# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

---

# FORM 10-Q

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

# For the quarterly
period ended April 2, 2004

# OR

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

# For the transition
period from _______________to______________

# Commission file
Number: 0-9692

# TELLABS, INC.

(Exact name of
registrant as specified in its charter)

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

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.      YES XNO___

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

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

---

# TELLABS, INC.

# INDEX

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

2

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# PART I. FINANCIAL
INFORMATION

# Item 1. Financial Statements

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

|                                                      |  | Three Months Ended
|----------------------------------------------------- |  | ------------------
|                                                     
|
|                                                     
|Revenue                                               |  |                   
|Product and other                                     |  | $       232       
|Services                                              |  | 31                
|                                                     
|                                                      |  | 263               
|Cost of Revenue                                       |  |                   
|Product and other                                     |  | 87                
|Services                                              |  | 25                
|                                                     
|                                                      |  | 113               
|                                                     
|Gross Profit                                          |  | 150               
|                                                      |  |                   
|Gross profit as a percentage of revenue               |  | 57                
|                                                      |  |                   
|Operating Expenses                                    |  |                   
|Selling, general and administrative                   |  | 57                
|Research and development                              |  | 61                
|Restructuring and other charges                       |  | 16                
|Intangible asset amortization                         |  | 3                 
|                                                     
|                                                      |  | 139               
|                                                     
|Operating Earnings/(Loss)                             |  | 10                
|                                                      |  |                   
|Other Income/(Expense)                                |  |                   
|Interest income                                       |  | 6                 
|Interest expense                                      |  | (0                
|Other                                                 |  | (1                
|                                                     
|                                                      |  | 4                 
|                                                     
|Earnings/(Loss) Before Income Tax                     |  | 15                
|Income tax (expense)/benefit                          |  | (2                
|                                                     
|Net Earnings/(Loss)                                   |  | $        13       
|                                                     
|Net Earnings/(Loss) per Share                         |  |                   
|Basic                                                 |  | $          0      
|                                                     
|Diluted                                               |  | $          0      
|                                                     
|Average number of common shares outstanding - Basic   |  | 415               
|                                                     
|Average number of common shares outstanding - Diluted |  | 420               
|                                                     

The
accompanying notes are an integral part of these statements.

3

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# TELLABS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                         | 4/2/04 | 1/2/04      
|-------------------------------------------------------- | ------ | ------------
|                                                        
|
|                                                        
|Assets                                                   |        |             
|Current Assets                                           |       
|Cash and cash equivalents                                |        | $        263
|Investments in marketable securities                     |        | 916         
|                                                        
|                                                         |        | 1,180       
|Accounts receivable, net                                 |        | 186         
|Inventories                                              |        |             
|Raw materials                                            |        | 8           
|Work in process                                          |        |             
|Finished goods                                           |        | 34          
|                                                        
|                                                         |        | 42          
|Income taxes                                             |        | 9           
|Miscellaneous receivables and other current assets       |        | 73          
|                                                        
|Total Current Assets                                     |        | 1,492       
|                                                         |        |             
|Property, Plant and Equipment                            |        | 567         
|Less: accumulated depreciation                           |        | (268        
|                                                        
|                                                         |        | 299         
|Goodwill                                                 |        | 551         
|Intangible assets, net                                   |        | 102         
|Other assets                                             |        | 127         
|                                                        
|Total Assets                                             |        | $    2,571  
|                                                        
|                                                         |        |             
|Liabilities and Stockholders' Equity                     |       
|Current Liabilities                                      |        |             
|Accounts payable                                         |        | $         43
|Accrued liabilities                                      |        | 93          
|Accrued restructuring and other liabilities              |        | 37          
|                                                        
|Total Current Liabilities                                |        | 173         
|                                                         |        |             
|Long-term restructuring and other liabilities            |        | 39          
|Income taxes                                             |        | 100         
|Other long-term liabilities                              |        | 33          
|                                                         |        |             
|Stockholders' Equity                                     |        |             
|Preferred stock: authorized 5,000,000 shares of $.01 par |       
|value; no shares issued and outstanding                  |        |             
|Common stock: 1,000,000,000 shares of $.01 par value;    |       
|419,041,928 and 417,859,719 shares issued, including     |        |             
|treasury stock                                           |        | 4           
|Additional paid-in capital                               |        | 559         
|Deferred compensation expense                            |        | (7          
|Treasury stock, at cost: 3,250,000 shares                |        | (129        
|Accumulated other comprehensive income                   |       
|Cumulative translation adjustment                        |        | 76          
|Unrealized net gains on available-for-sale securities    |        | 6           
|                                                        
|Total accumulated other comprehensive income             |        | 83          
|Retained earnings                                        |        | 1,715       
|                                                        
|Total Stockholders' Equity                               |        | 2,225       
|                                                        
|Total Liabilities and Stockholders' Equity               |        | $    2,571  
|                                                        

The
accompanying notes are an integral part of these statements.

4

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

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

The
accompanying notes are an integral part of these statements.

5

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# TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# 1. Basis of Presentation

Our accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial statements and the requirements of Form 10-Q
and applicable rules of Regulation S-X and accordingly do not include all disclosures
normally required by generally accepted accounting principles for complete financial
statements. Accordingly, the financial statements and notes herein should be read in
conjunction with our Annual Report on Form 10-K for the year ended January 2, 2004.

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

# 2. New Accounting
Pronouncements

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

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

# 3. Restructuring and
Other Charges

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

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

6

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|(in millions)                               |  |                                                                   | 
|------------------------------------------- |  | ----------------------------------------------------------------- | 
|                                           
|
|                                           
|Cost of revenue                             |  | Inventory adjustments                                             | 
|                                            |  | Disposal of property, plant
        and equipment                 | 
|                                            |  | Other obligations                                                 | 
|                                           
|                                            |  | Sub-total                                                         | 
|Adjustment to prior reserves                |  | Reduction of excess purchase
        commitment accrual           | 
|                                           
|                                            |  | Total in cost of revenue                                          | 
|                                           
|Restructuring and other charges             |  | Severance and related expenses                                    | 
|                                            |  | Consolidation of excess leased
        facilities                 | 
|                                            |  | Disposal of property,
        plant and equipment                 | 
|                                            |  | Other obligations                                                 | 
|                                           
|                                            |  | Sub-total                                                         | 
|                                           
|Adjustments to prior reserves               |  | Proceeds from fixed asset
        disposals in excess of reserves | 
|                                           
|                                            |  | Total in operating expenses                                       | 
|                                           
|Net restructuring and other
        charges |  |                                                                   | 
|                                           

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

|                    |  |    |     |          |     |          |     | Consol. of |     | Disposal of |     |        |     |           
|------------------- |  | -- | --- | -------- | --- | -------- | --- | ---------- | --- | ----------- | --- | ------ | --- | ----------
|
|
|
|                   
|Balance at 1/2/04   |  | $  | -   | $     38 | .4  | $     13 | .5  | $     54   | .8  | $           | -   | $    2 | .9  | $     109 
|Additional reserves |  | 2  | .3  |          | -   | 4        | .1  | 1          | .4  | 12          | .9  | 2      | .6  | 23        
|Cash paid           |  |    | -   | (14      | .7) | (7       | .6) | (3         | .5) |             | -   | (2     | .5) | (28       
|Non-Cash activity   |  | (2 | .3) | (12      | .0) |          | -   | (0         | .5) | (12         | .9) |        | -   | (27       
|                   
|Balance at 4/2/04   |  | $  | -   | $     11 | .7  | $     10 | .0  | $     52   | .2  | $           | -   | $    3 | .0  | $       76
|                   

Inventory adjustments and
excess purchase commitments accrual

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

Severance and related
expenses

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

7

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Consolidation of excess
leased facilities

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

Disposal of property,
plant and equipment

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

Other obligations

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

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

# 4. Stock Options

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

|                                                             |  | Three Months Ended
|------------------------------------------------------------ |  | ------------------
|                                                            
|
|                                                            
|Net earnings/(loss), as reported                             |  | $      13         
|                                                             |  |                   
|Add: stock-based employee compensation expense included in   |  |                   
|reported net earnings, net of related tax effects            |  | 3                 
|                                                             |  |                   
|Less: total stock-based employee compensation expense        | 
|determined under fair value based method for all awards, net |  |                   
|of related tax effects                                       |  | (11               
|                                                            
|                                                             |  |                   
|Pro forma net earnings/(loss)                                |  | $        5        
|                                                            
|                                                             |  |                   
|Net earnings/(loss) per share - Basic:                       |  |                   
|As reported                                                  |  | $        0        
|                                                            
|Pro forma                                                    |  | $        0        
|                                                            
|                                                             |  |                   
|Net earnings/(loss) per share - Diluted:                     |  |                   
|As reported                                                  |  | $        0        
|                                                            
|Pro forma                                                    |  | $        0        
|                                                            

8

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

|                        | 2004 | 2003
|----------------------- | ---- | ----
|                       
|Expected volatility     |      | 72  
|Risk-free interest rate |      | 3   
|Expected life           |      | 5.0 
|Expected dividend yield |      | 0   

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

# 5. Retiree Medical Plan

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

|                                   |  | Retiree Medical Plan
|---------------------------------- |  | --------------------
|
|                                  
|
|                                  
|Service cost                       |  | $    0              
|Interest cost                      |  | 0                   
|Expected return on plan assets     |  | (0                  
|Amortization of prior service cost |  |                     
|Amortization of net (gain)/loss    |  |                     
|                                  
|Net periodic benefit cost          |  | $    0              
|                                  

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

# 6. Comprehensive
Income/(Loss)

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

|                                                                    |  | Three Months Ended
|------------------------------------------------------------------- |  | ------------------
|                                                                   
|
|                                                                   
|Net earnings/(loss)                                                 |  | $     13          
|Other comprehensive income/(loss):                                  | 
|Cumulative translation adjustment                                   |  | (17               
|Unrealized net
        gain/(loss) on available-for-sale securities |  | 5                 
|                                                                   
|Comprehensive income/(loss)                                         |  | $      1          
|                                                                   

# 7. Product Warranties

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

9

---

|                                                              |  | Three Months Ended
|------------------------------------------------------------- |  | ------------------
|                                                             
|
|                                                             
|Total product warranty reserve at the beginning of the period |  | $     19          
|Accruals for product warranties issued                        |  | 0                 
|Settlements made during the period                            |  | (1                
|                                                             
|Total product warranty reserve at the end of the period       |  | $     18          
|                                                             

# 8. Income Taxes

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

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

# Introduction and
Overview of Business

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

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

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

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

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

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

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

10

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

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

# New Product Categories

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

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

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

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

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

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

# RESULTS OF OPERATIONS

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

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

Revenue

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

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

11

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

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

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

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

Gross Profit

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

Operating Expenses

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

Other Income/Expense

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

Effective Tax Rate

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

Financial Condition,
Liquidity and Capital Resources

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

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

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

12

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Off-Balance Sheet
Arrangements

None.

Critical Accounting
Policies

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

Outlook

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

# Forward-Looking
Statements

This Managements Discussion and
Analysis and other sections of this Form 10-Q contain forward-looking statements made
pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements reflect managements expectations, estimates and assumptions, based on the
information available at the time the document was prepared. These forward-looking
statements include, but are not limited to, statements regarding future events, plans,
goals, objectives and expectations. The words anticipate, believe,
estimate, target, expect, predict,
plan, possible, intend, likely,
will, should, could, may and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are not
guarantees of future performance and involve risks, uncertainties and other factors that
may cause our actual performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by those statements.
Important factors that could cause our actual results to differ materially from those in
forward-looking statements include, but are not limited to: economic changes impacting the
telecommunications industry; financial condition of telecommunication service providers
and equipment vendors, including any impact of bankruptcies; the impact of customer and
vendor consolidation; new product acceptance; product demand and industry capacity;
competitive products and pricing; competitive pressures from new entrants to the
telecommunications industry; research and new product development; protection and access
to intellectual property, patents and technology; ability to attract and retain highly
qualified personnel; availability of components and critical manufacturing equipment and
capacity; foreign economic conditions, including currency rate fluctuations; the
regulatory and trade environment; availability and terms of future acquisitions;
uncertainties relating to synergies, charges, and expenses associated with business
combinations and other transactions; and other risks and future factors that may be
detailed from time to time in our filings with the SEC. For a further description of such
risks and future factors, see Exhibit 99.3 to Form 10-Q for the quarterly period ended
March 28, 2003 filed with the SEC on May 9, 2003. Our actual future results could differ
materially from those predicted in such forward-looking statements. In light of the
foregoing risks, uncertainties and other factors, investors should not place undue
reliance on the forward-looking statements in determining whether to buy, sell or hold any
of our securities. We undertake no obligation to publicly update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of anticipated
or unanticipated events or changes to future results over time.

# Item 3. Quantitative and
Qualitative Disclosures About Market Risk

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

# Item 4. Controls and
Procedures

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

13

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# PART II. OTHER
INFORMATION

# Item 1. Legal Proceedings

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

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

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

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

|Director              | For | Withheld   
|--------------------- | --- | -----------
|                     
|Michael J. Birck      |     | 351,145,996
|Frederick A. Krehbiel |     | 350,510,716
|Krish A. Prabhu       |     | 352,336,295

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

|For         | Against | Abstain    | Broker Non-Votes
|----------- | ------- | ---------- | ----------------
|           
|237,685,577 |         | 49,279,987 |                 

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

|For         | Against | Abstain    | Broker Non-Votes
|----------- | ------- | ---------- | ----------------
|           
|348,184,367 |         | 14,076,247 |                 

14

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# Item 6. Exhibits and Reports on Form 8-K

# (A) Exhibits

|   |   
|-- | --
|10 | .1
|10 | .2
|10 | .3
|11 |   
|31 | .1
|31 | .2
|32 | .1
|32 | .2

# (B) Reports on Form 8-K:

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

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

15

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# SIGNATURE

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

TELLABS, INC.
(Registrant)

| |                               
| | ------------------------------
| | /s/ James A. Dite             
| | James A. Dite                 
| | Vice President and Controller 
| | (Principal Accounting Officer)
| |                               
| | May 11, 2004                  
| | (Date)                        

16

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# EXHIBIT INDEX

|Exhibit | Description
|------- | -----------
|       
|10      | .1         
|10      | .2         
|10      | .3         
|11      |            
|31      | .1         
|31      | .2         
|32      | .1         
|32      | .2         

17

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