deemed to be excess. These
charges related primarily to both items that became excess or obsolete as a
result of product feature and rollout strategy changes, as well as, excess
items that resulted from lower forecasted demand. The inventory write-offs were
recorded as a reduction to inventory, while the reserve for excess
non-cancelable purchase commitments was recorded to accrued restructuring and
other charges. The Company is working towards negotiating the settlement of
all purchase commitments within the next twelve months.

Severance and related expenses

During the second quarter of 2003, the Company recorded charges of $15.0
million for severance pay and related fringe benefits for the reduction of
approximately 665 employees worldwide resulting from its April 2003
restructuring initiative. The Company anticipates paying out the majority of
the remaining severance costs over the last half of 2003. During the quarter
the Company reversed $1.4 million in severance and related charges from
previous restructurings that were the result of lower than expected costs from
those earlier actions.

Consolidation of excess leased facilities

During the second quarter of 2003, the Company recorded $0.5 million in charges
related to the consolidation of excess facilities. This charge was attributable
to the closure or downsizing of certain locations.

Disposal of property, plant and equipment

The Company recorded a total of $14.7 million related to the disposal of
property, plant and equipment as part of its April 2003 restructuring. The
property, plant and equipment consisted primarily of manufacturing equipment,
lab and data equipment, and computer software. This equipment is disposed of
primarily by conducting periodic open bid auctions with items sold to the
highest bidders. During the quarter the Company also recorded $5.0 million in
proceeds on asset disposals that exceeded the original estimates.

Other obligations

During the second quarter of 2003, the Company recorded $2.2 million in charges
for various other obligations that arose as a direct result of its April 2003
restructuring activities. These obligations primarily relate to software
licenses that have ceased to be used due to the workforce reductions that have
occurred.

Of the remaining $126.0 million reserves as of June 27, 2003, $72.3 million is
classified as short-term as it is expected to be paid in the next 12 months.
The long-term balance of $53.7 million will be paid over the remaining terms of
the facility leases which expire at various times through 2011.

4. Business Combinations

In June 2003, the Company acquired 100% of the outstanding preferred and common
stock of Vivace Networks, Inc. (Vivace), for $129.8 million in cash and
options assumed. Vivace was a leading provider of flexible, high-performance
multi-service switch routers.

Cash paid for Vivace consisted of the liquidation of the holdings of preferred
stockholders in the amount of $111.0 million and $13.6 million for the holders
of common stock for a total cash consideration of $124.6 million. The fair
value of options assumed was $6.4 million and was determined using the
Black-Scholes option valuation model. Deferred compensation expense of $1.3
million was also recorded and represents the intrinsic value of the unvested
Vivace stock options on the acquisition date, which will be recognized over the
remaining service period of the options.
The purchase price allocation has been recorded primarily to Goodwill and is
preliminary, awaiting the conclusion of a study on the possible allocation of
purchase price toward intangible assets and in-process research and
development, a final determination of deferred taxes related to the
acquisition, and other acquisition costs.

The acquisition was accounted for as a purchase, in accordance with the
guidance in SFAS 141, Business Combinations.Because the acquisition occurred
late in the second quarter (June 18, 2003), any difference between Vivaces
actual expense accruals and the amount of estimated expense accruals included
in Tellabs second-quarter consolidated results will be included in results for
the third quarter. The Company

8



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believes the amount of such additional expense accruals would not be meaningful
to either second- or third-quarter results of operations or financial
condition.

Pro forma combined results of operations prepared assuming the acquisition had
occurred at the beginning of the comparative periods are not being presented
since they would not differ materially from reported results.

Also as a result of the merger the Company entered into an employee retention
incentive program which will award approximately 1.3 million shares of the
Companys stock to eligible employees if certain employment and revenue targets
are achieved over a two year timeframe. The estimated cost of this program is
approximately $10.0 million and will be recognized ratably over the two year
timeframe.

5. Stock Options

Under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
and SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of SFAS No. 123, the Company has elected to continue
to apply Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and its related interpretations in accounting for
its stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plan grants. Had compensation cost for
the Companys 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, the Companys net loss and loss per share
would have been reduced to the pro forma amounts indicated in the following
chart:

|                                                                                                                                            |             |           |                    |           |                  |           |         |           |   |  |         |        |   |  |         |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | --------- | ------------------ | --------- | ---------------- | --------- | ------- | --------- | - |  | ------- | ------ | - |  | ------- | ------ | -
|                                                                                                                                            |             |           | Three Months Ended |           | Six Months Ended
|(In millions, except per-share amounts)                                                                                                     |             | 6/27/2003 |                    | 6/28/2002 |                  | 6/27/2003 |         | 6/28/2002
|                                                                                                                                            |             |           |                    |           |                  |           |         |          
|Net Loss, as reported                                                                                                                       |             |           | ($110.7            | )         |                  |           | ($142.8 | )         |   |  | ($153.6 | )      |   |  | ($137.5 | )     
|Plus: stock-based employee compensation
expense included in reported net
earnings, net of related tax effects                               |             |           | 2.7                |           |                  |           | 2.7     |           |   |  | 5.4     |        |   |  | 4.5     |       
|Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects |             |           | (19.8              | )         |                  |           | (31.9   | )         |   |  | (36.5   | )      |   |  | (68.5   | )     
|                                                                                                                                            |             |           |                    |           |                  |           |         |           |   |  |         |        |   |  |         |       
|Pro forma net loss                                                                                                                          |             |           | ($127.8            | )         |                  |           | ($172.0 | )         |   |  | ($184.7 | )      |   |  | ($201.5 | )     
|                                                                                                                                            |             |           |                    |           |                  |           |         |           |   |  |         |        |   |  |         |       
|Loss per common share:                                                                                                                      |             |           |                    |           |                  |           |         |           |   |  |         |        |   |  |         |       
|                                                                                                                                            | As reported |           |                    | ($0.27    | )                |           |         | ($0.35    | ) |  |         | ($0.37 | ) |  |         | ($0.33 | )
|                                                                                                                                            | Pro forma   |           |                    | ($0.31    | )                |           |         | ($0.42    | ) |  |         | ($0.45 | ) |  |         | ($0.49 | )
|Loss per common share, assuming dilution:                                                                                                   |             |           |                    |           |                  |           |         |           |   |  |         |        |   |  |         |       
|                                                                                                                                            | As reported |           |                    | ($0.27    | )                |           |         | ($0.35    | ) |  |         | ($0.37 | ) |  |         | ($0.33 | )
|                                                                                                                                            | Pro forma   |           |                    | ($0.31    | )                |           |         | ($0.42    | ) |  |         | ($0.45 | ) |  |         | ($0.49 | )

The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 2003 and 2002:

|                        |  |           |      |          |  |  |      |  
|----------------------- |  | --------- | ---- | -------- |  |  | ---- | -
|                        |  | 2003      |      | 2002    
|                        |  |           |      |         
|Expected volatility     |  |           | 74.2 | %        |  |  | 68.9 | %
|Risk-free interest rate |  |           | 2.78 | %        |  |  | 4.1  | %
|Expected life           |  | 5.25years |      | 5.6years
|Expected dividend yield |  |           | 0.0  | %        |  |  | 0.0  | %

The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. It requires the use of assumptions that are subjective, such as
the expected volatility of the exercise price and the expected remaining life
of the

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option. Since the Companys options have significantly different
characteristics from traded options, and since the changes in the subjective
input assumptions can result in materially different fair value estimates, in
managements opinion, the existing option pricing models do not necessarily
provide a reliable single measure of the fair value of the options and do not
give a meaningful comparison of companies in a given industry.

6. Comprehensive Loss

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

|                                   |                            |           |                    |           |                  |           |         |           |  |  |         |      |  |  |         |      |  
|---------------------------------- | -------------------------- | --------- | ------------------ | --------- | ---------------- | --------- | ------- | --------- |  |  | ------- | ---- |  |  | ------- | ---- | -
|                                   |                            |           | Three months ended |           | Six months ended
|(In millions)                      |                            | 6/27/2003 |                    | 6/28/2002 |                  | 6/27/2003 |         | 6/28/2002
|                                   |                            |           |                    |           |                  |           |         |          
|Net Loss                           |                            |           | ($110.7            | )         |                  |           | ($142.8 | )         |  |  | ($153.6 | )    |  |  | ($137.5 | )   
|Other comprehensive income
(loss): |                            |           |                    |           |                  |           |         |           |  |  |         |      |  |  |         |     
|                                   | Net Unrealized Gain (Loss) |           |                    | 1.4       |                  |           |         | .5        |  |  |         |     |  |  |         | (.9  | )
|                                   | Cumulative Translation     |           |                    |           |                  |           |         |           |  |  |         |      |  |  |         |      |  
|                                   | Adjustment                 |           |                    | 65.1      |                  |           |         | 73.3      |  |  |         | 90.3 |  |  |         | 69.9 |  
|                                   |                            |           |                    |           |                  |           |         |           |  |  |         |      |  |  |         |     
|Comprehensive Loss                 |                            |           | ($44.2             | )         |                  |           | ($69.0  | )         |  |  | ($63.3  | )    |  |  | ($68.5  | )   
|                                   |                            |           |                    |           |                  |           |         |           |  |  |         |      |  |  |         |     

7. Loss per Share

The following table sets forth the computation of the Companys loss per share:

|                                                                                                |                                     |           |                    |           |                  |           |         |           |  |  |         |       |  |  |         |       | 
|----------------------------------------------------------------------------------------------- | ----------------------------------- | --------- | ------------------ | --------- | ---------------- | --------- | ------- | --------- |  |  | ------- | ----- |  |  | ------- | ----- | 
|                                                                                                |                                     |           | Three Months Ended |           | Six Months Ended
|                                                                                                |                                     |           |                    |           |                 
|(In millions, except per-share amounts)                                                         |                                     | 6/27/2003 |                    | 6/28/2002 |                  | 6/27/2003 |         | 6/28/2002
|                                                                                                |                                     |           |                    |           |                  |           |         |          
|Numerator:                                                                                      |                                     |           |                    |           |                  |           |         |           |  |  |         |       |  |  |         |      
|Net Loss                                                                                        |                                     |           | ($110.7            | )         |                  |           | ($142.8 | )         |  |  | ($153.6 | )     |  |  | ($137.5 | )    
|Denominator:                                                                                    |                                     |           |                    |           |                  |           |         |           |  |  |         |       |  |  |         |      
|Denominator for basic earnings per share-                                                       |                                     |           |                    |           |                  |           |         |           |  |  |         |       |  |  |         |      
|                                                                                                | Weighted-average shares outstanding |           |                    | 412.5     |                  |           |         | 411.2     |  |  |         | 412.4 |  |  |         | 410.9 | 
|Effect of dilutive securities:                                                                  |                                     |           |                    |           |                  |           |         |           |  |  |         |       |  |  |         |      
|Employee stock options and awards                                                               |                                     |           |                   |           |                  |           |        |           |  |  |        |       |  |  |        |      
|                                                                                                |                                     |           |                    |           |                  |           |         |           |  |  |         |       |  |  |         |      
|Denominator for diluted earnings (loss) per
share-
adjusted weighted-average shares outstanding |                                     |           |                    |           |                  |           |         |           |  |  |         |       |  |  |         |      
|                                                                                                | And assumed conversions             |           |                    | 412.5     |                  |           |         | 411.2     |  |  |         | 412.4 |  |  |         | 410.9 | 
|Loss per share                                                                                  |                                     |           | ($0.27             | )         |                  |           | ($0.35  | )         |  |  | ($0.37  | )     |  |  | ($0.33  | )    
|Loss per share, assuming dilution                                                               |                                     |           | ($0.27             | )         |                  |           | ($0.35  | )         |  |  | ($0.37  | )     |  |  | ($0.33  | )    

8. Product Warranties

The Company offers warranties for all of its products. The specific terms and
conditions of those warranties vary depending upon the product sold. The
Company provides a basic limited warranty, including parts and labor, for all
products for a period up to five years. Factors that enter into the Companys
estimate of its warranty reserve include the number of units shipped,
historical and anticipated

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rates of warranty claims, and cost per claim. The following table presents the
changes in the Companys product warranty reserve:

|                                                              |  |                    |      |                  |  |   |      |  
|------------------------------------------------------------- |  | ------------------ | ---- | ---------------- |  | - | ---- | -
|                                                              |  | Three months ended |      | Six months ended
|(In millions)                                                 |  | June 27, 2003      |      | June 27, 2003   
|                                                              |  |                    |      |                 
|Total product warranty reserve at the beginning of the period |  | $                  | 14.0 |                  |  | $ | 13.9 |  
|Accruals for product warranties issued                        |  |                    | 6.4  |                  |  |   | 9.6  |  
|Settlements made during the period                            |  |                    | (3.8 | )                |  |   | (6.9 | )
|                                                              |  |                    |      |                  |  |   |      |  
|Total product warranty reserve at the end of the period       |  | $                  | 16.6 |                  |  | $ | 16.6 |  
|                                                              |  |                    |      |                  |  |   |      |  

9. Income Taxes

SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance
be established when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. This valuation allowance offsets the
value of tax assets related to the carryforward of tax deductions, operating
losses, and tax credits. While the Company expects to realize these benefits,
it also expects to continue to record a full valuation allowance on future U.S.
and certain non-U.S. tax benefits until an appropriate level of profitability
is attained.




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

Overview

Tellabs designs, manufactures, and markets communications equipment to
telecommunications service providers worldwide. The Companys customers include
incumbent local exchange carriers, independent telephone companies,
interexchange carriers, other local exchange carriers, original equipment
manufacturers, cellular and other wireless service companies, cable operators,
alternate service providers, competitive local exchange carriers, Internet
service providers and system integrators. The Company also provides
installation and professional services that support its product offerings.

In June 2003, the Company acquired 100% of the outstanding preferred and common
stock of Vivace Networks, Inc. (Vivace), renamed Tellabs San Jose, a leading
provider of flexible, high-performance multi-service edge switch routers. (See
Note 4: Business Combinations).The acquisition enables Tellabs to expand into
the high-growth global service provider edge router and switch market. The
acquisition brings two new complementary products to Tellabs that will become
the Tellabs® 8800 series: the Tellabs® 8860 multi-service switch router, which
offers 320 gigabits of full-duplex switching capacity and the Tellabs® 8820
multi-service switch router, a flexible high-performance service edge switching
platform that provides up to 16 gigabits of port density in a compact form
factor.

Tellabs optical networking systems are the primary strategic products the
Company offers to service providers in North America. These systems manage
network bandwidth to help service providers deliver voice, data and video
services while reducing operating costs. Product offerings include the Tellabs®
5000 series of digital-cross connect systems, the Tellabs® 5500 NGX and
Tellabs® 6500 transport switches and the Tellabs® 7100 series of optical
transport systems.

The Companys primary strategic offerings for service providers outside North
America are the next-generation SDH (synchronous digital hierarchy) transport
products and managed access systems. The Companys customers use these systems
to deliver voice and data services for businesses and consumer wireless
services. Products include the Tellabs® 6300 and Tellabs® 8000 series of
managed access and transport systems and the Tellabs® 7200 optical transport
system.

Included under the heading Other Products are the Tellabs® 2000 family of cable
telephony distribution systems, the Tellabs® 3000 family of broadband and
narrowband echo cancellers and Tellabs voice-quality enhancement (VQE)
solutions, and a small amount of other miscellaneous product revenue. Although
these products are sold to customers around the world, organizationally they
are managed as part of the North

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America business. In the future, this category will also contain revenues
generated by the Tellabs 8860 multi-service switch router and the Tellabs 8820
multi-service switch router.

The Company also generates revenue globally from professional services such as
product and system installation, network deployment, traffic management and
others. Revenue trends from professional services have generally followed the
revenue trend for product sales.

Beginning in the first half of 2001, telecommunications service providers,
particularly in the United States, began to significantly reduce their capital
spending. This began a period of significant change in the market conditions
within the telecommunications industry. Throughout this period the Company has
responded by undertaking actions to realign its business with the changes
taking place in the industry and its expectations for the future. Those
actions have included: reducing headcount from a peak of 9,200 in the first
quarter of 2001 to less than 4,200 at the end of the second quarter of 2003;
and closing four out of six manufacturing facilities. Throughout 2003 the
Company will continue to identify and implement actions to cut fixed costs
through facility consolidation, increase returns from manufacturing operations,
including outsourcing additional portions of its manufacturing operations and
implement further cost reductions across the business including work force
reductions as needed. These efforts may result in additional restructuring
charges.

Results of Operations

Market conditions during the quarter within the telecommunications equipment
industry continued to be impacted by a combination of decreased end-user
demand, excess capacity in both network bandwidth and the number of service
providers, burdensome debt obligations for some providers, extended
macroeconomic and geopolitical concerns, and certain regulatory uncertainties.
The Company cannot predict when these conditions will improve. All of these
market conditions have negatively impacted the Companys revenue performance in
the periods of this report.

In response to these continuing market conditions the Company announced during
the second quarter of 2003 a further restructuring of its operations. The major
components of the restructuring efforts included workforce reductions and the
closure and consolidation of excess facilities. Other charges included the
write-off of excess inventories, an accrual for excess inventory purchase
commitments, and the write-off of related fixed assets. Total charges
associated with this plan were $86.7 million. This amount was partially offset
by a reversal of $6.4 million of previously recorded restructuring costs
relating to severance and the receipt of greater than expected proceeds on the
disposal of fixed assets. The net charge during the second quarter of 2003 was
$80.3 million. (See Note 3: Restructuring & Other Charges)

In the second quarter of 2002, the Companys management approved a plan to
restructure its operations. The major components of the restructuring efforts
included workforce reductions, the closure and consolidation of excess
facilities, and a review of the sufficiency of the reserves for excess leased
facilities from the Companys 2001 restructuring programs. Other charges
included the write-off of excess inventories, an accrual for excess inventory
purchase commitments, and the write-off of related fixed assets. Total charges
associated with this plan were $219.1 million. (See Note 3: Restructuring &
Other Charges)

Quarter Ended June 27, 2003, Compared with the Quarter Ended June 28, 2002

Total revenue for the quarter ended June 27, 2003, was $234.1 million compared
with $344.6 million in the second quarter of 2002. This is primarily due to a
decline in the products sold in North America. Revenue within North America for
the second quarter of 2003 amounted to $141.2 million or 60.3% of total
revenue, compared with $249.5 million or 72.4% in the second quarter of 2002.
International revenue for the second quarter of 2003 amounted to $92.9 million
or 39.7% of total revenue, compared with $95.1 million or 27.6% in the second
quarter of 2002.

Optical Networking

Revenues from optical networking products were $92.7 million in the second
quarter of 2003, compared with $162.0 million in the second quarter of 2002.
New product revenues (Tellabs 5500 NGX, Tellabs 6500 and Tellabs 7100 systems)
fell to $7.6 million from $29.6 million in the second quarter of 2002,
reflecting an unwillingness by customers to purchase new products for their
networks.

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Next-Gen SDH and Managed Access Systems

Next-Gen SDH transport products and managed access systems, the primary
products the Company offers to its international customers, accounted for $69.7
million in sales during the second quarter of 2003, compared with $57.1 million
in the second quarter of 2002. The increase was the result of higher revenue
from both the Tellabs 8000 managed access systems and the Tellabs 6300
transport switch.

New international products (Tellabs® 6340, Tellabs® 6350 and Tellabs 7200
systems) accounted for $14.8 million of revenue in the second quarter of 2003
compared with $8.0 million in the second quarter of 2002.

Other Products

Revenue from Other Products was $32.7 million for the second quarter of 2003
compared with $81.4 million for the same period last year. The decline in
revenue is primarily the result of lower sales of the Tellabs 2000 cable
telephony products.

Professional Services

Professional services revenue for the quarter ended June 27, 2003, was $39.0
million, compared with $44.1 million in the second quarter of 2002. The
decline in services revenue is attributable to the decrease in
installation-related services due to the lower level of overall product
revenue, offset slightly by an increase in other value-added services.

Gross Profit

For the quarter ended June 27, 2003, total gross profit was $44.5 million or
19.0% of revenue compared with $49.4 million or 14.3% of revenue in the second
quarter of 2002. Of the 4.7 percentage point increase in gross margin,
approximately 9.1 percentage points was due to a reduction in charges for
excess and obsolete inventories and excess purchase commitments ($54.3 million
in 2003 vs. $111.3 million in 2002); partially offsetting this improvement was
a reduction of 4.4 percentage points due to lower absorption of fixed
manufacturing cost due to lower volume, a shift in product mix toward lower
margin products, and lower product prices due to the competitive environment.

Operating Expenses

Operating expenses declined by $113.4 million from the second quarter of 2002
to the second quarter of 2003. Of the decline, $75.4 million was due to a
reduction in restructuring and other charges ($32.5 million in 2003 vs. $107.9
million in 2002; See Note 3: Restructuring & Other Charges); and $38.0 million
was due to lower headcount related expenses which were a direct result of
workforce reductions; lower depreciation, amortization, and facilities expense
due to prior restructuring actions; and implementation of expense control
initiatives across the Company.

Effective Tax Rate

The effective tax rate for the quarter ended June 27, 2003, was an expense of
3.1% compared with a benefit of 34.5% in the second quarter of 2002. The tax
rate for the second quarter of 2003 reflects the absence of a tax benefit for
operating losses incurred primarily in the United States and a small tax
provision from international operations.

SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance
be established when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. This valuation allowance, which
totaled $212 million at the end of second quarter 2003, offsets the value of
tax assets related to the carryforward of tax deductions, operating losses, and
tax credits. While the Company expects to realize these assets, it also
expects to continue to record a full valuation allowance on future U.S. and
certain non-U.S. tax benefits until an appropriate level of profitability is
attained.

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Six Months Ended June 27, 2003, Compared with the Six Months Ended June 28,
2002

Total revenue for the six months ended June 27, 2003, was $456.6 million
compared with $716.1 million in the first six months of 2002. Declines occurred
across all product families and in both the international and North American
businesses. Revenue within North America for the first half of 2003 amounted
to $282.6 million or 61.9% of total revenue, compared with $508.6 million or
71.0% of total revenues in the first half of 2002. International revenue for
the first half of 2003 amounted to $174.0 million or 38.1% of total revenue,
compared with $207.5 million or 29.0% of total revenues in the first half of
2002.

Optical Networking Products

Revenues from optical networking products were $197.2 million in the first six
months of 2003, compared with $342.5 million in the first six months of 2002.
New product revenues (Tellabs 5500 NGX, Tellabs 6500 and Tellabs 7100 systems)
for the first six months of 2003 were $22.3 million versus $43.5 million for
the first half of 2002, reflecting an unwillingness by customers to purchase
new products for their networks.

Next-Gen SDH and Managed Access Systems

Next-Gen SDH transport products and managed access systems, the primary
products the Company offers to its international customers, accounted for
$132.1 million in revenues during the first half of 2003, compared with $137.6
million in the first half of 2002. The decrease was the result of lower
revenue from the Tellabs 7200 system partially offset by higher revenues from
both the Tellabs 8000 managed access systems and the Tellabs 6300 transport
switches.

New international products (Tellabs 6340, Tellabs 6350 and Tellabs 7200
systems) accounted for $29.0 million of revenue in the first half of 2003
compared with $29.6 million in the first half of 2002.

Other Products

Revenue from Other Products was $52.6 million for the first six months of 2003
compared with $140.2 million for the same period last year. The decline in
revenue is primarily the result of lower sales of our Tellabs 2000 cable
telephony products.

Professional Services

Professional services revenue for the six months ended June 27, 2003, was $74.7
million, compared with $95.8 million for the same period in 2002. The decline
in services revenue is attributable to the decrease in installation-related
services due to the lower level of overall product revenue, offset slightly by
an increase in other value-added services.

Gross Profit

For the six months ended June 27, 2003, total gross profit was $138.0 million
or 30.2% of revenue compared to $224.4 million or 31.3% of revenue in the first
six months of 2002. Margins were benefited by approximately 3.6 percentage
points due to a reduction in charges for excess and obsolete inventories and
excess purchase commitments ($54.3 million in 2003 vs. $111.3 million in 2002),
but the benefit was more than offset by the effect of a lower absorption of
fixed manufacturing cost due to a significantly lower volume, a shift in
product mix toward lower margin products, and lower product prices due to the
competitive environment.

Operating Expenses

Operating expenses declined by $144.3 million from the first six months of 2002
to the first six months of 2003. Of the decline, $75.4 million was due to a
reduction in restructuring and other charges ($32.5 million in 2003 vs. $107.9
million in 2002; See Note 3: Restructuring & Other Charges) and $68.9 million
was due to lower headcount related expenses which were a direct result of
workforce reductions; lower depreciation, amortization, and facilities expense
due to prior restructuring actions; and implementation of expense control
initiatives across the Company.

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Effective Tax Rate

The tax rate for the first six months of 2003 was nominal, reflecting a small
tax provision on our international operations and no tax benefit on our
domestic operations. The effective tax rate for the six months ended June 28,
2002 was 34.5%.

SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance
be established when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. This valuation allowance, which
totaled $212 million at the end of second quarter 2003, offsets the value of
tax assets related to the carryforward of tax deductions, operating losses, and
tax credits. While the Company expects to realize these assets, it also
expects to continue to record a full valuation allowance on future U.S. and
certain non-U.S. tax benefits until an appropriate level of profitability is
attained.

Financial Condition, Liquidity and Capital Resources

The Companys principal source of liquidity remained its cash and equivalents
and short-term investments, which increased, in total, $31.5 million during the
first six months of 2003 to $1,050.7 million. This increase during the first
half of the year was due primarily to the receipt of a $157.7 million U.S. tax
refund and the positive impact of the strengthening euro vs. the dollar, offset
by the cash paid in acquiring Vivace Networks (See Note 4: Business
Combinations).

During the first six months of 2003, the Companys cash and equivalents balance
decreased $206.2 million while its short-term investment balance increased
$237.8 million. These changes reflect managements decision to modify the
investment portfolio mix for its European operations, moving away from highly
liquid cash equivalents and into higher yielding short-term investments.

Approximately one-half of the $1,050.7 million in funds was generated by
offshore operations and remains invested offshore. The Company currently
considers these funds to be permanently re-invested. In the event the funds are
needed for investment purposes in the United States some additional foreign
withholding taxes and U.S. federal income taxes might be payable. The amount of
the taxes will depend on foreign withholding tax rates and the Companys tax
position in the United States at the time the funds are repatriated. Any such
taxes are not expected to have a significant impact on the Companys liquidity.

Management believes that the current level of working capital, and in
particular its cash and short-term investments, are sufficient to meet the
Companys normal operating and strategic growth needs, both now and in the
foreseeable future. Management believes sufficient resources exist to support
the Companys operations, including funding the remaining short-term
obligations under the restructuring programs, either through currently
available cash, cash generated from future operations, short-term or long-term
financing or equity offerings.

Critical Accounting Policies

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

Outlook

During its quarterly investor teleconference held on July 22, 2003, the Company
indicated it could not provide specific revenue or earnings guidance for future
quarters. However, the Company stated that based on leading internal
indicators the Company anticipated flat to slightly up revenue in the third
quarter, with risk from normal third-quarter seasonality and a potential strike
at Verizon, one of Tellabs largest customers.

Future revenue growth is dependent on revenue growth from both existing and new
products. However, the Company believes that industry conditions will continue
to be marked by constrained customer spending, making it difficult to predict
with an acceptable level of confidence what its customers capital spending
will be for products Tellabs currently offers. The Company also believes its
customers will continue to be reluctant to purchase new products for their
networks. Therefore, the Company cannot predict the level of market acceptance
of new products, particularly in North America where revenue from new products
(Tellabs 5500 NGX, Tellabs 6500, and Tellabs 7100) declined year-over-year. As
a result of these market conditions, the Company expects to continue to
experience a highly-competitive pricing environment and related margin pressure
across some product lines.

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The Company will continue to pursue a strategy for profitable growth that
includes getting maximum earnings power in an uncertain revenue environment,
reducing costs to improve financial performance to breakeven and beyond, and
channeling investments, including potential acquisitions, toward the most
promising growth opportunities. This strategy could lead the Company to:



| |  |  | Reduce its workforce.                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | Close, consolidate, or outsource manufacturing plants and other facilities.                                  
|
| |  |  | Dispose of machinery and equipment and other fixed assets.                                                   
|
| |  |  | Reduce general operating expenses.                                                                           
|
| |  |  | Form strategic business relationships, including acquisitions.                                               
|
| |  |  | Terminate unprofitable product lines or scale back development of
new product features for existing products.

In the event any of these actions are taken, it is possible the Company would
be required to record restructuring or other charges of a currently
undeterminable amount.

On August 1, 2003 the Company announced a plan to outsource manufacturing of
its North American products by the end of 2003 to Sanmina-SCI Corporation
(Sanmina). The Company believes that partnering with Sanmina will allow it to
benefit from lower manufacturing costs, and by freeing up capital currently
invested in equipment, inventory and facilities. As a result of the plan, the
Company will close its main Bolingbrook, Illinois building and lay off
approximately 325 employees. Beginning with the third quarter of 2003, the
Company expects to record an estimated $90-100 million in charges related to
the outsourcing move. Cash outflows resulting from incremental expenses and
restructuring charges associated with the outsourcing are expected to be
approximately offset by cash inflows arising from a sale of inventory to
Sanmina.

Prior to the acquisition of Vivace in June 2003, the Company had announced a
target to reduce quarterly operating expenses to $125 million by the fourth
quarter of this year. This amount excluded any future operating expenses or
charges related to the Vivace acquisition or subsequent restructuring
activities because they were not known at the time the $125 million target was
announced. Although operating expenses in future quarters will reflect the
addition of Vivace, and the recently announced restructuring activities,
management intends to continue to develop and implement plans targeted at
reducing those expenses encompassed by the $125 million goal.

The Company previously announced it expects Vivace to add $6-8 million of
operating expenses in the third quarter and possibly higher in the fourth
quarter due to accelerating product development initiatives. The Company also
expects operating expenses to increase due to amortization of acquired
intangibles, deferred compensation expense related to the Companys assumption
of Vivaces stock options, and the write-off of in-process research and
development acquired in the acquisition.

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, plan, intend, likely, will, should
and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are not guarantees of future performance and involve
risks, uncertainties and other factors that may cause our actual performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by those statements. Important factors that
could cause our actual results to differ materially from those in
forward-looking statements include, but are not limited to: economic changes
impacting the telecommunications industry; financial condition of
telecommunication service providers and equipment vendors, including any impact
of bankruptcies; the impact of customer and vendor consolidation; new product
acceptance; product demand and industry capacity; competitive products and
pricing; competitive pressures from new entrants to the telecommunications
industry; manufacturing efficiencies; research and new product development;
protection and access to intellectual property, patents and technology; ability
to attract and retain highly qualified personnel; availability of components
and critical manufacturing equipment and capacity; facility construction and
start-ups; the regulatory and trade environment; availability and terms of
future acquisitions; uncertainties relating to synergies, charges, and expenses

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associated with business combinations and other transactions; and other risks
and future factors that may be detailed from time to time in the Companys
filings with the SEC. For a further description of such risks and future
factors, see Exhibit 99.3 to Form 10-Q for the quarterly period ended March 28,
2003 filed with the SEC on May 9, 2003. The Companys actual future results
could differ materially from those predicted in such forward-looking
statements. In light of the foregoing risks, uncertainties and other factors,
investors should not place undue reliance on the forward-looking statements in
determining whether to buy, sell or hold any of the Companys securities. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
anticipated or unanticipated events or changes to future results over time.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the disclosures on this matter made in the
Companys Annual Report on Form 10-K for the year ended December 27, 2002.




Item 4. Disclosure Controls and Procedures

Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Companys
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have concluded that the Companys
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. Subsequent to the date of their evaluation, there
were no significant changes in the Companys internal controls or in other
factors that could significantly affect the disclosure controls.




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 the Company,
Michael Birck, and Richard Notebaert (former CEO, Director, and
President of the Company). 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 the Company,
Mr. Birck, Mr. Notebaert, and certain other of the Companys 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 its
products, and reporting overstated revenues for the fourth quarter of the year
2000 in the Companys financial statements. Further, certain of the individual
defendants were alleged to have violated the federal securities laws by trading
Company securities while allegedly in possession of material, non-public
information about the Company pertaining to these matters. On January 17, 2003,
the Company 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 defendants 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 the Company, Mssrs. 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. The Company intends to file a
motion seeking the dismissal with prejudice of all claims alleged in the second
consolidated amended class action complaint, and otherwise to defend this
action vigorously.




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

On April 22, 2003, the Company held its annual meeting of stockholders at the
Signature Room at Seven Bridges in Woodridge, Illinois.

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Messrs. Bo Hedfors, Mr. Michael Lavin and Jan Suwinski were elected as members
of the Tellabs Board of Directors for 3-year terms expiring in 2006. A
stockholder proposal regarding declassification of the Board was approved by a
majority of votes cast. The votes on these matters were as follows:

1.     Election of Directors

|              |  |     |             |          |  |  |            | 
|------------- |  | --- | ----------- | -------- |  |  | ---------- | 
|Name          |  | For |             | Withheld
|              |  |     |             |         
|Bo Hedfors    |  |     | 333,499,503 |          |  |  | 20,512,205 | 
|Michael Lavin |  |     | 333,444,549 |          |  |  | 20,567,159 | 
|Jan Suwinski  |  |     | 322,159,720 |          |  |  | 31,851,988 | 

Stockholder proposal regarding declassification of the Board.

|            |  |         |            |         |  |  |           | 
|----------- |  | ------- | ---------- | ------- |  |  | --------- | 
|For         |  | Against |            | Abstain
|            |  |         |            |        
|186,661,772 |  |         | 86,529,904 |         |  |  | 2,725,269 | 




Item 6. Exhibits and Reports on Form 8-K

(A) Exhibits

99.1  Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code

99.2  Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code

99.3  Agreement and plan of merger and reorganization by Tellabs, Inc., Vivace
Networks, Inc. and Venice Acquisition Corp.

99.4  Amendment to agreement and plan of merger and reorganization between
Tellabs, Inc., and Vivace Networks, Inc.

(B) Reports on Form 8-K:

The Registrant filed a press release on April 22, 2003, announcing the election
of Bo Hedfors, Michael Lavin and Jan Suwinski as members of the Tellabs Board
of Directors and the passage of a stockholder proposal to recommend annual
elections of all directors.

The Registrant filed a press release on May 13, 2003, announcing its plan to
merge with Vivace Networks.

The Registrant filed a press release on June 18, 2003, announcing the
completion of its merger with Vivace Networks.

The Registrant filed a press release on July 24, 2003, announcing its earnings
for the quarter ended June 27, 2003.

The Registrant filed a press release on August 1, 2003, announcing Tellabs will
outsource North American manufacturing to Sanmina-SCI.

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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)
| |  |                               
| |  | August 4, 2003                
| |  | (Date)                        

19